The Securities and Exchange Commission (“SEC”) has brought its first-ever enforcement action against a company for using language in confidentiality agreements that prohibits employees from speaking with the SEC without prior approval from company officials, in violation of Rule 21F-17 of the Securities Exchange Act of 1934 (17 C.F.R. 240.21F-17). Rule 21F-17, enacted under the Dodd-Frank Act, prohibits any action that would “impede an individual from communicating directly with the [SEC] staff about a possible securities law violations, including enforcing, or threatening to enforce, a confidentiality agreement. . .with respect to such communications.”
Houston-based technology and engineering firm KBR Inc. required employees interviewed in internal investigations, including investigations of possible securities law violations, to sign confidentiality statements which warned that they could be disciplined or fired if they discussed the fact or substance of the interviews with third parties without prior approval of KBR’s legal department. Although the SEC found no “apparent instances in which KBR specifically prevented employees from communicating with the SEC about specific securities law violations,” it nevertheless charged KBR with a Rule 21F-17 violation on the basis that a “blanket prohibition against witnesses discussing the substance of [an] interview has a potential chilling effect on whistleblowers’ willingness to report illegal conduct to the SEC.”
Under the terms of the settlement, KBR agreed to pay a $130,000 penalty and amend its confidentiality statement.
The language at issue in KBR’s confidentiality statement said,
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.
As part of the SEC settlement, KBR agreed to amend its confidentiality statement to include the following:
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 report or disclosures and I am not required to notify the company that I have made such reports or disclosures.
In announcing the action, the SEC warned, “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.” The SEC’s press release may be found here and the order may be found here.
This action is a poignant reminder to regulated firms of the importance of conducting a thorough review of their codes of conduct, employment agreements, severance agreements, and any other documents that contain confidentiality or non-disparagement covenants, to ensure compliance with Rule 21F-17. Firms that currently use broadly worded confidentiality or non-disparagement clauses should discuss with legal counsel how to achieve compliance with Rule 21F-17, including by adding language that expressly allows for regulatory reporting, similar to the regulatory reporting exception KBR amended to its confidentiality statement.
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