SEC Goes After Confidentiality Agreements That Curb Whistleblowing

The Securities and Exchange Commission (“SEC”) has announced its first enforcement action against a company for violating whistleblower protection Rule 21F-17 of the Dodd-Frank Act, which prohibits companies from impeding whistleblowers from reporting potential securities violations to the SEC.

According to the SEC, Houston-based KBR, Inc., required employees involved in internal investigations to sign a confidentiality agreement that banned them from discussing those investigations with outsiders without prior approval from the company’s legal department. Violating the agreement could subject the employees to disciplinary actions, including termination.

The SEC said that by requiring employees to seek internal approval before reporting any securities violations to the SEC, KBR potentially discouraged employees from reporting violations.

As part of its settlement with the SEC, KBR has agreed to pay a $130,000 fine and amend the confidentiality agreement to clarify that employees may report any possible violations to the SEC or other federal agencies without prior company approval or fear of retaliation. In addition, KBR agreed to notify employees who had signed the confidentiality agreement of the SEC action.

The SEC said that any blanket prohibition on employees’ rights to report violations to any governmental agency has a potential chilling effect on the reporting of illegal activities.

“Other 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,” said Sean McKessy, Chief of the SEC’s Office of the Whistleblower.

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