The Use of Confidentiality Provisions in Settlement Agreements
Brokerage firms cannot include a confidentiality provision in a settlement agreement with a customer that restricts or prohibits communication with the Securities and Exchange Commission ("SEC"), FINRA, or any federal or state regulatory body. The Financial Industry Regulatory Authority ("FINRA") recently issued Regulatory Notice 14-40 reminding members that a provision such as this is a violation of FINRA Rule 2010.
The caution comes from the Wall Street watchdog with the concern that such provisions would impede, or have the potential to impede, FINRA investigations and the prosecution of FINRA enforcement actions. Customers of a FINRA member, or anyone else, must be able to disclose to the appropriate regulator the underlying facts of the dispute upon inquiry.
According to Regulatory Notice 14-40, "confidentiality provisions also cannot be used to prohibit or restrict an individual from initiating communications directly with FINRA or other securities regulators regarding the settlement terms or underlying facts of a dispute. For example, even with a confidentiality provision in a settlement agreement, the customer or any other person may, at any time, alert FINRA to potentially fraudulent or suspicious activities by a firm or its associated persons through FINRA's Investor Complaint Center, or communicate directly with SEC staff regarding a possible securities law violation."
FINRA maintains the Investor Complaint Center on its website. Individuals with evidence of, or material information about, potentially illegal or unethical activity may also contact FINRA's Office of the Whistleblower.
According to the Notice, the same is true regarding documents that the parties in arbitration have marked "confidential." FINRA notes that this designation does not restrict or prohibit the disclosure of the documents to the SEC, FINRA, or any other regulator. The Notice reflects FINRA's efforts to encourage people with information to reach out to a regulatory authority concerning a possible securities violation.
About the Meyer Wilson
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