December 11, 2019

December 11, 2019

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December 10, 2019

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December 09, 2019

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SEC Whistleblower Enforcement Settlement Reminds Private Fund Sponsors to Review Organizational Policies and Procedures for Compliance with Governmental Whistleblower Programs

A recent SEC settlement of whistleblower charges should serve as a useful reminder for private fund sponsors to conduct a comprehensive review of their policies and procedures.

On August 10, 2016, the SEC announced that BlueLinx Holdings Inc., an Atlanta-based building products distributor, had settled charges that it violated securities laws by using severance agreements that contravened Dodd-Frank provisions prohibiting employers from impeding whistleblower reporting.  Specifically, the severance agreements required outgoing employees to waive their rights to monetary recoveries in the event that they filed a charge or complaint with the SEC or other federal agency.  In settlement, BlueLinx agreed to pay $265,000, amend its severance agreements, and inform former employees that they are not prohibited from providing information to the SEC or accepting whistleblower awards.

As the SEC’s Division of Enforcement further develops and relies on its whistleblower program, private fund sponsors should be conducting a comprehensive review to proactively ensure that their policies and procedures are up-to-date and consistent across their organization. This review can demonstrate to both employees and regulatory authorities that the firm takes seriously its responsibilities relating to whistleblowers.

Private fund sponsors frequently have provisions affecting whistleblowers in various agreements, polices and manuals utilized across the enterprise, such as:

  • employee manuals, handbooks and policies,

  • codes of conduct,

  • employment agreements,

  • confidentiality and non-compete agreements,

  • separation agreements,

  • compliance manuals,

  • LLC, partnership and shareholder agreements,

  • procedures for internal investigations, or

  • consulting and licensing agreements.

A key issue for private fund sponsors is ensuring consistency. Policies should encourage a clear and available avenue for internal reporting, while avoiding any language that might impede an employee from making protected disclosures to governmental agencies.  Given the compressed time frame to address potential violations, senior employees must be attentive to concerns raised by subordinates and assure them that their concerns are being taken seriously and investigated thoroughly.

By now, private fund sponsors should have modified any language in confidentiality agreements that could be interpreted as discouraging potential whistleblowers from contacting a government agency, conforming with the guidance contained in the SEC’s April 1, 2015 action against KBR Inc.  Even in the absence of a formal internal investigation, sponsors should be careful using any language that requires a current or former employee to obtain the prior approval of the firm’s legal department before discussing underlying facts with the government.

Where a fund adviser had previously used a broad, pre-KBR confidentiality agreement, should that adviser reach out to former employees to let them know that they remain free to communicate with the government?  It is a judgment call, but certain SEC exam staff might have this expectation.

A private fund sponsor’s review should not be limited to its own employees. Where a sponsor uses operating partners or other service providers in connection with managing a fund’s portfolio companies, the firm should also address whistleblower provisions in agreements with those quasi-independent individuals or entities.  Indeed, according to the SEC’s most recent whistleblower program report (at 16-17), over half of the SEC’s whistleblower awards have gone to non-employees.  As we discussed here, under certain circumstances, a private fund’s auditor or legal and compliance staff might even be an eligible whistleblower.

In addition to the SEC, fund advisers should be aware of other federal and state agencies that may impose additional whistleblower protection requirements. Two key examples:

  • Since passage of the Occupational Safety and Health Act of 1970, Congress has expanded OSHA’s whistleblower authority to protect workers from retaliation under twenty-two federal laws—an important consideration for portfolio companies with government contracts.

  • The Defend Trade Secrets Act (DTSA), which went into effect on May 11, 2016, contains a whistleblower immunity provision. Among other things, the DTSA provides that an individual cannot be held liable for disclosure of a trade secret made in confidence to a government official or to an attorney for the sole purpose of reporting or investigating a suspected legal violation. To comply with the DTSA’s notice requirement, an employer should consider either incorporating the immunity provisions into a contract or agreement or including in the agreement a cross-reference to the employer’s whistleblower policy containing an immunity provision. It is an open question whether a cross-reference to a stand-alone policy will satisfy the Dodd-Frank whistleblower retaliation prohibitions.

Finally, private fund sponsors should integrate whistleblower training into ongoing compliance educational programs for employees. These trainings should emphasize the internal reporting channels available to employees, and the firm should keep comprehensive documentation of the training.

Private fund sponsors should be mindful that there are whistleblower implications across many facets of the sponsor’s enterprise and its relationship with third parties. As discussed previously, and particularly following the BlueLinx enforcement action, all employers (including all private fund sponsors) should promptly review materials that contain confidentiality, non-disclosure, non-disparagement and whistleblower provisions to ensure that they are prepared to proactively respond to a potential whistleblower situation.

© 2019 Proskauer Rose LLP.


About this Author

Anthony M. Drenzek, Special regulatory Counsel, Proskauer Rose, Attorney, Finance Policy Lawyer
Special Regulatory Counsel

Tony is special regulatory counsel in the Corporate Department and a member of the Private Funds Group and the Private Equity & Hedge Fund Litigation team. His practice focuses on advising U.S. and offshore private fund managers on all aspects of federal, state and SRO organizational and operational compliance, with a specific emphasis on the Investment Advisers Act of 1940.

Tony assists U.S. and offshore private fund clients in registering with the SEC as investment advisers, or reporting as exempt reporting advisers, and complying with...

Joshua Newville, Proskauer Rose, regulatory enforcement attorney, industry compliance legal counsel, securities exchange commission lawyer

Joshua M. Newville is a partner in the Litigation Department in New York. His practice focuses on commercial litigation and regulatory investigations. Mr. Newville advises companies and individuals in securities litigation and compliance matters. He also focuses on internal investigations and enforcement matters. Prior to joining Proskauer, Josh was senior counsel in the U.S. Securities and Exchange Commission’s Division of Enforcement, where he investigated and prosecuted violations of the federal securities laws. Josh served in the Enforcement Division’s Asset Management Unit, a specialized unit focusing on investment advisers and the asset management industry.  His prior experience with the SEC provides a unique perspective to help private investment funds and their advisers manage risk and handle regulatory issues.

Timothy W. Mungovan, Litigation Attorney, Proskauer Law Firm

Timothy Mungovan is a Partner in the Litigation Department, co-head of the Private Investment Funds Disputes practice and a member of the Private Investment Funds Group. Tim has an international practice in complex commercial litigation, advising public and private companies in a variety of areas, including securities, corporate governance, fiduciary obligations, investment management and financial services, fraud and trade secrets.

In addition to his regular commercial litigation practice, Tim focuses on disputes involving private investment...

617-526-9412, 212-969-3201
Michael R. Hackett, Litigation Attorney, Proskauer Law Firm

Michael R. Hackett is an associate in the Litigation Department and a member of the Asset Management Litigation practice. His practice focuses on disputes and regulation involving private funds, including private equity, venture capital, hedge, real estate and private credit funds, as well as other limited partnerships, where he regularly advises funds, fund sponsors, investment advisers and institutional and individual investors.

Mike’s experience representing private fund clients runs the gamut, from control contests within advisers, to...