Client Alert: SEC Whistleblowing on Employment Confidentiality Agreements
Avoid cease and desist proceedings by the SEC. Review your policies and procedures governing allegations of wrongdoing, including any materials that might run afoul of SEC Rule 21F-17.
Corporate policies and employment agreements that impose confidentiality obligations on employees may run afoul of whistleblower protections implemented under the Dodd-Frank Wall Street Reform Act and Consumer Protection Act. Companies that fail to review such policies and agreements in light of a recent SEC order risk finding themselves on the wrong side of an SEC enforcement proceeding.
Cease & Desist Proceedings
On April 1, the SEC instituted (and settled) cease and desist proceedings against KBR, Inc., requiring KBR to abandon a form confidentiality statement that KBR used in its internal investigations. The form required witnesses in investigations to agree to 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.
Violation of SEC Rule 21F-17
The SEC determined that this language violated SEC Rule 21F-17, which prohibits any action that would impede a person from communicating with the SEC regarding potential securities laws violations. Although the SEC's order acknowledges that the agency was unaware of any instances in which the confidentiality agreement actually stopped any KBR employee from communicating with SEC staff, or that KBR ever took steps to enforce the confidentiality agreement, the agency concluded that the agreement could impede a whistleblower from communicating potential securities violations to the SEC. It therefore fined KBR $130,000, and required it to amend the confidentiality statement. KBR also agreed to attempt to locate individuals who had signed the agreement, and provide them with the SEC Order and let them know that they may communicate with the SEC without prior approval of KBR's law department. KBR's new confidentiality statement provides:
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.
We Can Help
The Wall Street Journal has reported that the SEC has sent letters to "a number of companies" asking them to provide the SEC with their nondisclosure agreements and other documents that restrict communication by whistleblowers.
Companies should review their policies and procedures governing allegations of wrong doing, and other materials that might run afoul of SEC Rule 21F-17, and amend those materials to eliminate language that could be interpreted as violating that rule.
Let us help you prepare for these changes and stay informed of recent developments. Please contact your Barack Ferrazzano attorney for more information.