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SEC Takes Action Against Employer Confidentiality Clauses That Could Limit Employee Whistleblowing

Published by on August 7, 2015

Recently, the Securities Exchange Commission (“SEC”) warned that it will investigate and take administrative action against employers who require employees to sign confidentiality agreements/statements prohibiting the employees from communicating the employer’s possible securities law violations to the SEC (i.e. whistleblowing). The authority for the SEC to take such action against employer confidentiality clauses that could […]

Recently, the Securities Exchange Commission (“SEC”) warned that it will investigate and take administrative action against employers who require employees to sign confidentiality agreements/statements prohibiting the employees from communicating the employer’s possible securities law violations to the SEC (i.e. whistleblowing).

The authority for the SEC to take such action against employer confidentiality clauses that could limit employee whistleblowing comes from Code of FRegulations § 240.21F-17, which states in pertinent part:

“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.”  17 C.F.R. § 240.21F-17.

Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, promised that the SEC “will vigorously enforce” § 240.21F-17 to ensure that whistleblowers can freely provide information to the SEC to enable the SEC to investigate and enforce violations of federal securities laws.  See Press Release from U.S. Securities Exchange Commission, “SEC: Companies Cannot Stifle Whistleblowers in Confidentiality Agreements” (April 1, 2015).

As an example of the SEC’s recent emphasis on the enforcement of § 240.21F-1, on April 1, 2015, the SEC took administrative action against KBR, Inc. for requiring witnesses in certain internal investigations to sign confidentiality statements that threatened the employees with disciplinary action, including termination of employment, if they discussed the interviews with outside parties without KBR’s prior approval. See Exchange Act Release No. 74619.

Significantly, the SEC determined KBR violated § 240.21F-17 because the confidentiality statement threatened disciplinary action if the employees disclosed information relating to the interviews with outside parties.

The SEC made this determination despite a lack of proof that the confidentiality statement actually prevented employees from communicating directly with the SEC and without evidence that KBR actually took any disciplinary action against employees to enforce the confidentiality agreement.

Laconic Lookout:

Employers should amend their agreements and policies to ensure that current and former employees are free to report (without the employer’s approval) possible violations to the SEC and other federal agencies.

Other federal agencies, including the Equal Employment Opportunity Commission (“EEOC”), the National Labor Relations Board (“NLRB”), the Occupational Safety and Health Administration (“OSHA”) and the Department of Labor (“DOL”), are also scrutinizing confidentiality agreements/statements for unlawful prohibitions of employee whistleblowing so the revisions should be broad enough to ensure protection of an employee’s communications with all federal agencies.

The SEC suggests that language in a confidentiality agreement/statement similar to the following disclaimer will likely comply with § 240.21F-17:

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.

Although the SEC seems to be targeting confidentiality agreements/statements that could prevent employee whistleblowing, employers should also review and amend other agreements/provisions/clauses that may indirectly prohibit a former employee from communicating with the SEC or any other federal agency. For example, requiring an employee to certify in a severance agreement that he or she has not made any disclosure to the SEC could be found to be § 240.21F-17 violation.

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