SEC Blows the Whistle on Confidentiality Agreements – Are You Next?

The Securities and Exchange Commission (SEC) recently filed its first enforcement action alleging that a company improperly used confidentiality agreements to deter whistleblowing.

The action highlights that securities regulators are taking a much closer look at how companies use non-disclosure provisions in their confidentiality agreements with employees.

Late last year, the Financial Industry Regulatory Authority (FINRA) issued a regulatory notice regarding the use of confidentiality provisions in settlement agreements. It specifically highlighted that FINRA Rule 2010 prohibits provisions that restrict or preclude a customer or any other person from communicating with the SEC, FINRA, or any federal or state regulatory authority regarding a possible securities law violation.

As highlighted by the recent enforcement action, confidentiality agreements are also on the SEC’s radar. The agency alleged that Houston-based global technology and engineering firm KBR Inc. violated the whistleblower protection Rule 21F-17, which was enacted under the Dodd-Frank Act, by requiring witnesses in internal investigations regarding possible securities law violations to sign confidentiality agreements.

Although the SEC did not allege that KBR specifically prevented employees from communicating with the SEC about specific securities law violations, it maintained that the company’s blanket prohibition against witnesses discussing the substance of their interviews with outside parties without prior company approval “has a potential chilling effect on whistleblowers’ willingness to report illegal conduct to the SEC.”

KBR agreed to pay a $130,000 penalty to resolve the SEC’s charges In addition, KBR voluntarily added the following language to its confidentiality statement in order to bring it into compliance:

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.

In a press statement announcing the settlement, the SEC advised that all employers should “similarly review and amend existing and historical agreements that in word or effect stop their employees from reporting potential violations to the SEC.”