SEC Orders Halt to Agreements Impeding Whistleblower Reports

The U.S. Securities and Exchange Commission (SEC) announced earlier this month that it intends take action against companies that use confidentiality agreements to stifle whistleblowers’ ability to report wrongdoing to government authorities.  The SEC accompanied its announcement with an order instituting cease and desist proceedings against KBR, Inc.  According to the SEC, KBR was requiring witnesses in internal investigations to sign confidentiality statements warning that the employee could be subject to discipline if he or she disclosed matters relating to the investigation to outside parties.  The SEC concluded that KBR’s confidentiality agreement and others like them violated SEC rule Rule 21F-17, which “prohibits companies from taking any action to impede whistleblowers from reporting possible securities violations to the SEC.”

Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, explained the chilling effect of KBR’s confidentiality agreement: “By requiring its employees and former employees to sign confidentiality agreements imposing pre-notification requirements before contacting the SEC, KBR potentially discouraged employees from reporting securities violations to us.  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.”

In addition to halting the use of such agreements, KBR agreed to pay $130,000 to settle any charges related to its use of such confidentiality agreements.  Sean McKessy, Chief of the SEC’s Office of the Whistleblower, explained that “KBR changed its agreements to make clear that its current and former employees will not have to fear termination or retribution or seek approval from company lawyers before contacting us.  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.”

Katz, Marshall & Banks partners David J. Marshall and Debra S. Katz have long advocated that government agencies like the SEC take action to discourage the use of such employment agreements to chill whistleblowers’ disclosure activities.  In May 2013, Marshall and Katz wrote a letter to the SEC regarding the imposition of contractual limitations on a whistleblower’s ability to make such disclosures, and have worked with the agency since that time to curb the use of such draconian agreements.  More recently, Marshall and Katz wrote to the FAA concerning the use of similar confidentiality agreements in the context of airline industry internal investigations, which implicates the safety of the flying public.