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Employer's Overbroad Confidentiality Language Leads to SEC Investigation and Penalty

Most employers have confidentiality provisions in their handbooks, employment agreements, or other employment procedures manuals. Employers might want to take a minute to review those provisions in light of some recent criticisms articulated by the National Labor Relations Board in the March 18, 2015 General Counsel's Report, and today, by the U.S. Securities and Exchange Commission (SEC). As a result of problematic confidentiality language, one employer found itself facing an enforcement action from the SEC and a steep monetary penalty. 

On April 1, 2015, the SEC filed an enforcement action — the first of its kind — against an employer on the grounds that the company's confidentiality agreement contained improperly restrictive language which stifled the whistleblowing process.

In this particular instance, the Houston-based technology firm required employees who were participating in internal investigations, including those addressing allegations of possible securities law violations, to sign confidentiality agreements. These agreements contained language that warned the witnesses that if they were to discuss those matters with outside parties without obtaining the prior approval of the company's legal department, they could face discipline or termination.

Specifically, the agreement stated that:

I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.

The SEC claimed that the terms of the confidentiality agreements at issue were unlawful in that they violated Rule 21F-17 because the blanket prohibitions in the agreements could have potentially discouraged whistleblowers' from reporting any such violations to the SEC. Rule 21F-17 provides that:

(a) 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.

In this situation, the employer's confidentiality agreement pre-dated the promulgation of Rule 21F-17, but it was continuously used up through the investigation into these matters.

Given that the employer was apprised of the likelihood of institution of proceedings, it submitted an Offer of Settlement to the SEC which was accepted. In doing so, the employer amended its confidentiality statement to read as follows, which was found acceptable to the SEC:

Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity,including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.

In addition to making the changes to the agreement as set forth above, the SEC further entered an order demanding that the employer cease and desist from committing or causing any violations and any future violations of Rule 21F-17, and to pay a civil penalty in the amount of $130,000. The SEC did note that it was unaware of any instances in which the employer specifically prevented an employee from "whistleblowing", but obviously, that did not stop the investigation, nor did it stop the SEC from assessing a significant penalty.

Confidentiality provisions are critical to most employers' business and are typically recommended by counsel and HR professionals alike. It is necessary to review the language contained in those provisions, however, to ensure that the agreements comport with the existing and ever-changing state and federal laws. Overbroad provisions or language which is read to prevent an employee from lawfully reporting or communicating with a government agency regarding potential illegal conduct are likely to be found unenforceable, which can also lead to an entire agreement being rendered void.

Hinshaw attorneys are available to assist you in reviewing and modifying your agreements and handbook language.

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