On April 1, 2015, the Securities and Exchange Commission (“SEC”) announced its first enforcement action against a company for attempting to stifle whistleblowing by including improperly restrictive language in employee confidentiality agreements. The SEC charged global engineering and technology firm KBR Inc. with violating whistleblower protection Rule  21F-17 under the  Dodd-Frank Wall Street Reform and Consumer Protection Act, which prohibits any action taken 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.” KBR, without admitting or denying liability, agreed to voluntarily amend its employee confidentiality policy and pay a $130,000 penalty to settle the SEC’s charges.

According to the SEC order, the offending confidentiality provision prohibited employees from disclosing information learned in the course of certain internal investigations, including investigations into potential violations of the federal securities laws, without prior approval from KBR’s legal department. Notably, the SEC acknowledged that it was unaware of any instances in which a KBR employee was in fact prevented from communicating directly with the SEC about potential securities law violations or any KBR action to enforce the confidentiality agreement or otherwise prevent such communications. Rather, the SEC determined that “the language found in the form confidentiality statement impedes such communications” and “undermines the purpose of Section 21F and Rule 21F-17(a), which is to ‘encourage individuals to report to the Commission.’”

As SEC Enforcement Director Andrew Ceresney explained, “[b]y requiring its employees and former employees to sign confidentiality agreements imposing pre-notification requirements before contacting the SEC, KBR potentially discouraged employees from reporting securities violations to us.”   Ceresney further cautioned, “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.”

The SEC has thus made it clear that the potential chilling effect of an employee confidentiality agreement is sufficient to warrant enforcement action; evidence of actual discouragement is not necessary. As reported in our previous alert, SEC Touts Historic Year for the Whistleblower Program, whistleblower tips and awards increased steadily in 2014, and this ramp up in activity is likely to continue. According to a February 25, 2015, report in the Wall Street Journal, the SEC sent letters to a number of companies requesting production of nondisclosure agreements, employment contracts and other documents. These actions indicate that the SEC is paying close attention to corporate policies that discourage whistleblower reporting. Therefore, public companies should strongly consider reviewing  their existing  employee confidentiality policies and agreements to ensure compliance with SEC Rule 21F-17