Due to a recent enforcement action by the SEC, companies in the financial services industry are now on alert of potential SEC action against employers for including confidentiality clauses in employment-related agreements that restrict employees from reporting certain violations of securities laws to the SEC.
Background
On April 1, 2015, the Securities and Exchange Commission ("SEC") announced its enforcement action against KBR, Inc. ("KBR") for violations of Rule 21F-17 enacted under the Dodd Frank Act (the "Rule"). KBR was being investigated due to claims from employees involved in KBR's internal fraud investigations of improperly restrictive language in their confidentiality agreements. According to the SEC's administrative order, KBR required each employee, who was interviewed as part of an internal investigation into potential legal violations or unethical conduct, to sign a confidentiality statement. The confidentiality statement included language that prohibited the employee from discussing any details of the interview and the subject matter discussed therein without the prior authorization of KBR's legal department. The statement further detailed that any unauthorized disclosure could be grounds for disciplinary action including termination of employment.
The Rule prohibits companies from taking any action that would impede whistleblowers from reporting possible securities violations to the SEC. According to the SEC, the confidentiality statement signed by KBR employees undermined the very purpose of the Rule, which is to encourage individuals to report potential violations to the SEC. KBR settled with the SEC for $130,000 civil penalty and agreed to amend its corporate policies to expressly provide in its agreements with employees the authorization to report potential violations of securities laws to any governmental agency or entity.
Related Initiatives
The KBR enforcement action was the first enforcement action for violations of whistleblower protections. Since then, the SEC has expressed concern about other firms who may have violated the Rule by including in their employment confidentiality, severance and other agreements provisions that, in the SEC's opinion, may impede an individual from communicating with the SEC about a potential securities law violation. The SEC has confirmed that they intend to take an aggressive approach to interpreting and enforcing the Rule.
The SEC began with a sweep of confidentiality agreements used by public companies, broker dealer and private funds to identify potential candidates for enforcement action. Recently, the SEC has initiated a sweep of investment advisers located in the Boston area. The sweep covers all compliance policies and procedures (including employee handbooks), code of ethics and agreements with employee from 2012 to current. The results are intended to give the SEC guidance on whether to expand the sweep nationally.
Recommended Actions
Each advisory firm should review its employee agreements and policies and procedures to ensure that the employees are aware of their protections under the Rule. The following lists some of the best practices for firms with respect to this type of review:
- Review employer required NDAs.
- Review vendor required NDAs.
- Revise form NDAs as necessary.
- Communicate in writing to counterparties with existing NDAs regarding whistleblower protections.
- Review and revise other agreements with employees (such as policies and procedures, severance agreements and settlement agreements).
- Encourage employees to report concerns internally.
- Create a process to review internal reports of compliance questions and consider establishing a hot-line or firm email inbox.
- Ensure employees are aware of employer's confidentiality and retaliation practices.
Please contact Tatiana Perry, Jessica Morgan or Lindsay Reynolds if you need further clarification or assistance with your firm's confidentiality and employment-related agreements and policies in light of the KBR case.
This summary is not intended as specific or complete advice, and is subject to change as the industry develops best practices.
This client update is prepared for the general information of our clients and friends. It should not be regarded as legal advice. If you have any questions regarding this update, or for more information about this topic, please contact any of the attorneys listed above, or the attorney with whom you normally consult.
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