The Securities and Exchange Commission (“SEC”) is looking closely at employment agreements, separation agreements, and other agreements that include confidentiality provisions that prevent or discourage employees from reporting possible unlawful conduct to the SEC. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) amended the Securities Exchange Act to include protections and incentives (i.e., the whistleblower “bounty” program) to encourage whistleblowers to come forward. One of the implementing regulations of the bounty program, Rule 21F-17(a), specifically prohibits employers from taking any action that would “impede” an employee from communicating with the SEC about potential securities law violations, including enforcing or threatening to enforce a confidentiality agreement.

The SEC Cites Potential “Chilling Effects”

On April 1, 2015, the SEC announced that it had resolved its first enforcement action against a company, KBR, Inc. (“KBR”), for using overly restrictive confidentiality provisions. KBR’s compliance investigators required witnesses who were interviewed during the investigation of certain types of internal complaints to sign a statement that they were “prohibited from discussing any particulars regarding [the] interview and the subject matter discussed, without the prior authorization of the Law Department” and that “unauthorized disclosure of information may be grounds for disciplinary action up to and including termination.” There was no evidence that KBR ever prevented an employee from communicating with the SEC, or ever enforced the confidentiality statement to stop such communications.

Nevertheless, the SEC found that the statement violated Rule 21F-17 and undermined its purpose by forbidding employees from communicating with the SEC about the substance of an interview without KBR’s permission, lest they face discipline or even termination. In a press release announcing the action against KBR, the SEC said 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.”

For this first action, the SEC targeted a very specific type of confidentiality agreement that was being used only in the limited context of certain internal investigations. The scope of the SEC’s position will likely be further developed if and when it commences actions involving severance agreements, employment contracts, or general confidentiality agreements.

The Attorney-Client Privilege

In addition, the SEC’s statement does not address the lawfulness of confidentiality agreements that a witness might be asked to sign in connection with an internal investigation that is protected by attorney-client privilege. Significantly, the SEC’s reference to the “chilling effect” of confidentiality provisions that prevent witnesses from discussing interviews invites inquiry into an exception built into Rule 21F-17. That exception explicitly excludes from its reach confidentiality agreements that cover information obtained through attorney-client privileged communications, unless disclosure of that information falls under another SEC rule permitting attorneys who appear before the SEC to reveal confidential client information, without company consent, in certain extreme circumstances.

When legal counsel is performing an internal investigation into alleged unlawful activity, it is standard practice to be guided by the U.S. Supreme Court in Upjohn Co. v. United States, 449 U.S. 383 (1981). Based on Upjohn, attorneys tell witnesses that the interviews are confidential and subject to the attorney-client privilege. Moreover, attorneys typically explain that for the information to remain privileged, it is important that the witnesses not share the substance of the interview with anyone. While this is often done simply as notice rather than a written agreement, sometimes witnesses are asked to sign a statement containing the Upjohn notice.

Thus, the SEC’s position in In re KBR, Inc., would not (and should not) apply as a general proscription against the use of confidentiality agreements that apply to information learned during interviews that are part of privileged internal investigations conducted by legal counsel. As recognized in the exception to Rule 21F-17—which was conspicuously unmentioned in the SEC’s Order against KBR—a balance must be struck between the SEC’s investigatory mission and a company’s right to the attorney-client privilege.

In sum, while the full scope of the SEC’s enforcement initiative remains to be seen, employers would be wise to review the confidentiality provisions in all of their agreements proactively to ensure compliance with Rule 21F-17.