On April 1, 2015, the Securities & Exchange Commission (the “SEC” or “Commission”) fined a public company $130,000 for requiring employees involved in internal investigations to sign a confidentiality agreement that the Commission deemed violative of the whistleblower protections contained in the Dodd-Frank Act. KBR, Inc., Exchange Act Release No. 74619 (Apr. 1, 2015). This case was the first brought by the SEC involving anti-disclosure language of this type.

The language at issue was used by a Houston-based technology and engineering firm, KBR Inc., which does a substantial amount of government contract work. KBR required employees questioned during internal investigations to sign confidentiality agreements that include the following statement:

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.

In the complaint the SEC filed shortly before reaching a settlement with KBR, the Commission alleged that this language violated SEC Rule 21F-17, 17 C.F.R. § 240.21F-17, which was enacted in 2011 to give heft to the whistleblower protection provisions included in the Dodd-Frank Act. Rule 21F-17 provides that “[n]o 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 did not find that the KBR confidentiality agreement ever actually hindered an employee from discussing a potential securities law violation with the SEC. Instead, the Commission viewed the agreement as a “blanket prohibition” against witnesses discussing the interview that could have a chilling effect on potential whistleblowers. Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, stated, “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.”

Significantly, the settlement not only requires KBR to cease using the above-cited statement, but it also mandates that the firm include the following language in its confidentiality statement:

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.

Finally, the SEC required KBR to eliminate the requirement that employees seek approval from KBR’s law department before communicating with the SEC or other government agencies. KBR also agreed to remove language referencing termination or other disciplinary actions for violations of the policy.

In its new release announcing the settlement, the SEC warned employers to “similarly review and amend existing and historical agreements that in word or effect stop their employees from reporting potential violations to the SEC.” Given the penalties as well as the potential reputational harm that accompany SEC settlements, public companies with confidentiality agreements similar to KBR’s, would be wise to heed this warning — and add the above-cited language deemed acceptable by the SEC — especially if they do business with the government or are involved with the financial markets, as those businesses are more likely to draw the SEC’s scrutiny.

For more information on the matter or to obtain a copy of the SEC settlement order, please visit the SEC’s website here.