Securities and Exchange Commission (SEC) Rule 21F-17 ("the rule") (published in 2011 as part of the comprehensive whistle-blower regime mandated by the Dodd-Frank Act) prohibits any person from taking any action to impede an individual from communicating directly with the SEC regarding possible securities law violations.
On April 1, 2015, the SEC announced its first-ever enforcement action under the rule, charging KBR Inc. with violating the rule after it required employee witnesses in internal investigations to execute confidentiality statements that contained language suggesting that they could face discipline, including termination, if they discussed the matters with outside parties without prior approval of KBR's legal department. Since the internal investigations included allegations of possible securities violations, the SEC determined that the terms at issue violated the whistle-blower protection rule and imposed a $130,000 civil penalty. The SEC imposed the penalty absent evidence that KBR enforced the rule against SEC whistle-blowers or intended the policy to cover them. Rather, the SEC found that the mere existence of language in the agreement that could potentially chill an employee's willingness to report violations to the SEC was enough to violate the rule and warrant a penalty. Ultimately, KBR was fined in this instance because the agreements asked employees to talk to the legal department before discussing the "subject matter" of an interview with the SEC, as opposed to restricting the flow of information imparted by counsel during a privileged conversation.
In this regard, the SEC has adopted a similar approach to the National Labor Relations Board when it recently found overbroad employer confidentiality and other rules to violate the National Labor Relations Act if they could potentially deter employees from engaging in protected concerted activity, even absent any evidence that the rules were intended or enforced to do so.1
Considerations for Compliance
This is an important legal development as the SEC has made clear in a recent press release that it "will vigorously enforce this provision." Thus, employers should seek counsel to ensure compliance with the rule. To avoid running afoul of the rule, public companies should consider reviewing any agreements that restrict an employee's ability to approach the government with federal law violations and amending confidentiality agreements to include an express statement making it clear that nothing in the agreement precludes an employee from communicating possible violations of federal law or regulations to the appropriate governmental entity. Any hint of discipline in these agreements will be suspect. Companies should also seek counsel to negotiate the divide between managing the whistle-blower protection rule and exercising appropriate caution to ensure confidentiality associated with the attorney-client privilege remains shielded.
Footnote
1. See " NLRB Holds Hospital's Confidentiality Rule Violated the NLRA," Labor and Employment Alert (August 2012)
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