FINRA Reminds Firms to Avoid Stifling Whistleblowers in Settlement Agreements

by PIB Law on January 15, 2015

in Securities Litigation

FINRA Reminds Firms to Avoid Stifling Whistleblowers in Settlement AgreementsThe Financial Industry Regulatory Authority (“FINRA”) recently issued Regulatory Notice 14-40, which cautions firms against using confidentiality provisions in settlement agreements to deter whistleblowers.  As highlighted in the notice, FINRA rules expressly prohibit settlement agreements that include confidentiality provisions restricting a customer or any other person from communicating with regulatory authorities such as FINRA or the Securities and Exchange Commission (“SEC”) regarding a potential securities law violation.

FINRA previously warned that settlement agreements that restrict the other party from disclosing to securities regulators the settlement terms and the underlying facts of the dispute upon inquiry violate FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade). The latest notice goes further by advising that nondisclosure provisions should not be used to deter individuals from initiating communications directly with FINRA or other securities regulators regarding the settlement terms or underlying facts of a dispute, “regardless of whether the individual has received an inquiry from such regulatory authority regarding the dispute” (emphasis added).

Accordingly, FINRA advises that confidentiality provisions in settlement agreements should be written to expressly authorize, without restriction or condition, a customer or other person to initiate direct communications with, or respond to any inquiry from, FINRA or other regulatory authorities. The notice provides the following example of a confidentiality clause that would pass muster:

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 regulatory notice also addresses the use of confidentiality provisions during the discovery process, noting that parties often enter agreements regarding the non-disclosure of documents. While such stipulations are allowed, FINRA cautions that they should not be written so broadly as to bar the disclosure of the documents to the SEC, FINRA, or other regulatory authority. The regulatory notice also specifically warns that FINRA may pursue disciplinary proceedings if members require discovery stipulations that prevent a customer or other party from communicating with a state or federal securities regulator.

PIB Law represents national banks, retailers, reinsurers, insurers, mortgage lenders and financial services companies from its offices in New Jersey, New York City, Philadelphia, Boston, San Antonio, and Chicago. For more information about our securities litigation services, contact PIB Law at 908-725-9700.

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