The Securities and Exchange Commission (SEC) announced on January 16 that New York investment advisers Two Sigma Investments LP and Two Sigma Advisers LP have agreed to pay $90 million to resolve charges of securities law violations, including improper restrictions on whistleblower communications.
The settlement addresses dual violations: the firms’ failure to adequately address known vulnerabilities in their investment models and their violation of SEC Rule 21F-17(a), which protects whistleblower communications. This rule explicitly prohibits any actions that might impede individuals from directly communicating with Commission staff about potential securities law violations.
According to the SEC’s findings, Two Sigma’s separation agreements required departing employees to declare they had not filed complaints with any government agency. This requirement effectively created a mechanism to identify whistleblowers and potentially deny them post-separation benefits, actions that the SEC determined violated whistleblower protection regulations.
Regulatory Enforcement Trend
The Two Sigma case represents the latest in an intensifying regulatory crackdown on whistleblower impediments. Just weeks earlier, in January 2024, the SEC levied an $18 million penalty against J.P. Morgan Securities LLC for similar violations that restricted advisory clients and brokerage customers from reporting potential violations to the Commission.
Stephen M. Kohn, a prominent whistleblower attorney from Kohn, Kohn & Colapinto, who was instrumental in establishing Rule 21F-17(a) and handled the first SEC enforcement action under the rule, emphasized the significance of the J.P. Morgan case: “The SEC’s sanction in this case sends a message that illegal nondisclosure agreements that obstruct the ability of employees or clients to report potential crimes to law enforcement will not be tolerated.”
Cross-Agency Enforcement Movement
The SEC’s enforcement actions are part of a broader regulatory push against restrictive non-disclosure agreements (NDAs) across multiple financial oversight bodies:
- The Commodity Futures Trading Commission (CFTC) recently initiated its first enforcement action targeting NDAs that restrict whistleblowing
- The Consumer Financial Protection Bureau (CFPB) issued guidance warning that overly broad NDAs may violate federal whistleblower protection laws
Legal expert Benjamin Calitri noted the significance of the CFPB’s stance: “The CFPB’s Circular, taking a stance against illegally broad confidentiality agreements meant to silence whistleblowers, is an important step in expanding the protection of whistleblowers from being silenced due to illegally broad NDAs.” He emphasized that the CFPB’s position aligns with the SEC and CFTC’s recent enforcement actions, creating a united regulatory front against the misuse of NDAs to silence whistleblowers.
This coordinated regulatory approach suggests a growing focus on protecting whistleblower rights across the financial services sector, with significant penalties for firms that maintain practices that could discourage or impede whistleblower communications with regulatory authorities.