Cracking Down on Confidentiality Agreements
With other "enforcement actions" expected to follow the Securities and Exchange Commission's charge against KBR last week, experts suggest employers might be well-served to revisit their internal-investigation agreements-along with a whole host of others-to ensure they won't raise any red flags.
By David Shadovitz
Last Wednesday, the Securities and Exchange Commission announced its first "enforcement action" against a company it said had used restrictive language in its confidentiality agreements.
On the receiving end of this action was KBR Inc. The SEC charged the Houston-based engineering firm with violating whistleblower > protection Rule 21F-17 by requiring witnesses in certain internal-investigation interviews to sign confidentiality statements that included language stating violators could face discipline, including termination, if they discussed the matters with outside parties without KBR's approval.
KBR, without admitting or denying wrongdoing, agreed to pay a $130,000 penalty to settle the charges. Further, the company agreed to voluntarily amend its confidentiality statement by adding language making it clear employees are free to report possible violations to the SEC and other federal agencies without KBR approval or fear of retaliation.
"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," says Andrew J. Ceresney, director of the SEC's Division of Enforcement in Washington. "SEC rules prohibit employers from taking measures through confidentiality, employment, severance or other types of agreements that may silence potential whistleblowers before they can reach out to the SEC. We will vigorously enforce this provision."
Time will tell whether the SEC makes good on this promise. Experts say they have little reason to think that won't be the case. But whether the agency-whose mission is to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation-comes knocking on organizations' doors or not, some believe employers, in light of the SEC's announcement, would be wise to dust off and revisit their confidentiality agreements in order to ensure there's nothing in them that would pique the interest of SEC investigators.
Ada Dolph, a partner in the Chicago office of Seyfarth Shaw, points out that Sean McKessy, chief of the SEC's Office of the < Whistleblower >, has "made no secret of his desire to root out agreements that he feels chill or interfere with an employee's right to make a report directly to the SEC."
Dolph predicts more actions by the agency involving different employer-employee agreements are likely to follow.
As recently as February, she says, "the Wall Street Journal reported that the SEC had solicited-by 'official letter'-nondisclosure, confidentiality, severance and separation agreements from several other companies, so I expect that, in the coming months, we will see other enforcement actions [that will] continue to send a message regarding the SEC's position on these types of agreements."
Because the SEC's charges against KBR involve a < whistleblower > lawsuit, Dolph expects the < whistleblower > plaintiffs' bar will be incentivized to file more of these kinds of complaints with the agency.
Dolph advises HR executives who want to stay ahead of the SEC's enforcement initiative to take the time, now, to review all of their agreements and policies to ensure they do not contain confidentiality language that might catch the attention of the SEC or a < whistleblower > plaintiff's attorney. Further, she adds, the SEC enforcement action should not be viewed as impacting only agreements or policies regarding internal investigations.
The SEC, she says, has made plain that it is looking at all types of agreements for language that it views as running afoul of Rule 21F-17.
Specifically, Dolph says, employers should take a close look at agreement provisions that:
• Prohibit an employee from reporting possible violations to the SEC;
• Require any notice to the company of any report to the SEC;
• Require that an employee disclose to the company the content of any report to the SEC;
• Require an employee to represent that he or she has not made any complaint to the SEC; and
• Require an employee to represent that he or she has reported all wrongdoing to the company.
An open question, Dolph adds, is how far an alleged < whistleblower > can go in using company information to make a complaint with the SEC. "For obvious reasons," she says, "it is not uncommon for agreements to contain limitations on the use of company information, and it remains to be seen whether the SEC would find these types of provisions to similarly impede whistleblowers and violate SEC Rule 21F-17."
Some experts believe the SEC's announcement is very much in line with other employment and labor-related steps the Obama administration has taken.
"The fact that the SEC is taking a look at these kinds of agreements and focusing on any kinds of restrictions that might prevent a high-level executive from making [such] complaints is very consistent with the overall direction that we're seeing from this administration in a variety of other areas," says Michael Lotito, a shareholder with Littler in San Francisco and co-chair of its Workplace Policy Institute. "Much of the focus so far has been on the employee, but what the SEC is doing here is extending [the focus] to high-level executives who might not be covered by the NLRB."
In effect, Lotito says, the Obama administration is saying that "no matter who you are in the workplace, we want to make sure that you have the opportunity, without any restrictions whatsoever, without any concerns whatsoever, without any potential for retaliation whatsoever, to speak to the government ... an administrative agency ... the press ... or fellow workers when you have an issue or concern."
To eliminate any ambiguity, Lotito says he would like to see the SEC come up with some model language, similar to what NLRB General Counsel Richard F. Griffin Jr. did last month when he issued further guidance pertaining to employee handbooks. (The guidance cited specific examples of language considered by the agency to be appropriate and in violation of employee rights under the National Labor Relations Act.)
"It's one thing to say something is bad, but it's another thing to say something is good," Lotito says. "You may not like what [government agencies] have to say, but at least you know where you stand."
Ambiguity aside, some believe the SEC is seeking to address a problem that doesn't exist.
"It would be very different if the confidentiality agreement said you are prohibited from reporting any issue to the federal government," says Thomas Lewis, a shareholder with Stevens & Lee in Princeton, N.J. "But that's not what it says."
If there's widespread fraud, he says, it doesn't seem to make a lot of sense to think employees aren't going to come forward because they're concerned about losing their jobs over violating a confidentiality agreement and disclosing information to the government.
Lewis says he thinks the SEC is "making a big deal out of nothing."
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