here - Linklaters

April 2015
U.S. Securities Law Briefing
Check Your Forms – SEC Fines Company for
Confidentiality Agreement Language Potentially
Restricting Whistleblowing
Following a recent U.S. Securities and Exchange Commission (the “SEC” or
the “Commission”) enforcement action fining a company for restrictive
language in a confidentiality agreement, companies should closely review
language in their standard confidentiality agreements. The SEC brought the
enforcement action against KBR Inc., a technology and engineering
company, under the SEC’s whistleblower protection rules, for including a
warning that employees could face discipline or be fired for disclosing matters
discussed during an internal investigation to outside parties without the prior
approval of KBR’s legal department. KBR agreed to remove the language
and pay a $130,000 penalty, though there were no allegations that KBR ever
took action to enforce the confidentiality agreement or prevent whistleblower
communications with the SEC.
As part of the whistleblower program established by Section 21F of the U.S.
1
Securities Exchange Act of 1934 , the SEC adopted Rule 21F-17, which
states: “No person may take any action to impede an individual from
communicating directly with the Commission staff about a possible securities
law violation, including enforcing, or threatening to enforce, a confidentiality
agreement . . . with respect to such communications.”
According to the SEC’s order, KBR, a SEC-registered and reporting
company, used a form confidentiality statement in connection with interviews
in internal investigations, which included allegations of possible U.S. federal
securities law violations. The SEC determined that whistleblowers could have
been stifled by a provision in the agreement that employees were “prohibited
from discussing any particulars” of the interview and its subject matter
“without prior authorization of the Law Department” and that disclosure
without approval could result in “disciplinary action up to and including
termination of employment.”
Pursuant to its settlement with the SEC, KBR agreed to revise the language
of its confidentiality agreements to make clear that employees are not
prohibited from reporting possible violations of federal law or regulation, that
1
Section 21 was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010. The whistleblower program awards whistleblowers who provide the SEC with original
information about a federal securities law violation a minimum of 10% and up to 30% of any
monetary sanctions obtained by the SEC exceeding $1 million. For further information on the
whistleblower program, please see our earlier client briefing.
US Securities Law Briefing
1
such disclosures are protected under federal law, and that no prior company
authorization is required before doing so.
KBR agreed to pay a fine of $130,000, though it neither admitted nor denied
the SEC’s charges under the settlement. The SEC conceded that it was
unaware of any instances in which a KBR employee was in fact prevented
from communicating directly with the SEC about potential securities law
violations or that KBR ever took action to enforce the form confidentiality
agreement. Nevertheless, the SEC asserted that the language found in the
form confidentiality statement impedes whistleblower communications by
prohibiting employees from discussing the substance of an interview without
clearance from KBR’s law department, under penalty of disciplinary action
including termination of employment. In its press release, the SEC explained
that “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.”
KBR also agreed to make reasonable efforts to contact KBR employees in
the United States who signed the confidentiality statement from August 21,
2
2011 to the present, providing them with a copy of the SEC’s order and a
statement that KBR does not require the employee to seek permission from
the General Counsel of KBR before communicating with any governmental
agency or entity regarding possible violations of federal law or regulation.
***
Companies should consider the SEC’s recommendation that they “review and
amend existing and historical agreements that in word or effect stop their
employees from reporting potential violations to the SEC,” or they risk an
SEC enforcement action.
Accordingly, to the extent a company uses confidentiality agreements in
connection with its internal investigations, or in any other instances, any
language that could discourage whistleblowing should be revised, or
language should be included that expressly informs employees of the legal
rights and protections afforded to whistleblowers. In this action, the SEC
recognized as a remedial measure the inclusion of the following provision in
KBR’s confidentiality agreement:
Nothing in this Confidentiality Statement prohibits me from reporting
possible violations of federal law or regulation to any governmental
agency or entity, including but not limited to the Department of Justice,
the Securities and Exchange Commission, the Congress, and any agency
Inspector General, or making other disclosures that are protected under
the whistleblower provisions of federal law or regulation. I do not need the
prior authorization of the Law Department to make any such reports or
disclosures and I am not required to notify the company that I have made
such reports or disclosures.
2
Rule 21F-17 became effective on August 12, 2011.
2
Companies should also refrain from taking any action that could be seen to
discourage whistleblower complaints, such as threatening to enforce
confidentiality agreements and/or requiring internal authorization before
contacting the SEC.
Non-U.S. companies may also want to consider reviewing their confidentiality
language, as the case law is not yet settled regarding the whistleblower
program’s reach outside the United States. The Second Circuit Court of
Appeals recently held, in Liu Meng-Lin v. Siemens AG, that the anti-retaliation
protections of the Dodd-Frank whistleblower program do not apply outside the
United States, because there was no clear congressional intent that the
provision should apply extraterritorially, as required pursuant to the U.S.
Supreme Court’s Morrison v. Australia National Bank decision. The court
questioned – but did not decide – whether the SEC's regulations with respect
to the whistleblower bounty program (as opposed to the antiretaliation
provisions), which contemplate extraterritorial awards, should be accorded
deference. However, the case did not discuss Rule 21F-17, the regulation at
issue in the KBR case.
We will continue to monitor developments in this area and welcome any
queries you might have.
Contacts
For further information
please contact:
Mike Bienenfeld
Partner
+44 (0)20 7456 3660
[email protected]
Lance Croffoot-Suede
Partner
+1 212 903 9261
[email protected]
Tom Shropshire
Partner
+44 (0)20 7456 3223
[email protected]
Scott Sonnenblick
Partner
+1 212 903 9292
[email protected]
James Warnot
Partner
+1 212 903 9028
[email protected]
or any of your other usual
Linklaters contacts.
This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you
have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact
the editors.
© Linklaters LLP. All Rights reserved 2015
Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law
firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to
refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with
equivalent standing and qualifications. A list of the names of the members of Linklaters LLP together with a list of those nonmembers who are designated as partners and their professional qualifications is open to inspection at its registered office,
One Silk Street, London EC2Y 8HQ or on www.linklaters.com and such persons are either solicitors, registered foreign
lawyers or European lawyers.
Please refer to www.linklaters.com/regulation for important information on our regulatory position.
We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and
business communications.
Linklaters LLP
One Silk Street
London EC2Y 8HQ
Telephone +44 20 7456 2000
Facsimile +44 20 7456 2222
www.linklaters.com
We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to
those of our associated firms.
If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other
marketing communications, please let us know by emailing us at [email protected].
3