Employers and investigators need to consider an important carve-out to standard confidentiality agreements with employees. On April 1, 2015, the Securities and Exchange Commission (SEC) announced its first enforcement action targeted at employer confidentiality agreements the SEC viewed as inhibiting potential whistleblowers from reporting securities violations. This action is a reminder that employers and investigators must proceed carefully in crafting confidentiality agreements, including in the context of an internal or government investigation, in the course of ongoing litigation, or in relation to a separation agreement with a departing employee.
The SEC has an active whistleblower program. It exists as part of the Dodd-Frank Act, enacted in 2010 in the wake of the financial crisis, which added incentives and protections for whistleblowers reporting suspected misconduct to the SEC. Provisions of the Act protect whistleblowers from retaliation. In implementing these provisions, the SEC promulgated Rule 21F-17. That Rule prohibits companies from taking "any action to impede an individual from communicating directly with the [SEC] about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications."
The SEC's recent enforcement action, taken against KBR, Inc. illustrates the SEC's interpretation of this Rule. KBR is a publicly traded global construction, engineering, and services firm based in Houston. The company, like many others, maintains an internal compliance program through which employees can report potentially illegal or unethical conduct. KBR regularly conducts internal investigations into such allegations and typically interviews employees as part of these investigations. KBR's practice was to require employees being interviewed to sign a confidentiality agreement. That confidentiality agreement informed the employee that he or she was "prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview" without the prior authorization of KBR's attorneys. The confidentiality agreement also warned employees that "the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment."
The SEC viewed the KBR confidentiality agreement as a violation of Rule 21F-17. The SEC was unaware of any particular instance in which a KBR employee was prevented from disclosing information to the SEC under the confidentiality agreement. Nevertheless, the SEC initiated cease-and-desist proceedings, culminating in an April 1 settlement with KBR. Pursuant to the settlement, KBR agreed 1) to pay a $130,000 penalty; 2) to revise its standard confidentiality agreement to advise employees that they are not prohibited from disclosing possible violations of law to any governmental agency; and 3) to advise any employees who signed the prior confidentiality agreement since Rule 21F-17 became effective in August 2011 of the same.
As part of the settlement, KBR agreed to include to include the following language in its future confidentiality statements:
"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 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."
By taking action against KBR, the SEC has signaled that it will prioritize ensuring that company policies do not stifle potential whistleblowers. Employers subject to SEC regulation should consider Rule 21F-7 in preparing any confidentiality agreement with employees, whether in the context of an internal or government investigation, civil litigation, or a severance agreement. Such agreements should be crafted to make clear that they do not bar cooperation with government investigations in order to avoid accusations that employers are muffling potential whistleblowers or attempting to obstruct government action. The language set out in the SEC's KBR settlement serves as one model for consideration in company's confidentiality agreements.
The SEC's recent enforcement action against KBR demonstrates the care with which employers and investigators must proceed in entering confidentiality agreements with employees and others. HSE attorneys can assist you in crafting appropriate provisions to protect your interests while complying with the law.
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