On April 1, 2015, the Securities and Exchange Commission announced its first enforcement action against a company for using improperly restrictive language in confidentiality agreements with the potential to stifle whistleblowing.  In the attached order, the SEC charged KBR Inc. with violating whistleblower protection Rule 21F-17, which was enacted under the Dodd-Frank Act.  KBR required witnesses in certain internal investigation interviews to sign confidentiality statements with language warning that they could face discipline if they discussed the substance of the interview  with outside parties without the prior approval of KBR’s legal department.  The SEC found that the statements violated Rule 21F-17, which prohibits companies from taking any action to impede whistleblowers from reporting possible securities violations to the SEC.

KBR agreed to pay a $130,000 penalty to settle the SEC’s charges, and the company amended its confidentiality statement by adding language making clear that employees are free to report possible violations to the SEC and other federal agencies without KBR approval or fear of retaliation.  KBR agreed to the penalty and amendment notwithstanding the fact that there were no apparent instances in which KBR specifically prevented employees from communicating with the SEC about specific securities law violations.  The SEC found that the company’s blanket prohibition against witnesses discussing the substance of the interview had a potential chilling effect on whistleblowers’ willingness to report illegal conduct to the SEC.

The SEC’s Office of the Whistleblower (OWB) recently has announced that it “will continue to focus on agreements that attempt to silence employees from reporting securities violations to the Commission by threatening liability or other kinds of punishment.”  In pursuit of this goal, the OWB has been seeking from a number of companies every confidentiality agreement, nondisclosure agreement, settlement agreement, and severance agreement the companies entered into with employees since Dodd-Frank went into effect.  In light of the OWB’s focus and the potential consequences of overly broad confidentiality agreements, now is an opportune time for companies to review their standard agreements to ensure that they do not have a “potential chilling effect” on whistleblowers’ willingness to report to the SEC.

Please click here to download the full order.

Keesal, Young & Logan Employment Group

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