The Financial Industry Regulatory Authority announced that it was conducting an industry-wide inquiry to review cross-selling programs at broker-dealers. Among other things, it will be reviewing what incentives are provided to broker-dealer employees to promote bank products of an affiliate or parent company to retail customers; add features such as securities-based loans or credit and debit cards to broker-dealer retail accounts; and the opening of additional broker-dealer retail accounts for customers. Separately, the Securities and Exchange Commission announced that it will be reviewing registrants’ compliance with “key whistleblower provisions” arising from the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among other things, the Office of Compliance Inspections and Examinations will be looking at registered investment advisers’ and broker-dealers’ compliance manuals, code of ethics and employment and severance agreements to ensure that there is nothing inhibiting employees to take advantage of their whistleblower rights.
Legal Weeds: Recently, Blue Linx Holdings Inc., a publicly traded company, agreed to pay a fine of US $265,000 and to certain undertakings to settle SEC charges that the company impermissibly inhibited whistleblowing by ex-employees. According to the SEC, Blue Linx included provisions in severance agreements with ex-employees that prohibited them from sharing with any third party confidential information about the company learned while employed unless “compelled to do so by law or legal process.” This prohibition, said the SEC, violated provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that encourage whistleblowing and an SEC regulation that prohibits any person from impeding an individual “from communicating directly with the Commission staff about a possible securities law violation, including enforcing or threatening to enforce, a confidentiality agreement…with respect to such communication.” Two years after the SEC adopted this rule (SEC Rule 240.21F-17; click here to access), Blue Linx amended its severance agreements to authorize whistleblowing, but added a standard clause requiring ex-employees to waive their right to any monetary recovery in connection with any complaint or charge filed with an administrative agency. To resolve this matter, among its undertakings, Blue Linx agreed to add a provision to all its severance agreements expressly permitting ex-employees to file charges or complaints with administrative agencies, and to collect any relevant award. (Click here to access the SEC Blue Linx Order.) Previously, the SEC sanctioned two other publicly traded companies for including in their standard severance agreements language that the Commission determined potentially impeded employees from disclosing to the SEC a possible securities law violation. (Click here for background regarding the most recent SEC enforcement actions in the article, “Another Publicly Traded Firm Sanctioned by SEC for Allegedly Undercutting Whistleblower Protections Through Severance Agreements” in the August 21, 2016 edition of Bridging the Week.) Like the SEC, the Commodity Futures Trading Commission has a general rule that prohibits the waiver of the right of any person to file a whistleblower complaint and receive a monetary award from it (click here to access CFTC Rule 165.19). Employees of registrants and non-registrants may also not be retaliated against for whistleblowing. (Click here to access Section 23(h)(1) of the Commodity Exchange Act, 7 USC §26(h)(1) and here for Part A to Part 165 of the CFTC Rules.) Recently, the CFTC proposed to amend its whistleblower program to more closely emulate that of the SEC. Among other things, the CFTC proposed (1) new procedures to review whistleblower claims; (2) to clarify that the CFTC may bring enforcement actions against any employer that violates its anti-retaliation provisions; and (3) to expressly prohibit any agreement or condition of employment, including a confidentiality or pre-dispute arbitration agreement, from containing a provision that might “impede” an individual from communicating a possible violation of law to CFTC staff. (Click here for details in the article, "Another Day, Another Large SEC Whistleblower Award; CFTC Proposes to Update Its Whistleblower Rules" in the September 11, 2016 edition of Bridging the Week.) SEC and CFTC registrants, SEC-regulated publicly traded companies and entities subject to CFTC rules should review their form employment and severance agreements to ensure they are consistent with regulatory requirements regarding employee and ex-employee whistleblower rights.