Avoiding SEC Violations: How Investment Advisers and Broker-Dealers Can Comply with Whistleblower Protection Rules

The enforcement action against Nationwide Planning Associates, Inc. , NPA Asset Management, LLC , and Blue Point Strategic Wealth Management, LLC (collectively, 'Respondents') involved violations of Exchange Act Rule 21F-17(a) , which prohibits impeding individuals from reporting potential securities law violations to the SEC.

From May 2021 to February 2024, the Respondents required eleven brokerage and advisory clients to sign confidentiality agreements restricting their ability to report securities violations to the SEC or other regulators. Some agreements explicitly barred clients from reporting unless regulators initiated the inquiry and even required clients to affirm they had not reported past violations and would refrain from doing so. This conduct violated Dodd-Frank Act whistleblower protections aimed at encouraging individuals to report unlawful activities.

How Investment Advisers and Broker-Dealers Can Avoid Similar Issues

1. Comply with Whistleblower Protections : Investment advisers and broker-dealers must ensure that their agreements do not include provisions restricting or dissuading clients from reporting potential securities law violations to the SEC or other authorities. Legal teams should review confidentiality clauses to ensure they do not violate Rule 21F-17(a) of the Exchange Act , which protects whistleblowers.
2. Transparent Communication : Any compensatory agreements or settlement contracts with clients must be carefully drafted to ensure they comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act's whistleblower provisions. Specifically, language suggesting clients cannot approach regulators must be removed or clarified to align with federal securities laws .
3. Educate Staff and Compliance Teams : Conduct training programs for compliance officers, legal teams, and client-facing personnel on the whistleblower provisions of the Dodd-Frank Act and Exchange Act . Regular updates on SEC rules and guidance changes will help avoid inadvertent violations.
4. Internal Reporting Channels : Establish robust internal reporting mechanisms encouraging clients and employees to raise concerns. By providing clear internal channels, firms can proactively address issues while ensuring individuals retain the right to report directly to the SEC.
5. Review Existing Contracts : Conduct a thorough audit of existing contracts and agreements with clients to identify and revise any provisions that may conflict with SEC rules. Legal counsel should ensure that confidentiality clauses are narrowly tailored and do not prevent lawful whistleblowing.

Adhering to these practices can help investment advisers and broker-dealers avoid regulatory scrutiny and foster a culture of compliance, transparency, and accountability.

Additional links:

• SEC.gov | SEC Charges Broker-Dealer Nationwide Planning and Two Affiliated Investment Advisers with Violating Whistleblower Protection Rule.
• Order 34-100908.pdf (sec.gov).