FINRA recently issued Regulatory Notice 14-40, cautioning broker-dealer firms (and associated persons) against including overly restrictive confidentiality language in both settlement agreements and in arbitration discovery stipulations. FINRA asserts that overly broad confidentiality agreements can be treated as a violation of Conduct Rule 2010 and can result in enforcement action by the regulator.
It has long been a policy of FINRA (back to the NASD days) that firms could not prohibit a customer from cooperating with the regulators and discussing information about the matter, and guidance had been issued to that effect. In this notice, FINRA modifies its guidance somewhat to specifically state that a firm (or associated person) cannot prohibit another person from initiating contact with the regulator, or with the SEC. Previous guidance focused on language that would specifically allow the customer to respond to regulatory requests for information. Further, FINRA asserts that discovery stipulations in arbitration cases cannot require a person to keep documents received in discovery confidential and therefore not be allowed to share them with the regulator.
Firms and their counsel should review both their current settlement practices, including language in their settlement agreements, as well as any standard discovery stipulations and modify them as necessary in light of this guidance. While the regulatory notice itself is not a formal rule, it demonstrates the regulator's mindset and policy positions and shows how they can be expected to attempt to enforce Rule 2010 in the future. Forewarned is forearmed.