On January 16, the U.S. Securities and Exchange Commission (SEC) announced settled charges against New York-based investment advisers Two Sigma Investments LP and Two Sigma Advisers LP.
Two Sigma agreed to pay $90 million in civil penalties to settle the SEC’s charges that they failed to reasonably address known vulnerabilities in their investment models and that they violated the SEC’s whistleblower rule Rule 21F-17(a) through restrictive language in separation agreements.
SEC Rule 21F-17(a) prohibits entities from “tak[ing] 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.”
According to the SEC, Two Sigma “violated the Commission’s whistleblower protection rule by requiring departing individuals, in separation agreements, to state as fact that they had not filed a complaint with any governmental agency. This requirement, in effect, could identify whistleblowers and prohibit whistleblowers from receiving post-separation payments and benefits, both of which are actions to impede departing individuals from communicating directly with Commission staff about possible securities law violations, in violation of the whistleblower protection rule.”
Over the past year plus, the SEC has dramatically increased its enforcement efforts around Rule 21F-17(a). In January 2024, the Commission sanctioned J.P. Morgan Securities LLC $18 million over charges that it impeded the ability of advisory clients and brokerage customers to blow the whistle to the SEC.
“The SEC’s sanction in this case sends a message that illegal nondisclosure agreements that obstruct the ability of employees or clients to report potential crimes to law enforcement will not be tolerated,” leading whistleblower attorney Stephen M. Kohn of Kohn, Kohn & Colapinto said about the J.P. Morgan case.
Kohn played a leading role in the banning of restrictive non-disclosure agreements, pushing for Rule 21F-17(a) during the SEC Whistleblower Program rulemaking process and representing a whistleblower in the first enforcement action taken by the SEC over Rule21F-17(a) violations.
Other financial regulators are also cracking down on restrictive NDAs. The Commodity Futures Trading Commission (CFTC) took its first enforcement action over restrictive NDAs which impede whistleblowing and the Consumer Financial Protection Bureau (CFPB) issued a circular warning that broad and restrictive NDAs may violate federal whistleblower protection laws.
“The CFPB’s Circular, taking a stance against illegally broad confidentiality agreements meant to silence whistleblowers, is an important step in expanding the protection of whistleblowers from being silenced due to illegally broad NDAs,” whistleblower attorney Benjamin Calitri wrote. “By clearly stating that these agreements can be viewed as discrimination under Section 1057, the CFPB joins the stand that the SEC and CFTC have taken through their actions, especially in the past year, to ensure that NDAs are not used to silence whistleblowers.”
Further Reading:
SEC Charges Two Sigma for Failing to Address Known Vulnerabilities in its Investment Models
