BlackRock and HomeStreet Fined For Requiring Waiver Of Right
To SEC Whistleblower Award

Over the past several months, the SEC has brought several
high-profile cases against companies that required departing
employees to waive their rights to SEC whistleblower awards. 
Last week, the SEC brought two more such cases, this time
against BlackRock and HomeStreet.  For a potential
SEC whistleblower or an
SEC whistleblower lawyer, this string of enforcement actions is important, because
they demonstrate the SEC’s commitment to aggressively protect
its whistleblowers and its SEC whistleblower award program.

BlackRock’s agreement required waiver of SEC whistleblower
award

BlackRock’s separation agreements required departing employees
to “waive any right to recovery of incentives for reporting of
misconduct.”  This provision would prevent a former employee
from claiming an
SEC whistleblower award,
thereby eliminating what the U.S. Congress called a “critical
component” of the SEC whistleblower program.  (See the SEC’s
Order, p.2 ¶ 3.)

Congress created the SEC whistleblower program in 2010 as part
of the Dodd-Frank Act.

The SEC whistleblower rules became effective on August 12,
2011.  Approximately two months later, on October 14, 2011,
BlackRock added the waiver provision to its separation
agreements.  Specifically, the provision stated that:

…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.

BlackRock continued to use this provision in its separation
agreements through March 31, 2016.  One thousand sixty-seven
departing employees signed separation agreements containing
this waiver.  (BlackRock Order, p.3 ¶¶ 7-8.)

In its Order imposing sanctions against BlackRock, the SEC did
not mince words:  “BlackRock … 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.”  (BlackRock Order, p.3 ¶ 10.)

According to the Co-Chief of the SEC Enforcement Division’s
Asset Management Unit, “Asset managers simply cannot place
restrictions on the ability of whistleblowers to accept
financial awards for providing valuable information to the
SEC.”  (See the SEC’s press release
here.)

HomeStreet’s agreement also required waiver of SEC
whistleblower award

According to the SEC’s
Order, HomeStreet’s severance agreements required departing
employees to waive various potential claims as a condition of
receiving severance payments and other consideration from
HomeStreet.

One version of HomeStreet’s severance agreements also stated
that, while the departing employee would not be prohibited
from speaking with any government agency, doing so “shall be
considered a waiver of any damages or monetary recovery
therefrom.”  (HomeStreet Order, p. 9 ¶ 39.)

In addition, HomeStreet believed that an SEC whistleblower had
reported to the SEC.  HomeStreet attempted to discover the
identity of that whistleblower, pressured employees to reveal
whether they were the SEC whistleblower, and attempted to get
one employee to affirm that he was not a whistleblower in
order to receive indemnification payments. (HomeStreet Order,
pp. 7-9.)

The SEC’s Order describes HomeStreet’s methods as “Actions to
Impede Communication with the Commission”.  (HomeStreet Order,
p. 7.)

In a
press release
about the HomeStreet case, the Director of the SEC’s San
Francisco Regional Office stated, “Companies that focus on
finding a whistleblower rather than determining whether
illegal conduct occurred are severely missing the point.”  
The Chief of the SEC’s Office of the Whistleblower added,
“Companies simply cannot disrupt the lines of communications
between the SEC and potential whistleblowers.”

BlackRock’s remedial actions

With the BlackRock and HomeStreet cases, the SEC has now
brought 7 cases in the last 6 months against companies for
retaliating against SEC whistleblowers, chilling
whistleblowers from reporting to the SEC, or requiring
whistleblowers to waive their
SEC whistleblower reward.

To read about the previous cases, click
here
(retaliating),
here
(chilling), and
here
(requiring waiver of SEC whistleblower award).

The Orders require BlackRock and HomeStreet to do certain
things (undertakings), and impose monetary penalties on them,
for requiring that departing employees waive their rights to
an SEC whistleblower award.  In the case of HomeStreet, the
undertakings and penalties were also imposed for the company’s
additional actions to impede SEC whistleblowers, and for its 
substantive securities violations.

The sanctions against BlackRock and HomeStreet are similar to
certain sanctions imposed on prior companies, as discussed in
my earlier posts.

BlackRock also seems to have voluntarily taken certain
remedial actions on its own, before being contacted by the
SEC, which may have reduced the amount of the penalty that
BlackRock had to pay.

For example, BlackRock now provides all employees with
mandatory yearly trainings that summarize and give the
employees a link to a “Global Policy for Reporting Illegal or
Unethical Conduct.”  Part of that Policy advises employees of
their right to report violations and crimes to the SEC without
notifying BlackRock.  It also advises employees of their right
not to be retaliated against for reporting possible securities
violations.  (BlackRock Order, pp. 3-4 ¶ 12.)

BlackRock also updated its Code of Business Conduct and
Ethics, and other documents, “to ensure that employees
understand that there is no restriction on their rights” under
the SEC whistleblower program.  (BlackRock Order, p.4 ¶ 13.)

For the potential SEC whistleblower and SEC whistleblower
lawyer

The BlackRock case may hold some additional significance for
the potential SEC whistleblower and SEC whistleblower lawyer.

This is the first time that I am aware of that a major company
has publicly acknowledged that it has implemented a mandatory
yearly training program specifically designed to educate
employees about their rights under the SEC whistleblower
program.

While not binding on other public companies or financial
institutions, BlackRock’s mandatory training program could
serve as a precedent for other companies seeking to mitigate
the sanctions imposed on them by the SEC in future cases.

In addition, while BlackRock neither admitted nor denied any
wrongdoing in the Order, its remedial measures could be
interpreted as a major player acknowledging that it cannot try
to prevent its employees from receiving SEC whistleblower
awards.  As a widely-recognized elite asset manager,
BlackRock’s actions may grab the attention of other companies
in its industry.

* * *

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