In the aftermath of the Enron scandal and the Great Recession, Congress passed broad legislation to purportedly address corporate malfeasance, including the Dodd-Frank Act in 2010. The Dodd-Frank Act, in conjunction with the Sarbanes-Oxley Act, contains a whistleblower provision designed to protect employees of publicly traded companies from retaliation for reporting an action the employee reasonably believes violates federal law relating to fraud against shareholders. The Securities and Exchange Commission (“SEC”) is charged with enforcing the Dodd-Frank Act and recently sent a message to employers regarding language in confidentiality agreements that could potentially deter employees from reporting securities law violations.
On April 1, 2015, the SEC announced its first enforcement action against KBR, Inc. (“KBR”) related to a company allegedly using improperly restrictive language in a confidentiality agreement with the potential to stifle the whistleblower process. KBR apparently had a policy to ask employees to sign a confidentiality agreement at the conclusion of an investigation of employee misconduct. The purpose of this policy was to maintain the attorney/client and investigative privileges, a presumably legitimate business goal. The confidentiality agreement included language informing employees that they could face discipline or potential termination if they discussed KBR’s internal investigation with any third-parties without first obtaining approval from KBR’s legal department.
The SEC claimed that this provision violated Rule 21F-17 enacted under the Dodd-Frank Act. Rule 21F-17 reads in relevant part, “No person may take any action to impede an individual for communicating directly with the [SEC] staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.” KBR and the SEC recently reached a settlement agreement wherein KBR agreed to pay a $130,000 penalty and voluntarily amend its confidentiality provision in order to resolve the SEC charges. Importantly, as part of the settlement, KBR did not admit liability or violation of Rule 21F-17 in connection with the SEC’s charges.
This settlement is important because the SEC made it clear that it was making the protection of whistleblower rights a priority. 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 of the SEC.” Furthermore, Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, stated that the SEC intends to “vigorously enforce this provision.”
Publicly traded companies should carefully examine confidentiality agreements and amend relevant provisions to make it clear that nothing in the confidentiality agreements prohibits employees from reporting possible securities violations to the SEC or other federal agencies without approval from their employer or fear of retaliation for reporting such claim violations.
A copy of the press release issued by the SEC on April 1, 2015, can be found here: http://www.sec.gov/news/pressrelease/2015-54.html#.VR01XfnF_rQ.