It’s no April Fools’ joke. The SEC today announced its first-ever enforcement action against a company for using improperly restrictive language in confidentiality agreements with the potential to stifle the whistleblowing process.
The Securities and Exchange Commission charged Houston-based global technology and engineering firm KBR Inc. with violating whistleblower protection Rule 21F-17 enacted under the Dodd-Frank Act, the agency said in a press release.
KBR required witnesses in certain internal investigations interviews to sign confidentiality statements with language warning that they could face discipline and even be fired if they discussed the matters with outside parties without the prior approval of KBR’s legal department. Since the investigations 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.
KBR agreed to pay a $130,000 penalty to settle the SEC’s charges, and the company voluntarily amended its confidentiality statement by adding language making clear that employees are free to report possible violations to the SEC and other federal agencies without KBR approval or fear of retaliation.
KBR, which neither admitted nor denied the charges, also agreed to cease and desist from committing or causing any future violations of Rule 21F-17.
According to the SEC’s order instituting a settled administrative proceeding, there are no apparent instances in which KBR specifically prevented employees from communicating with the SEC about specific securities law violations. However, any company’s blanket prohibition against witnesses discussing the substance of the interview has a potential chilling effect on whistleblowers’ willingness to report illegal conduct to the SEC.
“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,” said Andrew J. Ceresney, director of the SEC’s division of enforcement. “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.”
On March 2, in another first, the agency announced a whistleblower award payout between $475,000 and $575,000 to a former company officer who reported original, high-quality information about a securities fraud that resulted in an SEC enforcement action with sanctions exceeding $1 million.
The agency, in a separate press release, didn’t disclose the name of the company involved.
Officers, directors, trustees, or partners who learn about a fraud through another employee reporting the misconduct generally aren’t eligible for an award under the SEC’s whistleblower program. However, there is an exception to this exclusion that makes an officer eligible if he or she reports the information to the SEC more than 120 days after other responsible compliance personnel possessed the information and failed to adequately address the issue.
This is the first SEC whistleblower award to an officer under these circumstances.
“Corporate officers have front-row seats overseeing the activities of their companies, and this particular officer should be commended for stepping up to report a securities law violation when it became apparent that the company’s internal compliance system was not functioning well enough to address it,” said Ceresney.
The SEC has made 15 whistleblower awards since the program began more than three years ago.
