SEC Fines Firm for Policy that Stifles Potential Whistleblowers

The SEC brought an enforcement action against KBR Inc. ("KBR") for violating Exchange Act Rule 21F-17, which prohibits companies from impeding employees' whistleblowing. The SEC's charges were based on KBR's use of confidentiality agreements that threatened possible disciplinary action against any employee who disclosed information they learned while serving as a witness in an internal investigation. The enforcement action and accompanying press release make the SEC's message clear: companies that discourage whistleblowers from reporting possible violations of securities laws to outside parties will be held accountable.

When a KBR employee was interviewed as part of an internal investigation, investigators required the employee to sign a confidentiality agreement that contained the following language:

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.

Since the internal investigations in which the confidentiality agreements were used related to possible violations of securities laws, the SEC alleged that KBR violated Rule 21F-17. The rule, which was adopted under the Dodd-Frank Act, states in relevant part that:

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.

KBR settled the matter without admitting or denying the SEC's allegations. It agreed to pay a penalty of $130,000 and to change the language of its confidentiality agreements to make clear that employees may report possible violations of the laws to outside parties without prior approval or fear of retaliation from KBR. In the press release accompanying the administrative order, Director of the SEC Division of Enforcement, Andrew J. Ceresney stated 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."

See: SEC Order; SEC Press Release.
See also: Whistleblower Specialty Page (available to Cabinet subscribers only).