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On June 17, 2024, Trafigura Trading LLC (“Trafigura”) agreed to pay $55 million to settle charges brought by the Commodity Futures Trading Commission (“CFTC”) that they “traded gasoline while in knowing possession of material nonpublic information, . . . manipulated a fuel oil benchmark to benefit its futures and swaps positions,” and notably that they violated CFTC Regulation 165.19(b) by “requir[ing] its employees to sign employment agreements, and request[ing] that former employees sign separation agreements containing non-disclosure provisions prohibiting them from disclosing company information, with no exception for law enforcement agencies or regulators.” This is the CFTC’s first enforcement of Regulation 165.19(b).
Regulation 165.19(b) states that “No person may take any action to impede an individual from communicating directly with the Commission’s staff about a possible violation of the Commodity Exchange Act, including by enforcing, or threatening to enforce, a confidentiality agreement or pre-dispute arbitration agreement with respect to such communications.” The SEC’s analogous Rule 21F-17(a) states similarly that “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.” While the CFTC had not enforced Regulation 165.19(b) prior to now, the SEC has actively enforced Rule 21F-17(a), beginning with an enforcement action against KBR in 2016 and with enforcement increasing especially over the past year.
In the enforcement action against Trafigura, the CFTC found that between 2017 and 2020 “Trafigura required its employees to execute and requested that former employees execute agreements that contained broad non-disclosure provisions that prohibited sharing Trafigura’s confidential information with third parties.” These contracts included preventing the employees and former employees who signed from providing information on violations to the CFTC and other regulators or law enforcement, except if required by law or court order – and therefore not voluntarily. The CFTC found that these non-disclosure clauses did in fact “ha[ve] the effect of impeding [Trafigura employees’] direct and voluntary communications with the Commission.”
This action to enforce Regulation 165.19(b) is fully consistent with prior enforcements by the SEC of Rule 21F-17(a). The SEC has enforced Rule 21F-17(a) based upon contract clauses in employment agreements in enforcements against The Brink’s Company and D.E. Shaw. There have also been eleven enforcements based upon language in severance or separation agreements.[1] In regards to the type of language itself, there have been five SEC Rule 21F-17(a) enforcements for similar contract clauses to the one found here that prevented the disclosure of confidential information, including to government regulators.[2]
In their enforcement action against D.E. Shaw, the SEC found that the company “required new employees to sign employment agreements . . . that prohibited them from disclosing “Confidential Information” to anyone outside of DESCO unless authorized by DESCO or required by law or an order of a court or other regulatory or governmental body, without any exception for voluntary communications with the Commission concerning possible securities laws violations.” Similar to the current action where the CFTC made a finding that the non-disclosure clauses had an effect in impeding communications with the CFTC, the SEC found in the D.E. Shaw enforcement that “one former [D.E. Shaw] employee… was initially discouraged from communicating with [the SEC]” due to the non-disclosure clauses.
Rules that prevent employers from using NDAs to silence whistleblowers, such as Regulation 165.19(b) and Rule 21F-17(a), have a long history. In 1989, the Nuclear Regulatory Commission (“NRC”) found that companies operating and constructing nuclear reactors were preventing their employees from reporting safety concerns to the NRC. As documented in the resulting Senate hearing on the issue, the NRC’s swift response to this was to send a letter to all companies licensed or applying to be licensed to operate in the nuclear energy industry instructing that:
Licensees should examine their current and previous agreements to assure that restrictive clauses are not present. If restrictive clauses are found, licensees should promptly inform the employee or former employee that the restriction should be disregarded, that he or she may freely come to NRC at any time without fear of any form of retribution, and that such a restriction will not be enforced. Please notify us no later than July 31, 1989 If any such restrictive clauses have been identified.
The NRC recognized in their letter that “[t]here can be no question that public health and safety require that employees be free to raise safety issues to their management or the NRC.” This action required an entire industry to review every contract they had entered into with employees and former employees, notify the employees or former employees that the provision was moot, and report all such restrictive clauses to the NRC.
Soon after this, in October 1993, the NRC published regulations to prevent companies from using employment agreements that contain any provision that “would prohibit, restrict, or otherwise discourage an employee from . . . providing information to the NRC or to his or her employer on potential violations or other matters within NRC’s regulatory responsibilities.” Regulation 165.19(b) and Rule 21F-17(a) are based directly off of this NRC regulation meant to prevent a nuclear disaster by companies preventing workers at nuclear powerplants from disclosing safety issues.
Regulation 165.19(b) and Rule 21F-17(a) have the same importance as the NRC regulation. These regulations are critical to ensuring the functioning of the SEC and CFTC whistleblower programs. One of the main deterrents keeping whistleblowers from going to regulators when they find violations and illegal activity, is the fear that they will be found liable for violating an NDA with the company. These NDAs are effective as threats, even if they are not brought to court to be enforced. By making these overly broad NDAs moot and preventing liability to employees that blow the whistle to the CFTC and SEC, these regulations prevent NDAs from interfering with the functioning of the whistleblower programs. More important, however, is their power to prevent the use in the first place of overly restrictive NDAs that mislead and intimidate employees from blowing the whistle.
Increased enforcements and meaningful sanctions against companies that utilize overly restrictive NDAs to silence whistleblowers are necessary to change industry behavior and protect whistleblowers. The SEC has taken this necessary action since the KBR enforcement in 2016 and the CFTC begins their protection of whistleblowers from these NDAs now with the Trafigura enforcement.
Footnotes
[1] Merrill Lynch; BlueLinx; Health Net; Anheuser-Busch InBev; NeuStar; BlackRock; Homestreet; Activision Blizzard; Gaia; CBRE; D.E. Shaw.
[2] Merrill Lynch; BlueLinx; Anheuser-Busch InBev; Brinks; D.E. Shaw.
Benjamin Calitri is an Associate at Kohn, Kohn & Colapinto LLP.
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