In Regulatory Notice 14-40 (“RN 14-40”), released last week, FINRA cautioned firms on confidentiality or settlement agreements that prohibit or restrict a party from communicating or providing documents to FINRA or other securities regulators. FINRA warned that such provisions would violate FINRA Rule 2010 (just and equitable principles of trade), and could subject firms to FINRA disciplinary action.
While FINRA had previously warned firms about settlement agreements that prohibited parties from communicating to regulators (see FINRA NTM 04-44), RN 14-40 significantly expands FINRA’s guidance, especially in regards to confidentiality agreements related to the exchange of documents in arbitration proceedings. RN 14-40 explicitly states, “[C]onfidentiality provisions relating to document production in the discovery process do not apply to the sharing of the documents with regulatory authorities.” RN 14-40, p.2 (emphasis added). Given FINRA’s stance on this issue, simply being silent on the production of confidential documents to FINRA could be construed as “restricting” FINRA’s access to these documents, and therefore potentially subject a firm to charges that it is in violation of FINRA Rule 2010. Thus, firms should consider using a regulatory carve out in confidentiality agreements that expressly permits the production of documents to FINRA and other regulators in order to avoid any possible regulatory issues.