The SEC and Whistleblowers: The Latest

This Spring, the SEC announced that it had made a settlement in the cease and desist proceedings against the Houston-based tech and engineering firm, KBR Inc. The case was based on what the SEC regarded as restrictive language in employee confidentiality agreements. In the settlement, KBR has agreed to compliance measures and to make certain penalty payments.

KBR AND CONFIDENTIALITY AGREEMENTS

KBR conducted employee interviews to investigate whether employees were engaged in unethical or illegal conduct. As part of those interviews, KBR mandated that employees sign a confidentiality agreement agreeing not to discuss the details of the interview without the consent of KBR. The confidentiality agreement also noted that any violation would result in termination.

DODD-FRANK ACT VIOLATIONS

In its cease and desist order, the SEC decided the terms of KBR’s confidentiality agreement violated Section 21F of the Securities Exchange Act, which discusses whistleblower protection and was implemented in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Specifically, SEC Rule 21F-17(a) states:

No 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.

PROBLEMATIC LANGUAGE

This first-of-its-kind enforcement is particularly interesting because there was no claim that KBR ever made any attempt to prevent communications between an employee and the SEC.

Furthermore, KBR never threatened and/or taking any action to enforce the confidentiality agreement. KBR’s sole wrongdoing was the misuse of restrictive language in the confidentiality agreement. The clause in question stated the following:

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.

THE PROBLEM WITH “PRE-NOTIFICATION REQUIREMENTS.”

In a statement about the settlement, the SEC’s head of enforcement Mr. Andrew Ceresney commented: “By 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.”

He also stated: “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. We will vigorously enforce this provision.”

In a separate statement, SEC whistleblower chief Sean McKessy 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.”

WHAT THIS MEANS FOR WHISTLEBLOWERS

The scale and breadth of the SEC’s enforcement in cases like this is clear Corporations must evaluate their contractual provisions involving their employees, the codes of conduct, all internal reporting, compliance policies, and termination agreements to make sure that no provision neither expressly nor impliedly run afoul of Rule 21F-17.

In taking this proceeding against KBR, as well as in its public promises both before and after the announcement of the settlement, the SEC has made its mission clear: Confidentiality contracts that could be viewed as an effort to impede whistleblowers are no longer viable.

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