January 27, 2017
BlackRock Inc. has agreed to pay a $340,000 penalty to settle Securities and Exchange Commission charges that the investment management firm illegally required employees to enter into separation agreements that prohibited them from collecting whistleblower awards.
The SEC’s Jan. 17 administrative order says New York-based BlackRock violated whistleblower protection rules by entering into separation agreements with over 1,000 employees from October 2011 to March 2016 that restricted employees’ rights under federal securities laws.
BlackRock settled without admitting or denying the charges.
The whistleblower protection rule, Rule 21F-17 of the Securities Exchange Act of 1934, 17 C.F.R. 240.21F-17, provides that no person may take action to impede an individual from communicating with the SEC regarding a possible securities law violation.
The rule, which applies to preemptive clauses in employment agreements, took effect Aug. 12, 2011.
BlackRock’s illegal provision
BlackRock historically has entered into voluntary separation agreements with employees departing the company, the SEC’s order said.
But after the rule took effect, BlackRock in October 2011 allegedly modified a provision in its separation agreement to require that a departing employee waive his or her ability to collect whistleblower awards.
According to the order, the provision provided that in exchange for monetary separation payments and other consideration from the company, a departing employee waived his or her ability to receive incentives for reporting misconduct under, among other things, the SEC’s whistleblower program. The separation agreements did not prohibit former employees from communicating with the SEC about possible securities law violations, but only the financial incentives for doing so, the order said.
According to the order, BlackRock entered into about 1,070 separation agreements containing this restrictive language.
Although the SEC said it was not aware of any incident where the provision prevented a former BlackRock employee from contacting the commission, it concluded that the company’s actions in adopting the provisions undermined the intent of the whistleblower protection rules of Section 21F-17.
Anthony S. Kelly, co-chief of the SEC enforcement division’s asset management unit, said in a statement announcing the settlement that “BlackRock took direct aim at our whistleblower program by using separation agreements that removed the financial incentives for reporting problems to the SEC.”
In addition to the financial penalty, BlackRock agreed to take certain remedial actions such as providing its employees mandatory training on the company’s policy for reporting misconduct and revising its code of ethics to ensure employees know their rights under Rule 21F-17.
Further, the company must begin efforts to contact former employees who signed separation agreements with the illegal provision within 60 days and inform them of their right to collect whistleblower awards.