Confidentiality Agreements and Dodd-Frank: Ensuring Whistle Blower Reporting Under Dodd-Frank is Not Prevented
The Securities and Exchange Commission (SEC) recently took an enforcement action against Kellogg Brown & Root (KBR) in response to KBR’s use of a form confidentiality agreement it required employees to sign which stated that they would not discuss anything related to an internal investigation without the prior authorization of KBR’s legal department. The internal investigation was undertaken by KBR in response to an SEC investigation of complaints of unethical conduct and potential violations of federal securities laws. The form confidentiality agreement also included a provision that said any unauthorized disclosure of information may be grounds for disciplinary action or termination.
The SEC found that the confidentiality agreement was improper because it had the effect of prohibiting employees from reporting to the SEC any securities law violations. Rule 21F-17 of the Dodd-Frank Act of 2010 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.”
Takeaways for Lawyers from SEC KBR Enforcement Action
Consider what exemptions need to be included in any confidentiality agreement, in particular any exemptions for legal compliance. Confidentiality agreements typically include standard exemptions for when information may be disclosed, in particular when something is a protected activity or when needed to comply with regulatory provisions. Take care to ensure that all confidentiality agreements, including those related to employment, include exemptions for legal compliance such as whistle blower reporting under Dodd-Frank. Exemptions for regulatory compliance are usually phrased broadly but consider whether the nature of the agreement is such that Dodd-Frank should be explicitly called out as an exemption.
Lawyers should also consider whether any provisions in other agreements have provisions which effectively could be seen as prohibiting or deterring an employee of a client from reporting any possible securities law violations to the SEC. This may involve amending form agreements or existing agreements.