Financial Industry Regulatory Authority (FINRA) Member Firms have new language to include in their settlement and confidentiality agreements. On October 9, FINRA released Regulatory Notice (RN) 14-40, warning that firms are prohibited from including any provisions in arbitration settlement agreements that bar customers or employees from reporting wrongdoing to regulators. FINRA clarified that including these types of provisions in settlement agreements or other documents would be considered a violation of Rule 2010 (Standards of Commercial Honor and Principles of Trade) and would subject a firm to discipline. The Notice goes a step further than FINRA’s previous guidance in Notice to Members (NTM) 04-44, which prohibited firms from including terms in a settlement that would prevent customers or employees from responding to a regulatory inquiry.
Settlement documents typically contain confidentiality provisions requiring parties to the settlement not to reveal confidential information about the dispute or the terms of the settlement. These provisions are often broadly worded, as firms and their attorneys seek to afford the maximum possible protection to confidential information. To ensure compliance with Rule 2010 and to prevent confusion that may arise from other non-disclosure provisions in the agreements, Member Firms would be well-advised to include in any future settlement agreements the following sample confidentiality provision approved by FINRA:
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.
Presumably this language may be used instead of—rather than in addition to—FINRA’s prior sample confidentiality provision set forth in NTM 04-44 since it incorporates and expands upon those earlier approved terms.
In addition to settlement agreements, RN 14-40 applies to confidentiality agreements or stipulations entered between arbitration parties in discovery, as well as to any confidentiality orders issued by an arbitration panel. The Notice makes clear that stipulations or confidentiality orders generally prohibiting the sharing of information or documents outside the dispute do not apply to sharing documents or information with regulators, whether affirmatively or in response to a regulatory inquiry. Any confidentiality stipulations that do restrict parties’ sharing documents or information with regulators will be considered a violation of Rule 2010. Firms would be well-advised to ensure that language similar to FINRA’s suggested language for settlement agreements is included in any confidentiality agreements or stipulations entered in discovery.
In light of FINRA’s new guidance, firms may wish to review their standard confidentiality and settlement agreements—as well as those of their outside counsel—to ensure that they contain the language suggested by FINRA. Firms may also wish to update their confidentiality agreements in pending customer arbitrations through supplemental agreements. Finally, firms should ensure that any settlement agreements entered into in the future contain the language suggested by FINRA or similar language.