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SEC charges liability company with Exchange Act violations

Securities SEC Enforcement Securities Exchange Act

Securities

On June 23, the SEC announced charges against a New York-based limited liability firm for Securities Exchange Act violations because the firm allegedly used language in the firm’s compliance manual that prohibited potential whistleblowers from speaking out to regulators. According to the order, over a four year span, the firm’s compliance manual stated that employees were “strictly prohibited from initiating contact with any Regulator without prior approval from the Legal or Compliance Department,” and that violation of this policy may result in “disciplinary action by the Firm.” The order noted, however, that the agency was “unaware of any specific instances” where an employee of the firm was prevented from disclosing to the SEC staff about possible violations. In 2018 and 2019, the firm also provided annual compliance training to its employees that allegedly included similar language. Specifically, a slide in the training contained language that prohibited employees “from initiating contact with any regulator without prior approval from Legal or Compliance, including conversation[s] regarding an individual’s registration status with FINRA.” The SEC further alleged that the firm’s employees were also required to comply with the code of conduct maintained by the firm’s indirect parent company, but acknowledged that the code was not meant to restrict employees’ whistleblower protections, and employees were not prohibited from reporting to government agencies. However, the firm’s manual also noted that “personnel should follow the more restrictive” of the various policies, “absent explicit direction to the contrary.” The order noted that the firm took remedial steps to correct the issues, including altering the language in the compliance manual to instead advise employees of their right to communicate with regulators about possible concerns without obtaining prior approval. The firm communicated the revisions to its employees by administering a compliance alert, which linked to the revised manual. The SEC charged the firm with violating Rule 21F-17 of the Securities Exchange Act and ordered the firm, to cease and desist for committing future violations of Rule 21F-17 and pay a $208,912 penalty.