As we reported in a previous post, “SEC Investigating Companies’ Employment Contracts That Restrict Whistleblowing,” the U.S. Securities and Exchange Commission (SEC) has been vocal about its concerns regarding the effects of confidentiality provisions on the agency’s enforcement efforts and on the rights of whistleblowers, and has even asked several companies for years of employment contracts, nondisclosure agreements, and other documents formed with their employees. Chief of the SEC Office of the Whistleblower Sean McKessy said that his office would be on the lookout for contracts that have a chilling effect on employees’ bringing allegations of wrongdoing to the SEC’s attention. According to a 2014 Law 360 article, McKessy warned “If we find that kind of language, not only are we going to go to the companies, we are going to go after the lawyers who drafted it.”
The SEC now has followed through on its warning. On April 1, 2015, the SEC brought its first enforcement action directed at language that it believes discourages whistleblowing activity. The action against KBR, Inc., was resolved with an Order under which KBR agreed to revise the language in its internal investigation confidentiality agreements and to pay $130,000 to settle the charges, even though there was no evidence of the prior language having deterred any person from reporting concerns to the government.
The action was brought under SEC Rule 21F-17(a), which was implemented under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Rule 21F-17(a) provides that that “[n]o 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.” The purpose of Rule 21F-17(a) is to encourage the reporting of potential unlawful conduct to the SEC.
The SEC focused on a form confidentiality statement KBR had been using in internal investigations pursuant to KBR’s Code of Business Conduct Investigation Procedures Manual. The prior statement, which witnesses were required to sign at the beginning of an interview, contained the following language:
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.
The SEC found this language to undermine Rule 21F-17(a). Although the SEC noted that it was “unaware” of any actual evidence that an employee had been prevented from communicating with the SEC because of this language, it found that the agreement had a chilling effect on whistleblowing by impeding “such communications by prohibiting employees from discussing the substance of their interview without clearance from KBR’s law department under penalty of disciplinary action including termination.”
KBR agreed to pay a penalty to resolve the matter, and without admitting or denying the charge, agreed to cease and desist from any future violations of Rule 21F-17. It also agreed to amend its confidentiality agreement, and to make reasonable efforts to contact employees who had signed the prior agreement and inform them that they did not need to seek permission to contact governmental agencies. The amended language, which the SEC approved in this case, reads as follows:
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.
Key Takeaways
There are two important lessons to be learned from the SEC’s first enforcement action targeting the language in company agreements with potential whistleblowers.
First, the SEC plans to bring enforcement actions to protect whistleblowing activity and to encourage the free exchange of information with regulatory agencies. In an SEC press release concerning the Order, Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, stated, “SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC. We will vigorously enforce this provision.” Clearly, the SEC is taking a careful look at these agreements, and is targeting these contractual provisions even where there is no evidence that the language had a chilling effect on any employee conduct. Companies should take note and should review immediately their employment agreements as well as their general confidentiality, nondisparagement, or nondisclosure provisions to ensure they do not contain language that the SEC might find has the effect of impeding an employee’s ability to report potential violations to regulatory agencies.
Second, the SEC’s Order provides an important preview of what the SEC believes to be acceptable language in confidentiality provisions. Prior to the Order, the SEC had yet to issue any specific guidance regarding the type of language it viewed as permissible, and Chief McKessy suggested that the SEC did not have any plans to provide specific language that would pass muster. However, at least for purposes of this enforcement action, the SEC has at long last approved confidentiality language. The language approved with respect to KBR may not be approved in every situation, and the placement of any language in an agreement will also be important, but for now, the modified language in the Order is the only example of language that the SEC deems acceptable.
Margaret H. Campbell is a shareholder in the Atlanta office of Ogletree Deakins, and she co-chairs the firm’s Ethics Compliance, Investigations, and Whistleblower Response Practice Group. Ms. Campbell and Theresa Donahue Egler, a shareholder in the Morristown office of Ogletree Deakins, who also co-chairs the firm’s Ethics Compliance, Investigations, and Whistleblower Response Practice Group, will discuss this development at Ogletree Deakins’ 2015 National Workplace Strategies seminar during a session entitled, “Breaking Developments in Whistleblower Litigation and Enforcement.” This year’s Workplace Strategies seminar will take place on May 14-15, 2015 (with pre-conference “immersion” sessions on May 13 and post-conference “interactive” sessions on May 16) at the Grand Hyatt hotel in San Antonio, Texas.
Jesse C. Ferrantella is an associate in the San Diego office of Ogletree Deakins.
