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Ahead of the Curve Auto Supplier Blog

April 10, 2015

SEC Enforcement Action on Confidentiality Agreement is Cause for Concern

Do confidentiality agreements create a liability for your company? A recent Securities and Exchange Commission (SEC) enforcement action suggests the answer to that question is “yes.”
On April 1, 2015, the SEC announced that it had entered into a settlement with a Houston-based global technology and engineering firm, KBR Inc. At issue was the confidentiality agreements KBR required its employees to sign in connection with an internal investigation.
According to an SEC release, the confidentiality agreements contained language warning employees that they “could face discipline and even be fired if they discussed the matters with outside parties without the prior approval of KBR’s legal department.” The SEC filed an enforcement action alleging a violation of Rule 21F-17 under the Securities Exchange Act of 1934, “which prohibits companies from taking any action to impede whistleblowers from reporting possible securities violations to the SEC,” according to the agency’s release.
In a statement related to the SEC release, Andrew J. Ceresney, director of the agency’s Division of Enforcement, said “SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other types of agreements that may silence potential whistleblowers before they can reach out to the SEC. We will vigorously enforce this provision.”
Of import and interest, the SEC noted that there were no specific instances in which KBR actually prevented employees from communicating with the agency. Instead, the SEC focused on the blanket prohibition that was seen as having what the agency called “a chilling effect on whistleblower’s willingness to report illegal conduct.” In other words, the SEC admitted there was no actual violation that it knew about. Rather, it was the language in the agreement that could result in a violation that gave rise to the enforcement action. The advice from the SEC’s Office of the Whistleblower was that “other 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.”
If you think that you’re safe because your company isn’t publicly-owned, think again. The National Labor Relations Board took an almost identical position in July 2012. In addition, there are whistleblower statutes in a number of other federal and state laws, giving similar powers to governmental agencies such as the Internal Revenue Service and the Environmental Protection Agency.
There is also a bill working its way through Congress that would directly apply to whistleblowers in the automotive industry. The Thune-Nelson Motor Vehicle Safety Whistleblower Act was approved by the Senate Committee on Commerce, Science and Transportation on Feb. 26, 2015. If history is a guide, the passage of similar legislation in other industries may be a good indicator that this legislation will pass as well.
The SEC enforcement and settlement action against KBR should serve as a warning to all companies: government agencies are increasingly getting more involved to protect whistleblowers. At a time when the number of automotive recalls has reached record numbers, internal investigations are happening all over. If you have concerns about the language in your company’s confidentiality agreements, talk to one of our Automotive Industry Group attorneys – before it’s too late.

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