Actions vs. J.P. Morgan, Monolith Serve as SEC Compliance Check Reminders

The Securities and Exchange Commission (SEC) recently settled charges against J.P. Morgan Securities LLC (JPMS) for impeding hundreds of advisory clients and brokerage customers from reporting potential securities law violations to the SEC.[1] JPMS agreed to pay $18 million in civil penalties to the SEC to settle the charges.

According to the SEC, from March 2020 through July 2023, JPMS regularly asked retail clients to sign confidential release agreements if they had been issued a credit or settlement from the firm of more than $1,000. In what the SEC alleged was a violation of whistleblower protections under securities laws, the agreements required the clients to keep all information related to the settlement and their accounts confidential. In addition, even though the agreements permitted clients to respond to SEC inquiries, they did not permit clients to voluntarily contact the SEC, violating whistleblower protection rules.

In addition to its anti-retaliation protections in the employment context, the SEC promulgated Rules following the enacting of the 2010 Dodd-Frank Act (Dodd Frank) that provide expansive protections and financial incentives to whistleblowers. One such Rule, Commission Rule 21F-17[2], states that “[n]o person may take 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 … with respect to such communications.”[3] By offering settlements in exchange for confidentiality, JPMS allegedly violated whistleblower protection rules by forcing customers to keep potential security violations confidential and waive possible financial incentives available if information underlying the settlements was voluntarily disclosed to the SEC.

Although parties have legitimate interests in protecting the confidentiality of agreements, the JPMS settlement is a stark reminder of the potential costly consequences if a party is prohibited from contacting the SEC about potential securities violations. Companies should also be mindful that they are subject to the SEC’s whistleblower protection rules even if they are privately held. Just last fall, the SEC settled allegations against Monolith Resources, LLC (a privately held company) that it was violating securities laws and regulations by utilizing separation agreements with similar waiver and confidentiality provisions under Securities Exchange Act of 1934 Rule 21F-17. This is important in the employment context, as many employers will be familiar with the phrase “your waiver and release of claims are intended to be a complete bar to any recovery or personal benefit by or to you,” which can be found in almost every separation agreement or management incentive plan. Without a listing of exceptions to this requirement including as to recovery under federal whistleblower programs, just the inclusion of this language in a proposed agreement may be a violation of securities laws.

Combined, the JPMS and Monolith settlements should put companies (public and private) on notice that the SEC is stepping up its enforcement of these claims and that it is time to review all of their agreements, not just confidentiality ones, to confirm compliance with the Dodd-Frank Act and SEC Rulemaking. If in doubt, provisions that discourage contacting the SEC should be avoided.

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[1] Reuters, JP Morgan to pay $18 million fine over whistleblower protection violations -SEC, Jan. 16, 2024,  https://www.reuters.com/legal/jp-morgan-pay-18mln-settle-whistleblower-protection-violations-sec-2024-01-16/.

[2] 17 CFR § 240.21F-17.

[3] 17 CFR § 240.21F-17(a).