According to the Securities and Exchange Commission (SEC)’s Press Release, J P Morgan will pay an SEC settlement for silencing potential whistleblowers. The SEC’s Order charges J.P. Morgan with impeding its customers from reporting potential securities law violations. It did this by requiring customers to sign restrictive release agreements. J.P. Morgan will pay an $18 million civil penalty to settle its securities law violations.
SEC’s Whistleblower Program
In the aftermath of the 2008 financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Dodd-Frank created the SEC Whistleblower Program. The SEC Whistleblower Program offers important protections and financial incentives to whistleblowers. If a whistleblower’s tip results in monetary sanctions exceeding $1 million, the whistleblower may receive an award between 10% and 30% of the total monetary sanctions collected. In 2023, the SEC Whistleblower Program paid out its largest-ever whistleblower award of $279 million to a single whistleblower.
Details of the SEC’s Findings
According to the SEC, from March 2020 through July 2023, J.P. Morgan required its clients to sign confidential release agreements if they received a credit or settlement exceeding $1,000 from the firm. These agreements compelled clients to maintain the confidentiality of the settlement, related facts, and account information. The agreements not only restricted clients from disclosing information to the public but also barred them from voluntarily contacting the SEC.
The problematic release stated:
[J.P. Morgan client] shall keep this Agreement confidential and not use or disclose (including but not limited to, media statements, social media, or otherwise) the allegations, facts, contentions, liability, damages, or other information relating in any way to the Account, including but not limited to, the existence or terms of this Agreement . . . . Notwithstanding, [J.P. Morgan client] and [J.P. Morgan client’s] attorneys are neither prohibited nor restricted from responding to any inquiry about this settlement or its underlying facts by FINRA, the SEC, or any other government entity or self-regulatory organization, or as required by law.
While the Release permitted clients to “respond” to inquiries from the SEC, it did not permit voluntary communications to the SEC concerning potential securities law violations. According to the SEC, these confidentiality provisions violated Rule 21F-17(a) under the Securities Exchange Act of 1934. Rule 21F-17(a) is intended to “encourag[e] individuals to report to the Commission.” It does this by prohibiting any action that hinders individuals from reporting potential securities law violations to the SEC. By forcing clients into a position where they had to choose between accepting settlements and reporting violations, J.P. Morgan undermined investor protections and engaged in illegal practices.
Surprisingly, despite the signed prohibition on the “client” reporting the underlying dispute to the SEC, J.P. Morgan voluntarily reported numerous disputes to the Financial Industry Regulatory Authority (FINRA), as required by FINRA Rule 4530. The SEC explained that J.P. Morgan’s self-reporting to FINRA did not mitigate its wrongful conduct in impeding clients from reporting potential securities law violations to the SEC.
Investors, whether retail or otherwise, must be free to report complaints to the SEC without any interference. Those drafting or using confidentiality agreements need to ensure that they do not include provisions that impede potential whistleblowers.
– Corey Schuster, Co-Chief of the Enforcement Division’s Asset Management Unit.
J P Morgan Will Pay $18 Million SEC Settlement
Without admitting or denying the SEC’s findings, J.P. Morgan agreed to be censured and to cease and desist from violating the whistleblower protection rule. The financial giant will pay an $18 million civil penalty as part of the settlement. The SEC’s order serves as a stark reminder to financial institutions that attempts to hinder individuals from reporting violations will not be tolerated.
SEC Likely to Scrutinize Similar Confidential Release Agreements
The J.P. Morgan penalty comes less than a year after the SEC imposed a $35 million fine on Activision Blizzard. The $35 million fine was imposed after the SEC determined that Activision Blizzard improperly demanded that its former employees sign separation agreements. The separation agreements impeded their ability to communicate directly with the Commission.
Taken together, these enforcement actions suggest that the SEC will investigate and fine companies, financial institutions, brokerages, or investment firms who force customers or employees to sign unfairly restrictive release agreements. Individuals who signed such a release may have the basis for filing a claim with the SEC.
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