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SEC Sends Message to Employers: Confidentiality Agreements That Silence Potential Whistleblowers are Prohibited

The U.S. Securities and Exchange Commission (“SEC”) relies heavily on whistleblowers to report potential securities law violations. Insider knowledge of the circumstances and individuals involved allows the SEC to identify fraud and other potential violations much earlier than might otherwise be possible. So, when Houston-based global technology and engineering firm KBR Inc. (“KBR”) attempted to silence potential whistleblowers through employee confidentiality agreements, the SEC put its foot down.

In its first enforcement action regarding confidentiality agreements (In the Matter of KBR, Inc.), the SEC seeks to send a message to other companies regarding the “potential chilling effect” that confidentiality agreements, like KBR’s, have on would-be whistleblowers. KBR’s confidentiality agreement required employees to seek prior approval from the company’s legal department before discussing internal investigations with outside parties. Failure to do so, KBR warned, could lead to discipline, up to and including termination. But, such improperly restrictive language violates SEC’s Rule 21F-17, enacted under the Dodd-Frank Act of 2010, which states:

No person may take any 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 . . . with respect to such communications.

Indeed, such blanket provisions fly in the face of the congressional purpose underlying whistleblower protections, which is “to encourage whistleblowers to report possible violations of the securities laws by providing financial incentives, prohibiting employment-related retaliation, and providing various confidentiality guarantees.”

Without admitting or denying the SEC’s charges, KBR settled the matter for $130,000 and agreed to amend its confidentiality agreements to make clear that current and former employees will not have to fear retaliation or termination or seek approval from company lawyers before contacting the SEC. Going forward, the SEC recommends that all companies review and amend their confidentiality agreements that, in word or effect, gag whistleblowers.

For more information about your rights, and a free consultation, please call us at (619) 342-8000.