This past April, in the first enforcement proceeding of its kind, the Securities and Exchange Commission (“SEC”) imposed a cease-and-desist action upon a Texas-based global technology and engineering firm, KBR, Inc., for language in its confidentiality agreements that had the potential to prevent employees from reporting illegal activity to the SEC.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, “whistleblowers” are granted special protections with regards to reporting illegal activity. A whistleblower is a person who provides the SEC “with information relating to a possible violation of the Federal securities law that has occurred, is ongoing, or about to occur.” More specifically, Rule 21F-17, which came into effect in August 2011, provides that:
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… with respect to such communications.
The SEC took issue with KBR’s confidentiality agreements for witnesses in internal investigations interviews. KBR would receive complaints and allegations from its employees regarding potential unethical or illegal activity, including at times possible violations of federal securities laws. As part of the investigation process, KBR would then conduct interviews of its employees. These witnesses were required to sign confidentiality agreements which threatened disciplinary action, up to and including termination, if they discussed the investigation with outside parties prior to receiving approval from the company to do so.
According to the SEC, the pre-notification requirements dictated by the confidentiality agreements undermined the law and could discourage employees from reporting securities violations to the Commission. The SEC took action against the company, based solely on the language of its confidentiality agreements and in fact did not find any instances in which KBR had prohibited employees from making reports to the SEC or penalized employees for doing so. However, the SEC was concerned with the potential these confidentiality agreements would have on stifling communication.
KBR neither admitted nor denied the charges. In light of the SEC’s action, KBR paid a $130,000 penalty to settle the charges and has since voluntarily changed its agreements to provide that employees may contact the appropriate federal agencies, without needing approval from the company, to report potential violations.
This action brought against KBR serves as a warning for companies that may attempt to restrict potential whistleblowers from reporting violations directly to the appropriate federal agencies or for companies that are using outdated confidentiality or non-disparagement agreements. This enforcement action highlights the SEC’s commitment and vigilance to ensuring that employees are able to communicate directly with the appropriate authorities.
Employers should review their current confidentiality, severance, and non-disparagement agreements to ensure that they comport with the federal securities laws and provide protection for potential whistleblowers. Employees, on the other hand, should be aware of what they are asked to sign regarding communicating with the SEC. While confidentiality agreements are common in many industries, the SEC has made it clear that these agreements cannot circumvent rights delineated by the Dodd-Frank Act.
