SEC Whistleblower Award Waiver

BlackRock Fined For Requiring Employees To Agree To An SEC Whistleblower Award Waiver

On January 17, 2017, the U.S. Securities and Exchange Commission (“SEC”) entered an Order sanctioning BlackRock, Inc. (“BlackRock”) for using “voluntary” separation agreements that contained an SEC whistleblower award waiver. BlackRock’s form separation agreement included “language requiring a departing employee to waive recovery of incentives for reporting misconduct available under, among other things,” the SEC whistleblower program in exchange for receiving their separation payments and other consideration.

The SEC Whistleblower Award Waiver In The Employee Separation Agreements

BlackRock added the SEC whistleblower award waiver into its separation agreements after the SEC adopted the SEC whistleblower protections contained in SEC whistleblower rule 21F-17. The relevant part of BlackRock’s separation agreements provided that:

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 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 SEC whistleblower program was created by the Dodd-Frank Act. According to the SEC’s Order, 1,067 departing employees signed BlackRock’s separation agreements containing the SEC whistleblower award waiver.
SEC whistleblower award waiver

The SEC Order

The SEC Whistleblower Award Waiver Violated SEC Whistleblower Protection Rules

The Order acknowledged that “before being contacted by the Commission staff in this matter, BlackRock voluntarily revised its separation agreement” to remove the clause containing the SEC whistleblower award waiver. The Order also acknowledged that the SEC was not aware of any instances where a former BlackRock employee who had signed a separation agreement containing the waiver “did not communicate directly with the Commission staff about potential securities law violations”.  Nor was the SEC aware of any instances in which BlackRock tried to enforce the award waiver provision or tried to prevent a former employee from communicating directly with the SEC. Nevertheless, the Commission found that the SEC whistleblower award waiver in BlackRock’s separation agreements:

… directly targeted the SEC’s whistleblower program by removing the critically important financial incentives that are intended to encourage persons to communicate directly with 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,” … and violate Rule 21F-17(a) by impeding individuals from communicating directly with the Commission staff about possible securities law violations.  (Citation omitted.)

BlackRock Instituted Mandatory Annual Training For All Employees

In addition to revising its separation agreements, BlackRock began providing all employees with mandatory annual training.  Part of that mandatory yearly training involves summarizing and linking to a BlackRock Policy that “summarizes several of the rights the employee possesses under the Commission’s Whistleblower Program”.  Those rights include, among other things, an employee’s right 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, …

… and (iii) cooperate voluntarily with or respond to any inquiry form the Commission or other federal or state agencies or self-regulatory organizations.

Furthermore, the Policy informs employees that they “have the right to not be retaliated against for reporting possible securities law violations”. It is not clear from the SEC’s Order whether BlackRock undertook to create this Policy and require the mandatory annual training on its own, or whether it was part of an undertaking agreed to with the SEC to settle the case. BlackRock further agreed to notify the SEC at least 60 days prior to discontinuing the mandatory annual training.
SEC whistleblower award waivers

The SEC’s press release

Sanctions Imposed By The SEC

The SEC imposed a civil monetary penalty on BlackRock in the amount of $340,000. The Order also required BlackRock to make reasonable efforts to contact its former employees, give them a link to the Order or a paper copy should an employee request it, and provide them with “a statement that BlackRock does not prohibit former employees from seeking and obtaining” SEC whistleblower awards. The Co-Chief of the SEC Enforcement Division’s Asset Management Unit explained in a press release:

BlackRock took direct aim at our whistleblower program by using separation agreements that removed the financial incentives for reporting problems to the SEC … Asset managers simply cannot place restrictions on the ability of whistleblowers to accept financial awards for providing valuable information to the SEC.

Additional Information

For additional information about the SEC’s position on agreements containing an SEC whistleblower award waiver, click on the links below:
  • The SEC’s Order in the BlackRock case.  (External link to the SEC’s website.)
  • The SEC’s Press Release about the BlackRock case.  (External link to the SEC’s website.)
  • Article about the BlackRock case.  (Note:  external link to The Pickholz Law Offices website.)

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