The Securities and Exchange Commission said Wednesday that it has levied its first enforcement action against a company for using “improperly restrictive language” in confidentiality agreements with the potential to stifle the whistleblowing process.

The SEC charged Houston-based global technology and engineering firm KBR Inc. with violating whistleblower protection Rule 21F-17, which was enacted under the Dodd-Frank Act. 

According to the SEC, KBR required witnesses in certain internal investigations and interviews to sign confidentiality statements with language warning 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. 

Since these investigations included allegations of possible securities law violations, the SEC found that these terms violated Rule 21F-17, which prohibits companies from taking any action to impede whistleblowers from reporting possible securities violations to the SEC. 

KBR agreed to pay a $130,000 penalty to settle the SEC’s charges and the company voluntarily amended its confidentiality statement by adding language making clear that employees are free to report possible violations to the SEC and other federal agencies without KBR approval or fear of retaliation.

Without admitting or denying the charges, KBR agreed to cease and desist from committing or causing any future violations of Rule 21F-17. 

“By 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,” said Andrew Ceresney, director of the SEC’s Division of Enforcement, in a statement. “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.”

Eric Young, a partner with McEldrew Young in Philadelphia, whose firm represents False Claims Act whistleblower cases as well as IRS whistleblower cases, told ThinkAdvisor that the SEC’s action against KBR is a “very positive” development. “If KBR were able to get away with that [restrictive language] it would have had a chilling effect on whistleblowers,” he said, creating a “standard operating procedure as far as I’m concerned” for other companies to follow. Young said his firm has seen an uptick in the number of whistleblower cases — particularly in  finance and banking — since the SEC set up its whistleblower office. Unlike the IRS, Young said, the SEC is “serious” about its whistleblower program. “Today’s decision is another sign that the SEC is serious about encouraging whistleblowers to come forward in an effort to prevent fraud,” Young said. The IRS’ whistleblower program, on the other hand, has been under scrutiny for the past five years for its “ineffectiveness,” he continued, which has resulted in “potential tax whistleblowers [being] reluctant to come forward.”

According to the SEC’s order instituting a settled administrative proceeding, there are no apparent instances in which KBR specifically prevented employees from communicating with the SEC about specific securities law violations.

But the law firm Kohn Kohn & Colapinto state in a news release that the SEC investigation into KBR was triggered by a complaint it filed  on Feb. 19 on behalf of a former KBR employee, Harry Barko.  

Stephen M. Kohn, Barko’s attorney, said in a Wednesday statement that “this is an historic day for whistleblowers. Corporations have a history of silencing employees by forcing them to sign highly restrictive non-disclosure agreements. Today’s action by the SEC signals the advancement of nationwide corporate reform. Transparency has triumphed over censorship.”

The securities regulator states that “any company’s blanket prohibition against witnesses discussing the substance of the interview has a potential chilling effect on whistleblowers’ willingness to report illegal conduct” to the SEC. 

“KBR changed its agreements to make clear that its current and former employees will not have to fear termination or retribution or seek approval from company lawyers before contacting us,” said Sean McKessy, chief of the SEC’s Office of the Whistleblower, in the statement. “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.”

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