SEC Announces First Whistleblower Action Addressing Confidentiality

Author: Marta Moakley, XpertHR Legal Editor

April 7, 2015

The Securities and Exchange Commission (SEC) initiated a first-of-its-kind enforcement action intended to regulate confidentiality provisions in a workplace agreement that could potentially stifle whistleblowers. Employers should review any existing policies and agreements to ensure that a preference for confidentiality does not violate any existing whistleblowing protections for employees.

The SEC alleged that Houston-based technology and engineering firm KBR, Inc., violated Rule 21F-17, enacted under the Dodd-Frank Act, which prevents a corporation from taking any actions to impede the reporting of securities law violations. The firm required witnesses in internal investigations to sign a confidentiality statement that threatened disciplinary action, up to and including termination, for sharing information with third parties without the prior approval of the internal legal department. Because the investigations concerned potential violations of securities laws, the SEC interpreted this requirement to potentially chill whistleblowing.

The firm agreed to settle the enforcement action by paying a $130,000 penalty and by voluntarily amending its agreement to state that employees are free to share information with the SEC without prior approval and without fear of retaliation.

Andrew J. Ceresney, Director of the SEC's Division of Enforcement, has no doubt that these types of enforcement actions will continue. In a press release, Ceresney explained that "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."

As is common in these types of enforcement actions, the SEC did not find any specific instance of the firm specifically preventing an employee from discussing a potential violation of securities laws. However, an enforcement agency will often take action if an overly broad prohibition may have a chilling effect on employees seeking to enforce protected rights. For example, overbroad workplace confidentiality requirements continue to be regulated by the National Labor Relations Board and the Equal Employment Opportunity Commission.