By Patricia Uceda, Fall 2014 Graduate Research Assistant
FINRA has issued a regulatory notice reminding brokerage firms that it is a violation of FINRA Rule 2010 to include confidentiality provisions in settlement agreements or any other documents that prohibit or restrict a customer from communicating the SEC, FINRA, or any federal or state regulatory authority regarding a possible securities law violation. Under FINRA Rule 2010, firms are required to observe “high standards of commercial honor and just and equitable principles of trade” in the conduct of their business.
As part of settlement agreements, some firms had required customers to sign confidentiality stipulations restricting them from disclosing to securities regulators the settlement terms and underlying facts of the dispute. Similarly, some investors had reported that during the arbitration discovery process, they had been asked to enter into stipulations that would prohibit them from using the documents outside of the proceeding. Such practices could, for example, prohibit investors from providing important information to regulators that would permit them to stop brokers who were engaged in questionable or illegal conduct.
FINRA’s regulatory notice makes clear that brokers cannot insist upon confidentiality clauses that would prohibit the disclosure of documents or information to securities regulators. While confidentiality provisions are acceptable, they may not attempt to restrict the customer from communicating with the SEC, FINRA, or any other regulatory authority. According to FINRA, such overly broad confidentiality provisions are inconsistent with just and equitable principles of trade, and may result in disciplinary proceedings.
Notwithstanding a confidentiality provision in a settlement agreement or discovery stipulation, customers may at any time alert FINRA to suspicious or harmful activities by a firm through FINRA’s Investor Complaint Center. Additionally, they may also contact the SEC or their state regulatory authority.