Why it matters
Demonstrating the Security and Exchange Commission's (SEC) stepped-up protection of whistleblowers, national retailer Barnes & Noble revealed in a quarterly filing that the agency is investigating the company's use of employee confidentiality agreements. The Dodd-Frank Wall Street Reform and Consumer Protection Act prohibited companies from placing restrictions on the ability of employees to report alleged wrongdoing. The SEC has taken the attempt to encourage whistleblowing to heart, keeping an eye on employers that might be running afoul of the statute—such as Barnes & Noble. The company's disclosure provides an important reminder to companies about the SEC's vigilance in the area of whistleblowing, particularly on the heels of the agency's recent rule interpretation that whistleblowers that report unlawful activity internally are entitled to the same legal protections as those who report to the agency. Although the agency has not commented on the Barnes & Noble investigation, it cautioned employers about the use of such agreements in a settlement earlier this year. "SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other types of agreements that may silence potential whistleblowers before they can reach out to the SEC," Andrew J. Ceresney, director of the agency's Division of Enforcement, said in a statement. "We will vigorously enforce this provision."
When the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed by President Barack Obama in 2010, the statute included a provision prohibiting employers from restricting employees from blowing the whistle on alleged wrongdoing.
To enforce the provision, the SEC promulgated Rule 21F-17, which 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."
In April, the SEC brought its first enforcement action based on an employer's confidentiality agreement. Texas-based KBR, Inc. had a policy under which employees could be disciplined or fined if they discussed an internal investigation with a third party absent prior approval from the legal department.
While the SEC noted that it had no evidence of specific incidents where KBR tried to block whistleblowing activity, the policy had a "potential chilling effect," the agency said. KBR neither admitted nor denied the charges but paid a $130,000 fine to settle the case and changed company policy to clarify that employees are able to report possible violations to third parties without prior approval.
Barnes & Noble could be the second company to reach a deal. In the company's third-quarter Form 10-Q, the national retail chain disclosed the agency is investigating its use of employee confidentiality agreements. "The SEC staff has identified [a] matter, related to Rule 21F-17 of the Dodd-Frank Act, resulting from certain historical confidentiality provisions in agreements with employees," according to the SEC filing. "The Company is in the process of discussing a potential negotiated resolution of this issue with the SEC staff in order to close the investigation."
To read Barnes & Noble's Form 10-Q, click here.