On April 1, the Securities and Exchange Commission (“SEC”) settled its first enforcement action against a company for violating whistleblower protections by including restrictive language in confidentiality agreements used in its internal investigations.

The SEC charged a Houston-based government services contractor with violating whistleblower protections codified in section 21F of the Securities Exchange Act. Rule 21F-17 specifically prohibits companies from taking any action to impede whistleblowers from reporting possible securities violations to the SEC.

The contractor’s policy allegedly required its employees in particular internal interviews to sign confidentiality statements that limited their rights to disclose information. The SEC alleged that the language warned of discipline and even termination if employees discussed the matter with outside parties without obtaining approval from the company’s legal department. Although the SEC did not find any specific instances in which the contractor specifically prevented employees from communicating with the SEC about specific securities law violations, the SEC found that imposing pre-notification requirements before contacting the SEC could potentially discourage employees from reporting securities violations.

To settle the allegations, the contractor agreed to pay a penalty, agreed not to violate Rule 21F-17 in the future, and amended its confidentiality statement to clarify that its employees will not have to seek approval from the company before contacting officials, and would not have to fear the consequences of termination or retribution for doing so. The amended confidentiality statement states:

“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.”

SEC officials indicated that they will continue to vigorously enforce the prohibitions found in Rule 21F 17. In light of this decision, government contractors should immediately review their policies and amend any existing forms or agreements that may discourage or deter employees from reporting potential legal violations to the SEC or other governmental agencies.