A story surfaced a few weeks ago that the Securities and Exchange Commission was taking a close look at employment agreements that limited the actions of whistleblowers. The story behind the story came out. The SEC brought an action against KBR, Inc. for violating whistleblower protection Rule 21F-17 enacted under the Dodd-Frank Act.
KBR required witnesses in certain internal investigations interviews to sign confidentiality statements with language warning that they could face discipline if they discussed the matters with outside parties without the prior approval of KBR’s legal department. Since these investigations could have included allegations of possible securities law violations, the SEC found that these terms violated Rule 21F-17, which prohibits companies from taking any action to impede whistleblowers from reporting possible securities violations to the SEC.
The 2010 Dodd-Frank financial-reform bill granted a financial incentive for whistleblowers. A tipster can get between 10% and 30% of the penalty collected if their information leads to an SEC action. The whistleblower program handed out an award for more than $30 million last year that caught the attention of many.
The Dodd-Frank whistleblower regulations prohibit companies from interfering with employees reporting potential securities-law violations to the SEC. Rule 21F-17 provides in relevant part:
(a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.
The form confidentiality statement that KBR has used before and since the SEC adopted Rule 21F-17 requires witnesses to agree to the following provisions:
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.
I bet many companies have a similar confidentiality provision.
The SEC brought the action even though it was not aware of any instances in which an employee was prevented from communicating the SEC about a potential securities law violation. Beyond that, the SEC was not aware of any instances in which KBR even tried to enforce the confidentiality provision.
KBR agreed to pay a $130,000 penalty to settle the SEC’s charges. The company voluntarily amended its confidentiality statement by adding the following language:
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.
KBR also agreed to reach out to KBR employees subject to that confidentiality after August 21, 2011 (the date the rule was in effect) to say that the agreement does not prevent them from reaching out to the government to report possible violations.
KBR was the sacrifice to alert others to this potential problem. It seems harsh for KBR considering there is no statement of an incident where harm was done. I would assume that the confidentiality provision surfaced as part of some other government investigation of KBR.
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