On April 1, the Securities and Exchange Commission (SEC) announced its first enforcement action, against KBR, Inc., based on language in confidentiality agreements that could stifle the whistleblowing process.  The action was brought under SEC Rule 21F-17.

KBR required witnesses in certain internal investigations to sign confidentiality agreements that included the following language:

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.

Since KBR’s internal investigations may include allegations of securities law violations, the SEC found that KBR’s confidentiality agreements violated SEC Rule 21F-17.  Rule 21F-17, which was adopted under the Dodd-Frank Act and became effective August 12, 2011, prohibits “any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation.”  The SEC acknowledged that it was not aware of any instances in which a KBR employee was prevented from communicating with the SEC about potential securities law violations, nor was it aware of KBR’s having taken any action to enforce its confidentiality agreements or otherwise prevent employees from communicating with the SEC.  Nevertheless, the SEC concluded that the language in KBR’s confidentiality agreements had a potential chilling effect on whistleblowers’ willingness to report illegal conduct.

KBR agreed to pay a $130,000 penalty to settle the charges, and it added language to its form confidentiality agreement making clear that employees are free to report possible violations of federal law to the SEC or other federal agencies without the company’s approval and without fear of retaliation.

In an April 1 press release, the SEC suggested that more enforcement actions addressing employers’ confidentiality agreements are likely to follow.  After noting that KBR had revised its form agreement, Sean McKessy, Chief of the SEC’s Office of the Whistleblower, stated: “Other employers should similarly review and amend existing and historical agreements that in word or effect stop their employees from reporting potential violations to the SEC.”

Employers should review any confidentiality language that they include in agreements with employees, including employment agreements, separation agreements, settlement agreements, and standalone confidentiality agreements, to make sure that the language does not run afoul of Rule 21F-17.