Whistleblowers are given protection under Section 240.21F-17 of the Dodd-Frank Act. The rule states, in part, “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violations, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.” This rule was promulgated to prevent companies from stifling whistleblowers.

Although the Securities and Exchange Commission has been signaling its intention to crack down on violators of the rule, it did so for the first time earlier this month. The SEC imposed a $130,000 penalty to Houston-based global technology and engineering firm, KBR, Inc., for using improperly restrictive language in its confidentiality agreements.

Specifically, KBR was found to have violated the rule by requiring witnesses to sign confidentiality agreements with language that threatened to discipline or fire them for speaking to outside parties without prior approval from its legal department during a securities fraud investigation. The SEC did not find any instances in which KBR specifically prevented employees from communicating with the SEC; however, it found that the language contained in the confidentiality agreements had a potential chilling effect on whistleblowing. KBR has since amended the language in its confidentiality agreement.

This case serves as a reminder to employers to avoid including language that an employee may interpret as impeding his or her right to talk to the SEC or another government entity in agreements including confidentiality agreements, employment agreements and separation agreements as well as employment manuals.