SEC Brings First Case for Retaliating Against Dodd-Frank Whistleblower
A hedge fund manager was fined and ordered to pay restitution aggregating over $2 Million and hire an independent consultant for taking retaliatory job actions against a whistleblower related to trading conflicts of interest. The SEC charges that the respondent forced the firm’s head trader to resign after discovering that he reported securities laws violations to the SEC. The head trader/whistleblower notified the SEC that the firm engaged in principal transactions with a proprietary account at a broker-dealer controlled by the respondent’s principal. The SEC asserts that the firm did not obtain sufficient consent from the hedge fund by submitting it for approval by the general partner’s conflicts committee staffed by personnel reporting to firm management. Apparently on the advice of the firm’s employment counsel, the firm removed the whistleblower from his position as head trader, took away his email account, barred him from the premises, and then demoted him into a make-work assistant compliance position from which he ultimately resigned. The Dodd-Frank Act prohibits retaliation against employees acting as whistleblowers.
OUR TAKE: Dodd-Frank’s whistleblower provisions should make firms consider implementing an element of independence into their compliance programs. Whether a firm hires an independent third party compliance provider or ensures that the CCO reports to an independent board, registrants need to give potential whistleblowers an outlet to uncover regulatory issues without being forced to go straight to the regulator. Separately, private fund sponsors should note that GP approval of principal transactions will not cure the conflict of interest.