SEC To Companies: “Hands Off Whistleblowers!”
On April 1, 2015, the SEC announced its first whistleblower protection case involving restrictive confidentiality language. The agency charged the Houston-based engineering and technology firm KBR, Inc., with using overly restrictive language in confidentiality agreements that allegedly obstructed the whistleblowing process.
The provision at issue contained language that witnesses in certain internal investigations could be disciplined, or even terminated, for discussing the investigation with outside parties prior to receiving approval from KBR’s legal department. Since these investigations included allegations of securities law violations, the SEC found that the provision violated Rule 21F-17 of the Securities Exchange Act of 1934, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Rule 21F-17 prohibits the enforcement or threat of enforcement of any confidentiality agreement that would impede an individual from communicating with the SEC.
While not admitting any wrongdoing, KBR agreed: to cease and desist from committing or causing any future violations of Rule 21F-17; to pay a $130,000 penalty to settle the SEC’s charges; and to amend its confidentiality agreement to make it clear that employees could report possible violations to the SEC as well as to other federal agencies without approval from the company or fear of retaliation. The amended language includes the following statement:
Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.
The action is noteworthy not only because it was the first of its kind, but also because the SEC found no actual instances in which KBR had prevented employees from communicating with the SEC. Such an aggressive stance demonstrates the SEC’s commitment to the anti-retaliation provisions of the whistleblower rules. Given that many entities reporting to the SEC require employees to notify internal counsel or compliance offices if contacted by a regulator or other authority, companies should review those policies following the SEC’s KBR order.