The Securities and Exchange Commission (SEC) recently announced that it brought (and resolved) an enforcement action against a company for allegedly discouraging whistleblower complaints by requiring employees to sign confidentiality agreements during internal investigations.

The SEC action, brought against KBR Inc., was the first of its kind. The SEC commenced the action after KBR required witnesses participating in internal investigations of possible securities law violations to sign confidentiality statements at the start of an interview. The confidentiality statement included a warning that employees could face discipline, including termination, if they discussed the investigation without prior approval of KBR’s legal department.

The SEC asserted that the confidentiality statement violated SEC Rule 21F-17, which prohibits companies from interfering in whistleblower attempts to report securities violations to the government.

KBR agreed to pay a $130,000 penalty to resolve the SEC’s charges. The company also agreed to modify its confidentiality statement to make it clear that employees are free to report possible securities violations to the SEC and other federal agencies without retaliation.

This action, coupled with the SEC’s statement that it will continue to enforce its rules prohibiting agreements that have the potential to chill whistleblower complaints, strongly suggests that employers should review an array of employment agreements and policies. Employment contracts, severance agreements, confidentiality agreements, and other employment policies should all be reviewed in light of this action.

Although the penalty was relatively light, Andrew Ceresney, director of the SEC’s Division of Enforcement, made clear that the agency will be vigilant in protecting whistleblowers in conjunction with its enforcement role. Issuers and others involved with the SEC should expect stronger sanctions in the future if such agreements are in place on a formal or informal basis. We expect that such agreements may well be regarded as aggravating factors in future SEC investigations and decisions.