Under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, whistleblowers that provide the SEC with original information that leads to substantial monetary sanctions are entitled to awards of up to 30 percent of those sanctions. Of course, the Act also prohibits retaliation against whistleblowers. To further these statutory objectives, SEC Rule 21F-17(a) prohibits taking “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”.

By its terms, Rule 21F-17 is limited to prohibiting the actual or threatened enforcement of employment agreements which impede whistleblowers from communicating with the SEC. Nevertheless, Sean McKessy, then head of the SEC’s Office of the Whistleblower, signalled, in a 2014 speech, that the SEC may take a more expansive view of Rule 21F-17, warning employers that the SEC would be “actively looking” for companies it believed were using employment agreements to make it more difficult for employees to provide information to the SEC. In April 2015, the SEC brought its first such case, charging KBR with violating Rule 21F-17 by requiring employees interviewed during an internal investigation to sign confidentiality statements warning them that they could face discipline if they discussed the investigation with outside parties without prior approval of KBR. Though there was no evidence that any employee was ever disciplined under that provision or was actually impeded from communicating with the SEC, the SEC reasoned that the confidentiality statement could have a chilling effect on employees’ willingness to communicate with the SEC. Hence, it required KBR to pay a $130,000 fine and modify the confidentiality statement to clarify that employees were not prohibited from providing information to regulators without alerting the company.

Jan-Mar 2017 Issue

Baker & Hostetler LLP