A. Alleged Violations of Whistleblower Protections

The core issue in this matter revolves around the Respondents’ alleged violations of whistleblower protections under Exchange Act Rule 21F-17(a). According to the SEC, during the period from May 2021 to February 2024 (the “Relevant Period”), the Respondents asked eleven clients to sign confidentiality agreements linked to compensatory payments for losses in their investment accounts. These agreements included provisions that obstructed the clients from reporting potential securities law violations to the SEC or other regulatory authorities. The confidentiality agreements contained clauses that not only restricted clients from disclosing information about the disputes or payments but also imposed conditions that clients would only be able to report violations if initiated by the regulators. This effectively impeded clients from voluntarily communicating with the SEC about potential violations.

B. Regulatory framework.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 introduced Section 21F into the Exchange Act, which aimed to bolster whistleblower protections by offering financial incentives and confidentiality protections. Rule 21F-17, effective from August 12, 2011, specifically prohibits any actions that obstruct individuals from reporting potential securities law violations directly to the SEC, including enforcing confidentiality agreements that restrict such reporting.

C. Details of the Agreements and Alleged Violations

The Respondents utilized two main templates for their confidentiality agreements: the “Agreement” and the “Agreement and Release”. According to the SEC, both templates contained provisions that violated Rule 21F-17(a). Key problematic clauses included:

One paragraph restricted clients from discussing the terms of the agreement or the underlying dispute, even in response to inquiries from regulators, unless those inquiries were unsolicited and did not result from any action by the client.
Another paragraph required clients to affirm that they had not previously reported the dispute to any regulatory authority and pledged to refrain from doing so in the future. It also contained provisions providing only a limited carve-out for responding to unsolicited inquiries, thereby creating a reasonable impression that clients were discouraged from voluntarily reporting potential violations to regulators.
The confidentiality agreements created significant barriers for clients who might otherwise report securities law violations. The restrictive clauses not only limited the clients’ ability to report violations voluntarily but also imposed a misleading impression that reporting to the SEC was only permissible if initiated by the SEC itself.

D. Penalties Imposed

The SEC has imposed the following sanctions on the Respondents:

NPA Asset Management, LLC: A civil monetary penalty of $160,000.
Nationwide Planning Associates, Inc.: A civil monetary penalty of $70,000.
Blue Point Strategic Wealth Management, LLC: A civil monetary penalty of $10,000.
The SEC’s order further requires the Respondents to cease and desist from future violations of Rule 21F-17(a) and the Respondents to be censured.

E. Conclusion

The sanctions reflect the SEC’s emphasis on enforcing whistleblower protections ensuring that entities do not obstruct the reporting of securities law violations, and punishing securities firms for whistleblower violations. If you are aware of significant violations of securities laws or industry rules by a FINRA Broker-Dealer firm or a Registered Investment Advisor, please contact Scott Greco for a free securities fraud attorney consultation about the issues and any potential case or whistleblower action.

Of particular note is The Huntington Investment Company’s case, which stands out due to its self-reporting and cooperation with the SEC. As a result, Huntington was ordered to pay a lower civil penalty compared to other firms, totaling $1.25 million. This demonstrates the importance of voluntary disclosure and cooperation in regulatory investigations.

The investigations uncovered widespread use of unapproved communication methods, such as personal text messages, across all sixteen firms. Employees at various levels, including supervisors and senior managers, were involved in these violations. The failure to maintain and preserve required records potentially deprived the SEC of crucial information in various investigations.

Each of the firms involved was charged with violating recordkeeping provisions of relevant securities laws and failing to reasonably supervise to prevent and detect such violations. In addition to the financial penalties, the firms were ordered to cease future violations, receive censures, and engage independent compliance consultants to review and enhance their policies and procedures.

Most securities brokerage firms and investment advisory firms prohibit texting between financial advisors and brokers and their customers because of the difficulty of supervising those communications. The reality is, however, that many brokers and advisors don’t follow these rules and often will send texts that can be used against them and their firms in related securities fraud actions. For this reason, customers who have been damaged by the wrongdoing of their advisors should take care to preserve all communications with their advisors including texts. If you believe you may have a claim against your financial advisor, broker, or their firm, please contact securities fraud attorney Scott Greco for a free attorney consultation.

The alleged wrongdoing centered on the language included by J.P. Morgan in its settlement agreements with its advisory and brokerage firm customers to which it paid over $1,000.00. Virtually all FINRA securities firms and Registered Investment Advisors require a confidentiality clause to be included in any settlement agreement with a customer. These settlement agreements are often the result of various misconduct by the firms or their advisors, such as securities fraud, breach of fiduciary duty, unauthorized trading, broker theft, recommended unsuitable investments, and churning. The reason why securities firms always require their settlements to be confidential is clear – they wish to hide their misconduct and the misconduct of their advisors from the public. FINRA’s Brokercheck report does require firms to disclose settlements with advisors/firms, but the details are often extremely general, and one has to look up the broker directly to find the disclosures.

According to the SEC Order, from 2020 to 2023 J.P. Morgan included language in 362 release agreements that prohibited customers not only from disclosing the amount of the settlement to the SEC, but also prohibited disclosing the facts related to the account (i.e. the misconduct). Although the releases did allow disclosure to the SEC in response to an inquiry, it did not allow the customers to initiate contact with the SEC.

These actions allegedly violated the SEC protections for securities whistleblowers, and as stated by the SEC in the Order: “JPMS willfully violated Exchange Act Rule 21F-17(a), which prohibits any person from taking any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation.”

In addition to the fine, J.P.Morgan was required to advise its customers that they were allowed to contact the SEC directly.

If you were the victim of misconduct of a securities brokerage firm or financial advisor/broker resulting in the loss of your monies, please contact investment fraud attorney Scott Greco for a free attorney consultation about your potential case.

According to the SEC Order, between February 2017 and August 2021, BAM, under Bruderman’s direction, persuaded at least thirteen investment advisory clients to invest substantial amounts totaling $6.1 million in entities where Bruderman had significant ownership and decision-making authority. Shockingly, these clients were not informed that their investments would temporarily be diverted to cover expenses unrelated to their intended investments or to repay loans made by Bruderman himself.

One particularly concerning example involved a $500,000 equity investment, where $400,000 was transferred to Bruderman’s personal bank account to repay a loan owed by one of the entities. The clients invested based on BAM’s advice, unaware of the temporary diversion of their funds. Despite BAM’s written policies requiring disclosure of material conflicts of interest, these conflicts remained undisclosed, leaving clients in the dark about the use of their investments.

The SEC found BAM and Bruderman in violation of the Advisers Act, specifically Sections 206(2) and 206(4), and Rule 206(4)-7. As part of the settlement, BAM and Bruderman have voluntarily repaid certain debts to investment advisory clients, totaling $1,650,000, and further were required to pay a $250,000 civil penalty.

This SEC order serves as a stern reminder of the regulatory responsibilities that investment advisers bear towards their clients. Misuse of customer funds and failure to disclose conflicts of interest are serious violations that can result in substantial penalties. Greco & Greco’s securities fraud lawyers have decades of experience seeking recovery of customer losses resulting from misconduct and fraud by investment advisory firms. If you believe you may be a victim of similar conduct, please contact Scott Greco for a free attorney consultation about your case.

Reg BI, 17 CFR 240-15l-1, specifically describes the “best interest” obligation as follows in section (a)(1):

“A broker, dealer, or a natural person who is an associated person of a broker or dealer, when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, shall act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or natural person who is an associated person of a broker or dealer making the recommendation ahead of the interest of the retail customer.”

Reg BI includes four best interest obligations – the disclosure obligation, the care obligation, the conflict-of-interest obligation, and the compliance obligation.

Although firms may address some conflicts of interest by disclosure to customers, the SEC discussed that certain conflicts cannot simply be disclosed, and must be eliminated. Specifically, the following activities by the Broker-Dealer would violate Reg BI – “sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific securities or specific types of securities within a limited period of time.”

Many cases of investor harm that end up in FINRA Arbitration are a result of financial incentives to the broker which encouraged the wrongful conduct or unsuitable recommendation. This can include churning, but also can involve high risk securities / investments that pay higher fees or compensation to the broker to generate more sales of the product. Issuers of high risk but low reward investments pay high commissions (sometimes at 8% or higher) because otherwise no reasonable broker would sell the investment. This can and does then lead to losses by public customers who were not explained the risk, and trusted their financial advisor. As the SEC makes clear, a Broker-Dealer cannot encourage the sale of certain kinds of high commission products through sales contests or quotas, and must have a compliance system in place to detect and prevent such violations of Reg BI.

If you believe you may have a potential claim against your financial advisor, please contact Scott Greco for a free attorney consultation about your case.