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News June 1, 2015 Issue

Confidentiality Agreements Are Still Okay, Except …

The SEC caused a bit of a ruckus among attorneys representing advisory firms and other companies with a recent ruling that targeted confidentiality agreements. It turns out that the attorneys’ concerns may have been a bit over the top – but perhaps not totally so.

That would seem to be the takeaway from comments made by SEC chair Mary Jo White on April 30 in Chicago in the wake of the agency’s April 1 enforcement action against KBR, for allegedly using confidentiality agreements to stifle would-be whistleblowers from reporting (ACA Insight, 4/13/15).

Under Securities Exchange Act Rule 21F-17, as amended by Dodd-Frank, individuals and entities may not take steps to prevent potential whistleblowers from contacting the SEC – including through confidentiality agreements. "The Enforcement Division has been focused on companies that use agreements or other mechanisms to improperly stifle whistleblowers from coming forward," White said in her speech.

But some may be reading too much into the enforcement action, she suggested. Concerns that the SEC has asserted "an overly broad interpretation of the rule and engaged in rulemaking by enforcement, which, in turn, has created uncertainty as to the enforceability of all confidentiality agreements" are "unwarranted," she said. "Enforcing a rule for the first time does not mean that we are engaged in rulemaking by enforcement."

"Companies conducting internal investigations can still give the standard Upjohn warnings that explain the scope of the attorney-client privilege in that setting," she said, referring to the 1981 case, Upjohn Co. v. United States. "Companies may continue to protect their trade secrets or other confidential information through the use of properly drawn confidentiality and severance agreements."

The key, she said, is that a company "needs to speak clearly in and about confidentiality provisions, so that employees, most of whom are not lawyers, understand that it is always permissible to report possible securities laws violations to the Commission."

Okay, but …

"I think the terrain is still pretty confused, but it’s welcome that White acknowledges that the industry is looking for more guidance after the recent enforcement action," said Shearman Sterling partner Nathan Greene. "It’s also welcome that she confirms that not every kind of confidentiality agreement has to be revisited."

"White’s speech provides some clarification of the SEC’s views on the use of confidentiality agreements after the KBR case," said Mayer Brown partner Matthew Rossi. "It’s important for investment advisers to understand that although they may legitimately use confidentiality agreements appropriately tailored to protect privilege and other categories of sensitive material such as trade secrets, they must avoid language that the Commission may view as a blanket prohibition on the disclosure of all information. The Commission is likely to view such provisions as having the potential to deter whistleblowers unless the agreements also contain a specific statement carving out communications with regulatory agencies."

White also used her speaking opportunity to note that the SEC has become aware that some companies may be attempting to require that employees sign agreements mandating that the employees not accept a whistleblower award, or that employees, as a pre-condition to obtaining a severance payment, represent that they have not made a prior report of misconduct to the SEC. "You can imagine our Enforcement Division’s view of those and similar provisions under our rules," she said.