The Financial Industry Regulatory Authority (FINRA) recently issued a regulatory notice regarding the use of confidentiality provisions in settlement agreements.
It specifically reminds firms that FINRA Rule 2010 prohibits provisions that restrict or preclude a customer or any 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.
According to the FINRA, its intent is not to preclude securities industry firms from entering into settlement agreements that include confidentiality provisions. Rather, it wants to ensure that agreements are written to expressly authorize, without restriction or condition, a customer or other person to initiate direct communications with, or to respond to, any inquiry from, FINRA or other regulatory authorities.
The notice provides 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’s guidance also highlights that confidentiality provisions relating to document production in the FINRA arbitration discovery process do not apply to the sharing of the documents with regulatory authorities. Moreover, the use of confidentiality provisions in discovery stipulations that prohibit or restrict a customer’s or other person’s ability to communicate directly with or in response to an inquiry from a regulatory authority may also violate Rule 2010.
Given the increased scrutiny by FINRA and the SEC, financial firms should review the non-disclosure provisions of their confidentiality agreements to ensure compliance. The failure to do so could lead to a costly violation.
If you have any questions about this post or would like to discuss your settlement agreements, please contact me or the Scarinci Hollenbeck attorney with whom you work.
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