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SEC Fines BlackRock For Financial Disincentive Provision For Whistleblowers
January 17, 2017On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted and among its provisions were those providing for "Whistleblower Incentives and Protection." The age of whistleblowing had dawned and Congress saw fit to ensure that those men and women who stepped forward were not harassed or retaliated against by their employers or former employers. In furtherance of implementing Dodd Frank, the Securities and Exchange Commission ("SEC") adopted Rule 21F-17, effective August 12, 2011, which states:
§ 240.21F-17 Staff communications with individuals reporting possible securities law violations.(a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement (other than agreements dealing with information covered by § 240.21F-4(b)(4)(i) and § 240.21F-4(b)(4)(ii) of this chapter related to the legal representation of a client) with respect to such communications.(b) If you are a director, officer, member, agent, or employee of an entity that has counsel, and you have initiated communication with the Commission relating to a possible securities law violation, the staff is authorized to communicate directly with you regarding the possible securities law violation without seeking the consent of the entity's counsel.
BlackRock, Inc.
BlackRock, Inc. had entered into voluntary severance agreements with departing employees. On October 14, 2011, following the SEC's implementation of Rule 21F-17 and in furtherance of the company's periodic housekeeping, BlackRock amended its form separation agreement to include the following Paragraph 5:
To the fullest extent permitted by applicable law, you hereby release and forever discharge, BlackRock, as defined above, from all claims for, and you waive any right to recovery of, incentives for reporting of misconduct, including, without limitation, under the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Sarbanes-Oxley Act of 2002, relating to conduct occurring prior to the date of this Agreement.
The above version of Paragraph 5 was part of agreements signed by 1,067 departing BlackRock employees from the date of its inception until March 31, 2016, when the firm voluntarily revised the provision to exclude any requirement that a separating employee waive the right to recover Dodd-Frank Act incentives. Said revision was undertaken prior to any contact by the Securities and Exchange Commission.
SEC OIP
In anticipation of the institution of cease-and-desist proceedings by the SEC (the "OIP"), without admitting or denying the findings, BlackRock submitted an Offer of Settlement, which the SEC accepted. In the Matter of BlackRock,Inc.,Respondent (OIP, '34 Act Rel. No. 79804; Admin. Proc. File No 3-17786; January 17, 2017). The OIP asserts that:
10. Though the Commission is unaware of any instances in which (i) a former
employee of BlackRock who executed the above-noted agreement did not communicate directly with Commission staff about potential securities law violations or (ii) BlackRock took action to enforce those provisions or otherwise prevent such communications, BlackRock - from October 2011 through March 2016 - directly targeted the SEC's whistleblower program by removing the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations. Such restrictions on accepting financial awards for providing information regarding possible securities law violations to the Commission undermine the purpose of Section 21F and Rule 21F-17(a), which is to "encourag[e] individuals to report to the Commission," [Adopting Release at p. 201], and violate Rule 21F-17(a) by impeding individuals from communicating directly with the Commission staff about possible securities law violations.
The Undertaking
In determining whether to accept Respondent's Offer of Settlement, the SEC considered BlackRock's voluntary revision of its separation agreements and:
12. BlackRock now provides all employees with mandatory yearly trainings that include a summary of and link to a document entitled, "Global Policy for Reporting Illegal or Unethical Conduct" ("Policy"). The Policy summarizes several of the rights the employee possesses under the Commission's Whistleblower Program, including an employee's rights to: (i) report potential violations of law to the Commission or other federal or state agencies or self-regulatory authorities without permission from or notice to his or her employer, (ii) report possible violations anonymously and to provide disclosures that are protected or required under whistleblower laws, and (iii) cooperate voluntarily with or respond to any inquiry from the Commission or other federal or state agencies or self-regulatory organizations. The Policy also states that employees have the right not to be retaliated against for reporting possible securities law violations. BlackRock has agreed to notify the Chief(s) of the Asset Management Unit of the Division of Enforcement, with a copy to the Chief of the Office of the Whistleblower, at least sixty (60) days in advance of discontinuing these mandatory yearly trainings.13. BlackRock has updated its Code of Business Conduct and Ethics as well as other relevant agreements, policies, and procedures to ensure that employees understand that there is no restriction on their rights under Rule 21F-17.
Sanctions
In accordance with the terms of the OIP, the SEC ordered BlackRock to cease and desist from further violations of Rule 21F-17, and ordered the company to pay a $340,000 civil money penalty.
ALSO READ: "SEC Fines Company For Financial Disincentive Provision For Whistleblowers" (BrokeAndBroker.com Blog, August 18, 2016)