US regulator issues first financial penalty to firm for alleged whistleblowing restrictions

The SEC said that KBR, an engineering firm based in Houston, Texas, used language in its agreements that breached regulatory rules forbidding companies from deterring whistleblowers. Although it did not come across any specific instances of KBR preventing whistleblowing during its investigation of the company, it said that any "blanket prohibition" of discussions had "a potential chilling effect on whistleblowers' willingness to report illegal conduct to the SEC".

KBR will pay $130,000 to the regulator to settle the charge without admitting or denying it, according to the SEC's report (4-page / 154KB PDF). It has also amended its standard confidentiality agreement, and will make "reasonable efforts" to contact those employees that have already signed it to let them know the updated position.

Financial regulation expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com, said that regulated UK firms should "take careful note" of the SEC's actions as "where the SEC goes the Financial Conduct Authority will often follow".

"The recent financial penalty imposed by the SEC on KBR is an additional indication of the increasing regulatory focus on whistleblowing recently identified in the UK and US," he said. "Not only is the FCA proposing that as part of its senior managers' regime an individual at senior management level must be appointed as a 'whistleblowing champion', the Home Office and BIS are currently tasked under the UK Anti-Corruption Plan with reviewing the potential to introduce financial incentives for whistleblowers to UK regulators."

"The SEC's action takes matters further by setting a line in the sand in relation to firms seeking, inadvertently or otherwise, to prevent individuals reporting their concerns to the relevant regulators," he said.

Recent figures obtained by Pinsent Masons from the FCA found a 44% increase in whistleblowing cases opened in 2014 compared to 2013; and a 142% increase compared to 2012, the last year under Financial Services Agency (FSA) supervision. The term 'whistleblowing' refers to an employee telling a prescribed person or a person in authority at their employer about alleged dishonest or illegal activities occurring within the organisation or company.

In the US, the 2010 'Dodd-Frank' Act encourages whistleblowers to report concerns about listed companies to the regulators. It contains various confidentiality guarantees, prohibits employment-related retaliation and makes provision for financial incentives for whistleblowers. The Dodd-Frank Act prevents companies and individuals from action "to impede an individual from communicating directly with [SEC] staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement".

According to the SEC's report, KBR used a standard confidentiality statement as part of its internal processes for investigating potential securities law breaches. This statement, which was introduced before the Dodd-Frank Act came into force, required witnesses to agree not to discuss investigations "without the prior authorisation" of the company's legal department. Unauthorised disclosures could lead to "disciplinary action up to and including termination of employment", according to the statement.

The SEC said that it was not aware of any instances in which KBR employees where either prevented from communicating with the regulators about potential breaches, or where the company took action to enforce the confidentiality statement. However, the language used in the statement "undermines the purpose" of the Dodd-Frank Act by "prohibiting employees from discussing the substance of their interview without clearance from KBR's law department under penalty of disciplinary action including termination of employment", according to its report.