October 21, 2021

Volume XI, Number 294

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Recommended Actions for Hedge Fund, Private Equity Fund and Other Private Fund Advisers To Prevent Possible Whistleblower Violations

On April 1, 2015, the Securities and Exchange Commission (SEC) announced that it had settled its first enforcement action under SEC Rule 21F-17, which prohibits companies from taking actions or using confidentiality agreements to impede whistleblowers from reporting possible securities law violations to the SEC. That enforcement action was highly fact-specific, involving an internal investigation by a corporation that was not an investment management business. The SEC took the position that confidentiality agreements that required employees (and, perhaps, others) to notify the company before contacting the SEC may have discouraged those persons from reporting securities violations and thereby ran afoul of the rule.[1]

The SEC has indicated that it is conducting additional investigations (which may include broad information requests of hedge fund, private equity fund and other private fund advisers) and has signaled that it is likely to bring further enforcement actions. In addition, this initiative by the SEC might well lead other federal and state regulators, along with self-regulatory organizations, to examine their own whistleblower rules and to investigate compliance by companies within their jurisdictions.

While the SEC has publicly stated that it is not trying to dictate the language that companies use in their agreements and policies, the SEC has indicated that it is closely scrutinizing various forms of these agreements and has concerns that extend beyond those addressed in the enforcement action. In light of the enforcement action and recent statements, all companies (including hedge fund, private equity fund and other private fund advisers), even those that are not public or regulated, should promptly review materials that contain confidentiality, non-disclosure, non-disparagement and whistleblower provisions. These types of provisions may appear in compliance manuals; employment, confidentiality and non-competition agreements; separation agreements; employee handbooks and codes of conduct; limited liability company, partnership and shareholder agreements; procedures for internal investigations; consulting and licensing agreements; and other forms and types of agreements and policies.

If you have any questions regarding the enforcement action and preventing possible whistleblower violations, please feel free to reach out to your usual Proskauer contact or any of the Proskauer lawyers listed in this alert.


[1] A copy of the order can be obtained here, and a copy of the SEC's press release about the order can be obtained here.

© 2021 Proskauer Rose LLP. National Law Review, Volume V, Number 161
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About this Author

Robert G Leonard, Proskauer Rose Law Firm, Private Investment Attorney
Partner

Robert G. Leonard is a Partner in the Hedge Funds Group. For more than 25 years Rob has been structuring, organizing and representing hedge funds, funds of funds and other private investment funds (both domestic and offshore) and investment advisers.

212-969-3355
Michael F Mavrides, Proskauer Rose Law Firm, Private Investment Attorney
Partner

Michael F. Mavrides is a Partner in the Hedge Funds Group. Mike focuses his practice on representing domestic and offshore hedge funds, funds of funds and other private investment funds, including private equity and real estate investment funds. He regularly advises funds and their managers on a wide variety of issues, including formation and structuring, seed capital, anchor capital and other strategic arrangements, placement agency, solicitation and other marketing arrangements, succession planning, separately managed accounts, and all types of portfolio management, trading and...

212-969-3670
Christopher M Wells, Proskauer Rose Law Firm, Private Investment Attorney
Partner

Christopher M. Wells is a Partner and head of the Hedge Funds Group. Chris advises hedge funds, funds of funds and other pooled investment vehicles and their managers on all aspects of fund formation, operations and compliance.

212-969-3600
Howard Beber, Tax Attorney, Proskauer Rose Law Firm
Partner

Howard J. Beber is a partner in the Corporate Department and co-head of the Private Funds Group, which is recognized by Chambers GlobalChambers USA and US Legal 500. His practice focuses on representing private equity funds and institutional investors on a broad range of issues including fund formations, secondary transactions and portfolio investments. 

Howard is actively involved in all stages of fund formation and fund sponsor representation, counseling on terms and marketing strategy, preparing offering documents...

617-526-9754
Sarah K Cherry, Tax Attorney, Proskauer Rose Law Firm
Partner

Sarah K. Cherry is a Partner in the Corporate Department and a member of the Private Investment Funds Group. Her practice is focused on the representation of U.S. and non-U.S. private equity funds and managers in capital formation, regulatory compliance and operational issues. Sarah also regularly represents institutional investors and funds-of-funds in their investments in U.S. and non-U.S. private equity funds both in primary and secondary transactions. In addition, Sarah advises clients in relation to internal general partner dynamics and management company issues.

617-526-9769
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