U.S. Chamber Asks SEC to Clarify Employer Pacts That Impede Whistle-Blowing

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By Yin Wilczek

April 9 — The U.S. Chamber of Commerce April 9 asked the Securities and Exchange Commission to clarify what language in employer agreements may be viewed as impeding whistle-blowers.

In a letter to SEC Chairman Mary Jo White, the chamber's Center for Capital Markets Competitiveness expressed “significant concern” over the recent enforcement against Kellogg Brown & Root Inc. regarding a confidentiality agreement that barred employees from discussing an internal investigation without permission from the company's legal department.

The KBR action was outside the scope of the SEC's whistle-blower rules and constituted “rulemaking through enforcement,” the chamber charged.

No ‘Clear Guidance.'

The action “has created significant uncertainty as to the enforceability of agreements of all kinds insofar as they make mere mention of the confidentiality of information,” it said. “This lack of clarity subjects companies—the vast majority of whom have robust ethics and compliance programs—to the prospect of enforcement action by the SEC’s enforcement division where there is no clear guidance from the Commission.”

An SEC representative did not immediately respond to a request for comment.

Under the SEC's bounty program, 1934 Securities Exchange Act Rule 21F-17(a) states that employers may not “take any action to impede” their workers from contacting the SEC about possible securities violations, “including enforcing, or threatening to enforce, a confidentiality agreement” with respect to the worker's communication with the agency.

The KBR case was the SEC's first-ever action to enforce the provision. Sean McKessy, chief of the SEC's Whistleblower Office, recently said that the commission will continue to actively scrutinize potentially problematic employment agreements.

Counsel for whistle-blowers have commended the KBR action and are asking the SEC to look into other employment pacts.

However, some defense bar attorneys have focused on the fact that there were no actual instances of KBR trying to prevent employees from contacting the SEC about specific securities law violations. In an April 2 legal memorandum, Willkie Farr & Gallagher LLP described the enforcement action as “somewhat aggressive.”

Eugene Scalia, a Washington-based partner at Gibson Dunn & Crutcher LLP, April 5 wrote in the Wall Street Journal that companies should not bow to SEC pressure to “needlessly compromise their confidentiality interests and constitutional rights.”

Why Targeted 

In its letter, the chamber also took issue with recent reports that the SEC is asking certain companies to turn over nondisclosure agreements, employment contracts, codes of conduct and other documents, saying it is not clear why the companies were targeted. 

“The current ambiguities in the SEC’s whistleblower program can be rectified and the SEC’s investigative resources can be preserved if the Commission provides additional clarity on what language it considers allowable in non-disclosure agreements, confidentiality agreements, employment contracts, codes of conduct, and other similar documents,” the chamber said. “Rather than using the enforcement process to gather data, set policy, and thereby define the parameters of acceptable behavior, we request that the SEC undertake an initiative to provide more formal guidance that would assist companies, employees, and other contractual counterparties to better understand the specific categories of agreements or provisions that may violate the SEC’s whistleblower rules.”

The letter was signed by CCMC President and Chief Executive Officer David Hirschmann.

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

The letter is available at http://op.bna.com/car.nsf/r?Open=ywik-9vesmh.