Existing privacy regulations and common sense have led investment advisors to vigorously protect confidential information from employee and contractor misappropriation. However, two recent developments raise concerns about how advisors restrict whistleblowers from disclosing confidential information to authorities. As a result, advisors should carefully review confidentiality agreements, severance agreements, employee manuals, policies and procedures, and potentially any other agreement that governs the use of confidential information.
The Defend Trade Secrets Act
The federal Defend Trade Secrets Act (DTSA) became effective on May 11. The DTSA’s primary function is to create a private cause of action for trade secret misappropriation under federal law.
Most critically for investment advisors, the DTSA provides immunity against criminal or civil liability to employees, consultants and contractors for violating trade secret laws if the disclosure is made solely for the purpose of reporting or investigating a suspected violation, or in a document filed under seal as part of a lawsuit or other proceeding.
Under the DTSA, advisors are required to give advance notice of such immunity in any agreement or other document with an employee, consultant or contractor that governs the use of trade secrets. To satisfy this requirement, advisors may simply include a cross reference in such an agreement to another policy document (e.g., policies and procedures manual).
Notably, this requirement only applies to contracts that are entered into or updated after May 11. Investment advisors should therefore amend any documents that govern the use or disclosure of trade secrets that are executed by or provided to employees, consultants and contractors to provide the advance notice of immunity to maximize recovery potential in misappropriation suits.