Don't Silence the Whistle: SEC Enforcement Action Attacks Employer's Confidentiality Agreement as Whistleblower Interference

On April 1, 2015, the Securities and Exchange Commission (SEC) announced its first enforcement action based upon improperly restrictive language in a Houston-based technology and engineering firm’s employee confidentiality statements. According to the SEC, this language violated the SEC’s Rule 21F-17, which was enacted under the Dodd-Frank Act of 2010, by impeding on employees’ communications with the SEC. That act also authorized the SEC to award whistleblowing employees 10 to 30 percent of monetary sanctions collected from public companies. The recent SEC enforcement action was promptly settled by the company’s agreement to pay a $130,000 penalty and voluntarily amend its employee confidentiality statement, among other actions. In light of this and other government enforcement actions, employers should review employee agreements and employment policies to avoid any implication that employees are prohibited from reporting issues to government agencies or participating in government investigations.

Enforcement Action

As a part of its internal investigation protocol, the company included a confidentiality statement in its Code of Business Conduct Investigation Procedures manual, which was provided to employees involved in internal investigations. Employees were asked to sign the statement at the start of internal investigation interviews. The statement provided in part:

I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.

The SEC issued an order citing SEC Rule 21F-17 that prohibits any individual, including employers, from impeding an individual from communicating with the SEC about possible securities violations, specifically including enforcing or threatening to enforce a confidentiality agreement regarding SEC communications. While the SEC was unaware of any instances in which an employee was prevented from communicating with the SEC or of any instances in which the company enforced the statement, the SEC nonetheless found the statement violated Rule 21F-17.

As a result of the SEC’s enforcement action, the company: (a) paid the SEC $130,000 in penalties; (b) was required to make reasonable efforts to contact employees that signed the statement, to provide them with a copy of the SEC’s April 1, 2015 order, and to inform them that they were not required to seek permission before communicating with a government agency; and (c) revised its confidentiality statement as follows:

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.

Concurrent with the order, the chief of the SEC’s Office of the Whistleblower, Sean McKessy, issued a statement indicating that “[o]ther employers should similarly review and amend existing and historical agreements that in word or effect stop their employees from reporting potential violations to the SEC.” McKessy stated the SEC’s rules on this issue apply broadly, including to confidentiality, employment, severance or other types of agreements.

Employers Take Notice

The SEC’s admonition to employers to review and consider their confidentiality statements and other employee agreements should be taken to heart. The SEC is not the only federal agency taking aim at employers for broad language in employee agreements and policies. After taking a similar position for many years, the Equal Employment Opportunity Commission (EEOC) brought two lawsuits in 2014 alleging language used in employee settlement agreements prevented employees from fully exercising their rights by discouraging employees from bringing claims to or cooperating with the EEOC. In these actions, the EEOC alleged that standard settlement terms, such as non-disparagement, cooperation, non-disclosure of confidential information and general release provisions, interfered with the rights of employees to file administrative charges, freely communicate, and participate in investigations with the EEOC or other government agencies. In 2014, the National Labor Relations Board issued several decisions finding work rules and policies were unlawful because they did not align with employee rights under the National Labor Relations Act, including policies addressing employee negativity, gossip, confidentiality and social media.

Confidentiality, employment, separation and other agreements with employees, as well as employment policies, should be carefully drafted to avoid any implication that employees are prohibited from reporting issues to government agencies. It may be advisable to include an affirmative statement that the agreements are not intended to prohibit employee reports to federal or state governments or to prohibit employee participation in government investigations or inquiries.

The implications of these agency positions can extend beyond standard agreements or policies that apply to all employees or broad categories of employees. Employers should also take care in their communications with employees who participate in internal investigations. When encouraging employees to keep internal investigations confidential, whether through an employment policy, confidentiality agreement or otherwise, employers should clearly articulate that the confidentiality obligations do not prohibit reports to government agencies.

Companies should periodically and systematically reassess their policies, procedures and related controls for dealing with possible misconduct. Among other things, companies should encourage internal reporting by whistleblowers and, when necessary, promptly respond to inquiries from the SEC or other government agencies that might result from external inquiries.