Why it matters
The Securities and Exchange Commission (SEC) has filed—and settled—the agency’s first enforcement action against an employer based on a confidentiality agreement that allegedly violated an agency rule issued pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. After the statute established the SEC’s whistleblower program, the agency promulgated a rule that prohibits employers from impeding employees from reporting possible violations of securities law, including by use of a confidentiality agreement. As part of the SEC’s stepped-up enforcement of whistleblower protections, the agency said a confidentiality agreement used by a technology and engineering firm ran afoul of the rule because it instructed employees not to discuss the workings of an internal investigation without prior authorization by the law department. To settle the suit, the employer agreed to contact all employees who signed the agreement over the prior four years to clarify their rights, pay a $130,000 penalty, and amend its confidentiality agreement to comply with the SEC rule going forward. Employers are on notice that the agency will take action based on employer contracts and agreements that appear to discourage whistleblower activity separate and alone from a preexisting case and should consider a review of any materials that could trigger SEC scrutiny, as the agency promised continued enforcement. “SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC. We will vigorously enforce this provision,” Andrew J. Ceresney, director of the SEC’s Division of Enforcement, said in a statement.
The Dodd-Frank Wall Street Reform and Consumer Protection Act established a whistleblower program for the financial services industry overseen by the SEC in 2010.
Regulations promulgated by the agency prohibit companies from interfering with or restricting employees from reporting potential violations to the agency. SEC Rule 21F-17 makes it a separate violation of law to “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.”
Recent news stories reported that the SEC had sent letters to companies requesting copies of various documents—including employment contracts, corporate training materials on confidentiality, nondisclosure agreements, confidentiality agreements, severance agreements, and settlement agreements reached with employees since Dodd-Frank went into effect—in an effort to ensure that employers were not impeding whistleblowers’ rights.
The news reports became a reality when the SEC announced a consent order reached with Texas-based KBR, Inc., a technology and engineering firm the agency said violated Rule 21F-17 with a confidentiality agreement.
KBR received complaints and allegations from employees of potentially illegal or unethical conduct by the company and its workers. As part of its compliance program, the company conducted internal investigations of such allegations, which typically included interviews of KBR employees, including the individual who originally lodged the complaint.
Interviewees were provided with a form confidentiality statement by KBR. The agreement was not required by company policy but was included in the Code of Business Conduct Investigation Procedures Manual and investigators had witnesses sign the statement at the start of an interview, the SEC said. The form was used both prior to the promulgation of Rule 21F-17 and after.
The agreement included the following provision:
“I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.”
Such language potentially discouraged employees from reporting securities violations in contravention of Rule 21F-17, the SEC alleged.
“Though the Commission is unaware of any instances in which (i) a KBR employee was in fact prevented from communicating directly with Commission Staff about potential securities law violations, or (ii) KBR took action to enforce the form confidentiality agreement or otherwise prevent such communications, the language found in the form confidentiality statement impedes such communications by prohibiting employees from discussing the substance of their interview without clearance from KBR’s law department under penalty of disciplinary action including termination of employment. This language undermines the purpose of Section 21F and Rule 21F-17(a), which is to ‘encourage[e] individuals to report to the Commission,’ ” according to the SEC’s order.
To settle the charges, KBR—which did not admit or deny the allegations—agreed to pay a $130,000 penalty to the SEC and amended its confidentiality agreement with a new clause:
“Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.”
The company also promised to make “reasonable efforts” to contact all KBR employees in the United States who signed the allegedly illegal agreement from August 21, 2011, to the present and provide them with a copy of the order and an explanation of their rights.
To read the SEC order in In the Matter of KBR, Inc., click here.