SEC Files Enforcement Action Against Employer’s Workplace Investigation Confidentiality Requirement: Cease-and-Desist Order Charges That Employer’s Confidentiality Requirement for Internal Investigations Contravened the Whistleblower Provision of the Securities Exchange Act of 1934

Sullivan & Cromwell LLP - April 2, 2015
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On April 1, 2015, the Securities and Exchange Commission (the “SEC”) announced an enforcement action seeking to strike an employee confidentiality requirement, for allegedly “using improperly restrictive language in confidentiality agreements with the potential to stifle the whistleblowing process.”  The SEC’s Office of the Whistleblower had previously publicized its interest in reviewing confidentiality agreements with this concern in mind.  The action was brought against KBR, Inc., a technology and engineering company based in Houston, Texas, alleging violation of Rule 21F-17, the rule implementing the Dodd-Frank Act’s Whistleblower Provisions found in Section 21F of the Securities and Exchange Act of 1934 (the “Exchange Act”).  As described in the Cease-and-Desist Order (the “Order”), the SEC charged that KBR’s form confidentiality statement, which it used in connection with its internal investigations, violated Rule 21F-17 because it prohibited “employees from discussing the substance of their interview without clearance from KBR’s law department under penalty of disciplinary action including termination of employment,” thereby undermining the purpose of Section 21F.  The Order was issued even though it noted that the SEC was not aware of KBR having taken action to enforce its policy or of any KBR employee having been prevented from communicating with SEC staff.  (Order at 3.)  KBR agreed to pay a fine of $130,000 and took the remedial step of amending its confidentiality statement to include language affirmatively stating that employees are not prohibited from reporting possible violations of federal law or regulation to the Department of Justice, SEC, Congress or any agency Inspector General, or from making any “disclosures that are protected under the whistleblower provisions of federal law or regulation.”