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FINRA Issues Guidance Notice on Confidentiality Provisions in Settlement Agreements and the Arbitration Discovery Process

In Regulatory Notice 14-40, FINRA reminds members that it is a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) to incorporate into a settlement agreement a confidentiality provision restricting or prohibiting a customer or other person from communicating with the Securities and Exchange Commission (SEC), FINRA, or any federal or state regulatory authority regarding a possible securities law violation.

While FINRA has previously addressed the use of confidentiality provisions in settlement agreements, see, e.g., Regulatory Notice 04-44 (June 2004), Notice 14-40 goes further than FINRA’s prior guidance and targets provisions silencing whistleblowers.  In its most recent notice, FINRA reminds firms that a confidentiality provision cannot impede an individual from initiating communications directly with a regulatory authority regarding the settlement terms or underlying facts of a dispute, regardless of whether the individual has received an inquiry from a regulator regarding the dispute.  According to FINRA, then, a party may at any time notify FINRA or the SEC of a possible securities law violation—notwithstanding a confidentiality provision to the contrary.

In that respect, FINRA advises that a confidentiality provision should expressly allow a party to initiate direct communications with, or respond to an inquiry from, a regulator.  It offers as an example the following clause:

Any non-disclosure provision in this agreement does not prohibit or restrict you (or your attorney) from initiating communications directly with, or responding to any inquiry from, or providing testimony before, the SEC, FINRA, any other self-regulatory organization or any other state or federal regulatory authority, regarding this settlement or its underlying facts or circumstances.

In addition, Notice 14-40 cautions firms about the use of confidentiality provisions during the discovery process.  FINRA makes it clear that a provision concerning the non-disclosure of documents outside of the arbitration of the particular case does not apply to the sharing of documents with a regulator.  It also warns that the use of a confidentiality provision in a discovery stipulation that restrict a party’s ability to communicate directly with or in response to an inquiry from a regulatory authority violates FINRA Rule 2010.

Notice 14-40 reflects FINRA’s continued efforts to encourage and protect whistleblowers.  Accordingly, member firms should ensure that the confidentiality provisions in their settlement agreements and discovery stipulations do not in any way impede a party’s ability to reach out to a regulatory authority concerning a possible securities violation.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume IV, Number 317


About this Author

Jeff Kern, Business Trial and White Collar Attorney, Sheppard Mullin,
Special Counsel

Jeff Kern is a special counsel in the Government Contracts, Investigations, and International Trade Practice Group in the firm's New York and Los Angeles offices.  He is admitted to practice in New York and Massachusetts.

Areas of Practice

Mr. Kern's practice encompasses securities regulation, compliance, and litigation as well as internal investigations and white collar defense.  He represents broker-dealers and associated individuals who are the focus of SEC, FINRA and other regulatory investigations and provides guidance in the FINRA membership application...