As reported this week by Law360 (subscription required), the Financial Industry Regulatory Authority (FINRA) recently issued a reminder (Regulatory Notice 14-40) warning firms against the use of confidentiality provisions in settlement agreements that prohibit or otherwise restrict customers or anyone else (such as current employees) from communicating with the Securities Exchange Commission (SEC), FINRA, or any federal or state regulatory authority regarding a possible securities law violation.
This is not the first warning on the use of confidentiality provisions in settlement agreements. The National Association of Securities Dealers (NASD)—a precursor to FINRA—issued a similar notice (NTM 04-44) in 2004. According to FINRA, this most recent notice supplements prior guidance by reminding firms that confidentiality provisions also cannot prohibit or restrict an individual frominitiating communications directly with FINRA or other securities regulators regarding settlement terms or the underlying facts of a dispute, regardless of whether the individual has received an inquiry from a regulatory authority.
With this renewed focus, FINRA has provided firms with the following example of an acceptable confidentiality provision in a settlement agreement:
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.
FINRA also cautioned firms against the use of confidentiality provisions in discovery stipulations that prohibit or restrict the ability of a customer or other person (such as an employee) to communicate directly with or in response to an inquiry from a regulatory authority. FINRA’s guidance further clarifies that confidentiality agreements governing documents produced as part of discovery do not apply to the sharing of the documents with regulatory authorities.
FINRA’s reminder comes at a time when the SEC too is eyeing contractual impediments to whistleblower complaints. (For more on the SEC’s efforts, see our March 17 and July 24 posts.) Given this increased regulatory scrutiny, firms in the securities industry should review and, if necessary, adjust the non-disclosure provisions of their confidentiality agreements to comply with applicable rules and guidance.