On January 16, 2024, the Securities and Exchange Commission (SEC) announced that J.P. Morgan Securities LLC (JPMS) agreed to pay an $18 million fine to resolve charges over violating whistleblower protection. According to the SEC order, from March 2020 through July 2023, JPMS routinely compelled certain advisory clients and brokerage customers receiving over $1,000 in credits or settlements to sign confidentiality agreements barring them from reporting any related facts or allegations to the SEC. By preventing clients from approaching the SEC, the firm violated explicit prohibitions on impeding individuals from reporting possible securities law breaches. While many people focus on the SEC’s work issuing whistleblower rewards, the JPMS decision shows that the SEC is using both the carrot and the stick to protect and encourage whistleblowing in the financial industry.
Impermissible Gag Orders to Hundreds of Retail Customers
As outlined in the SEC’s order, JPMS had a standard practice of requiring non-disclosure agreements when issuing resolutions over $1,000 to retail clients. The agreements prohibited clients from disclosing the settlement itself and any information regarding the circumstances and accounts involved, or even the mere existence of the agreement to any third party.
According to the order, “while the Release permitted clients to respond to inquiries from the Commission, it did not permit voluntary communications with the Commission concerning potential securities law violations.” By denying clients the affirmative ability to approach the SEC, the agreements directly violated Rule 21F-17(a), which unambiguously forbids “enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.”
The order notes that JPMS compelled over 362 clients to sign gag orders from 2020 through 2023, with settlement values ranging from approximately $1,000 to $165,000. In some instances, the firm offered extra compensation exceeding the initial resolution amount to convince clients to accept the non-disclosure provisions.
While JPMS did independently report certain cases to the Financial Industry Regulatory Authority (FINRA) as required by separate FINRA regulations, this mandatory reporting failed to offset prohibitions on voluntary SEC whistleblowing. As SEC Enforcement Division Co-Chief Corey Schuster stated in the press release, “those drafting or using confidentiality agreements need to ensure that they do not include provisions that impede potential whistleblowers.”
Explicit Prohibitions Against Potential Whistleblower Retaliation
The Commission implemented Rule 21F-17(a) in 2011 explicitly to bar corporations from attempting to mute prospective whistleblowers through restrictive severance agreement provisions and similar measures. Both the SEC order and press release clearly frame the case as unlawful retaliation against individuals potentially approaching the SEC about financial misconduct.
JPMS compelled clients “into the untenable position of choosing between receiving settlements or credits from the firm and reporting potential securities law violations to the SEC.” Such binary choices between remuneration and approaching regulators represent exactly the sort of coercive trade-off Rule 21F-17(a) aims to eliminate.
The Enforcement Division Director Gurbir S. Grewal bluntly stated in the press release, “Whether it’s in your employment contracts, settlement agreements or elsewhere, you simply cannot include provisions that prevent individuals from contacting the SEC with evidence of wrongdoing…For several years, [JPMS] forced certain clients into the untenable position of choosing between receiving settlements or credits from the firm and reporting potential securities law violations to the SEC. This either-or proposition not only undermined critical investor protections and placed investors at risk, but was also illegal.”
Ongoing Prioritization of Unfettered Whistleblower Rights
Statements from high-ranking SEC personnel in the order and press release explicitly characterize this case as the latest action to strengthen safeguards for would-be whistleblowers. The Commission sees the capacity for company employees and industry members to freely notify regulators of possible wrongdoing as an integral “critical component” for enforcement and achieving the SEC’s objectives.
Regulators are closely scrutinizing materials that appear to subtly compel employees to stay silent about violations. Previous cases like the 2022 Health Net settlement and punishments against BlackRock and BlueLinx Holdings targeting restrictive severance clause language, send a clear cautionary message to all companies drafting any contracts or compliance policies with provisions that could dissuade people from reporting misconduct.
By imposing a sizable $18 million penalty over gag order agreements, the SEC offered an unmistakable signal that stifling individuals from reporting violations will engender severe consequences. Any business seeking to avoid similar censure must ensure employee exit arrangements, resolution deals, and related materials never impede prospective whistleblowers from approaching regulators.
Authors: Harsh Sidhapurker and John Peterson
