Investment Advisers: Beware the Broad Confidentiality Clause

Investment advisers—hedge fund managers, private equity firms and others—may rely on confidentiality agreements to protect against the disclosure of an investment thesis or algorithm or simply as a means of keeping investors’ affairs private. Indeed, Regulation S-P requires registered investment advisers (RIAs) to take steps to “insure the security and confidentiality of customer records and information.” However, in light of recent enforcement measures taken by the Securities and Exchange Commission, RIAs should review their confidentiality agreements—including those with investor clients—to make sure these agreements do not violate SEC Rule 21F-17(a), which prohibits the use of confidentiality agreements to deter whistleblowers.

Enforcement Cases

SEC Rule 21F-17(a), adopted in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act, provides, “no person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement.” 17 C.F.R. §240.21F-17(a) (2016). In its three enforcement cases to date, the SEC has made clear that a violation of Rule 21F-17(a) may occur even where a confidentiality provision was not, in fact, used to impede whistleblowers.