Although the SEC stated that it was unaware of any instances in which a KBR employee was in fact prevented from communicating with SEC about potential securities law violations, the SEC found the restrictive language to violate Rule 21F-17(a). That rule provides that “[n]o person may take any action to impede an individual from communicating directly with the [SEC] staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.” In other words, in the SEC’s view, the existence of an agreement itself, and not its enforcement, can violate Rule 21F-17(a).
Without admitting or denying the SEC charges, KBR agreed to a cease and desist order, to a fine and to add a provision to its confidentiality agreement clarifying that employees can report possible violations of federal law or regulation to any governmental entity, including the SEC, without prior authorization from or subsequent notification to the company.
While the agreement at issue in the KBR matter was entered into at the outset of KBR’s internal investigation, a possible Rule 21F-17(a) violation may be hidden in any employment, severance or confidentiality agreement. In fact, in the press release that accompanied the KBR cease and desist order, Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, stated that “[b]y requiring its employees and former employees to sign confidentiality agreements imposing pre-notification requirements before contacting the SEC, KBR potentially discouraged employees from reporting securities violations to us…. SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC. We will vigorously enforce this provision.”
The KBR enforcement action followed the heels of a February 2015 article in The Wall Street Journal reporting that the SEC sent letters to a number of companies asking for copies of nondisclosure, employment, confidentiality, severance, and settlement agreements entered into with employees.
Importantly, Rule 21F-17(a) does not contain a knowledge or intent component, but rather the rule may be violated if a person unknowingly or unintentionally impedes a person from communicating with the SEC. Some have argued that the rule can be interpreted so broadly that an airline could violate it if the airline’s flight was delayed or cancelled and one of the passengers was supposed to attend a hearing at which the passenger was going testify regarding alleged securities law violations.
In light of the KBR enforcement action and the SEC’s related public statements and actions, companies should review relevant agreements and policies to ensure that they contain appropriate carve-outs to clarify that nothing in the agreement or policy is intended to impede an individual from communicating directly with the SEC regarding possible securities law violation.