SEC to Registrants: Review Agreements & Remove Language That May Impede Whistleblowers

Business Litigation Update

Date: April 09, 2015

In August 2011, the SEC prohibited “any action to impede an individual to communicate with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications” through rulemaking under the Dodd-Frank Wall Street Reform and Consumer Protection Act. On April 1, 2015 the SEC announced its first-ever enforcement action under that provision. In so doing, Sean McKessy, Chief of the SEC’s Office of the Whistleblower warned that “[o]ther employers should . . . review and amend existing and historical agreements that in word or effect stop their employees from reporting potential violations to the SEC.” Companies should undertake the recommended review, but must do so understanding the breadth of the SEC’s allegations and the potential impact on other matters such as the attorney-client privilege.

The recently settled enforcement action involved confidentiality agreements that KBR, Inc. provided to employees who were interviewed during internal investigations undertaken by KBR. The relevant language provided that “to protect the integrity of th[e] review,” the employee was “prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department.”

The SEC acknowledged that it was “unaware of any instances in which “(i) a KBR employee was in fact prevented from communicating . . . , or (ii) KBR took action to enforce the form confidentiality agreement or otherwise prevent such communications.” Nevertheless, the SEC took issue with the absence of a carve-out for discussions with law enforcement and regulators and concluded that the language “impedes” such communications by prohibiting the employee from discussing the substance of the interview without prior notification to and authorization from KBR. KBR agreed to a penalty of $130,000 and to reach out to all employees who had signed the agreement since August 2011 to inform them that they were free to approach the government without permission from the legal department.

The SEC’s Enforcement Division has signaled for some time its intent to step up enforcement in this area. As a result, public companies are well-advised to review all of their employment, confidentiality, severance and other agreements, as well as employee manuals, with an eye toward whether the document may impede a whistleblower, because in the SEC’s view, the possibility of a chilling effect is enough. Those agreements should be clear that they are not intended to prohibit truthful, non-privileged communication with regulators or law enforcement. Companies should also be mindful when giving Upjohn warnings (verbal confidentiality instructions often given in connection with an investigation). The company should continue to act to protect the attorney-client privilege, but the warning cannot convey or imply any prohibition on non-privileged communications with regulators.


For more information, please contact:

Tammy P. Bieber

Maranda E. Fritz

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

This document may be considered attorney advertising in some jurisdictions.