SEC Begins Clamping Down on Confidentiality Agreements Meant to Impede Whistleblowers

August 28, 2015

The SEC recently announced its first enforcement action against an employer for including improperly restrictive language in confidentiality agreements with its employees. KBR, Inc., a Houston technology company, required any employee interviewed as part of an internal investigation into potential legal violations or unethical conduct to sign a confidentially statement agreeing not to discuss “any particulars regarding [the] interview and the subject matter discussed during the interview, without the prior authorization of the Law Department.” Additionally, the agreement provided that the unauthorized disclosure of information may be grounds for disciplinary action, including termination of employment.

In its enforcement action, the SEC contended that the above language violated SEC Rule 21F-17, which was issued under the authority of the whistleblower provisions of the Dodd-Frank Act. This rule, among other things, provided that no person “may take 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…” Surprisingly, the SEC noted that it was unaware of any instances in which a KBR employee had been impeded or discouraged from actually communicating with the SEC about a securities law violation or issue. Rather, the SEC’s enforcement action was based solely on the language of the confidentiality agreement.

To settle the enforcement action, KBR agreed to pay a civil penalty of $130,000. KBR also agreed to amend its confidentiality agreement to expressly provide that nothing in the agreement prohibited employees from reporting possible violations of federal law or regulation to any governmental agency or entity.

Because the action was settled by KBR, it is unclear if the SEC’s position would have been upheld by a court if contested by the employer. Strong arguments could have been made by KBR against the SEC’s position because none of its employees had been deterred from communicating with the SEC about legal violations, and the rule at issue only applies if the employer takes “action to impede an individual from communicating” with the SEC. Nevertheless, the SEC’s pursuit of KBR indicates the SEC’s broad interpretation of Rule 21F-17 and strong interest in investigating companies that may be attempting to silence the reporting of securities law violations.

Following the KBR action, companies should review their employment, confidentiality, settlement, and severance agreements to ensure that they conform to the SEC’s position. In particular, these agreements should have carve-outs that allow an employee to communicate with government agencies about possible violations of federal law.