By Kenneth DiGia and Lauri F. Rasnick
FINRA just issued a reminder regarding its views on confidentiality provisions and confidentiality stipulations.
Settlement Agreements
In Regulatory Notice 14-40, FINRA follows up on its prior Notice to Members 04-44, in which it had cautioned firms about the use of certain provisions in settlement agreements that impede, or have the potential to impede, FINRA investigations and the enforcement of FINRA actions. Specifically, FINRA had addressed settlement agreement provisions which limited, prohibited or discouraged employees from disclosing settlement terms or underlying facts in dispute to FINRA or securities regulators. FINRA proposed acceptable language to be included in settlement agreements or similar contracts which contain confidentiality obligations.
FINRA now takes its position a step further and proposes revised sample language for employers to include. The new sample provision is as follows:
Any non-disclosure provision in this agreement does not prohibit or restrict you (or your attorney) from initiating communications directly with, or responding to an 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.
The primary difference in the language that FINRA has now suggested as opposed to the prior provision it set forth is with regard to maintaining an employee’s ability to initiate communications directly with the SEC, FINRA or any other self-regulatory organization or any other state or federal regulatory authority. Indeed, FINRA’s recent notice was meant to remind firms that confidentiality provisions – whether contained in settlement agreements, confidentiality agreements or other contracts – cannot be used to prohibit or restrict individuals from initiating communications. According to FINRA, confidentiality provisions should expressly authorize such communications.
Confidentiality Stipulations
The Recent Notice also discussed the need for clarity in confidentiality stipulations or orders which may be entered into during arbitration proceedings to protect the confidentiality of proprietary/confidential materials exchanged by the parties or produced by third parties during arbitration. Such confidentiality orders or stipulations generally prohibit the use of materials designated as confidential outside of the arbitration proceeding. Notice 14-40 warns that such stipulations or orders cannot restrict or prohibit the disclosure of documents to the SEC, FINRA or other self-regulatory organization or any other state or federal regulatory authority. While the Notice focuses on stipulations and orders entered into during arbitration proceedings, the message would apply equally to stipulations entered into during, for example, court or administrative proceedings.
Regulatory Notice 14-40 is at least the fourth reminder by FINRA (and its predecessor the NASD) that separation agreements entered into must not impede its investigatory functions. Given these repeated reminders, employers should review their separation agreements to ensure that former employees are told that they remain free to communicate with FINRA (and other related entities) regarding any such terms or their underlying facts and circumstances. Other employment documents containing confidentiality provisions, such as confidentiality agreements, handbooks, and employment agreements should similarly be reviewed for compliance. Employers should also ensure that confidentiality agreements used in arbitrations or other proceedings likewise do not restrict the investigatory authority of FINRA (and other related entities). Failure to do so may result in FINRA disciplinary proceedings on the basis that such conduct is “inconsistent with just and equitable principles of trade.”
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