Client Advisory: FINRA Regulatory Notice to Members 14-40 (“NTM 14-40”)

November 2014
Last month the Financial Industry Regulatory Authority (“FINRA”) issued a two-part Regulatory Notice to Members 14-40 (“NTM 14-40”). The notice “reminds” member firms that it is a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) to include confidentiality provisions in settlement agreements or other documents that prohibit or restrict a customer or any other person from communicating with regulators.  NTM 14-40 states that it “supplements FINRA’s prior guidance” and requires member firms to ensure that their non-disclosure agreements are carefully drafted to meet FINRA’s new, stricter standard for applying Rule 2010. NTM 14-40’s two parts address confidentiality in settlement agreements (Part A) and discovery orders or agreements (Part B).
 
Part A - Confidentiality in Settlement Agreements
 
FINRA’s predecessor, the National Association of Securities Dealers (NASD), previously issued various notices barring confidentiality provisions in settlement agreements that might serve to obstruct regulatory investigations. For example, a decade ago, FINRA issued NTM 04-44, which required confidentiality provisions in settlement agreements to expressly permit signatories to respond to inquiries from regulatory agencies.   NTM 14-40 discusses the prior FINRA guidance and reiterates the rule prohibiting member firms from using confidentiality agreements or non-disclosure provisions to prevent customers or others from responding to inquiries from FINRA or other regulators. 
 
However, Part A of NTM 14-40 goes significantly further than past notices by applying a new standard that requires firms to expressly give notice that confidentiality provisions in settlement agreements may not limit the signatory’s ability to initiate contact with FINRA, the Securities Exchange Commission (SEC), or any other regulators. An example of suggested language for a confidentiality provision deemed acceptably by FINRA is included in the NTM, as follows:
 
Any nondisclosure 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, or any other self-regulatory organization or any other state or federal regulatory authority regarding this settlement or its underlying facts. 
 
As a result of NTM 14-40, a settlement agreement that only informs customers and other persons that they may respond to an inquiry by regulators likely will be considered a violation of Rule 2010. Instead, the agreement must also explicitly advise the signatory that he or she (and/or counsel) may initiate contact with regulatory agencies and make disclosures regarding the settlement or related matters.
 
Part B - Confidentiality in Arbitrations and Discovery
 
Part B of NTM 14-40 provides similar guidance for confidentiality provisions in arbitrations and discovery matters and mandates that, whether by order or agreement, such confidentiality restrictions may not apply to prevent any disclosure of documents or information requested by FINRA or other regulators. As described in the NTM, a confidentiality requirement issued in a FINRA arbitration proceeding or in connection with related discovery may not restrict a person’s ability to respond to inquiries from a regulatory agency. NTM 14-40 states that such confidentiality orders or agreements may not impede a person’s “ability to communicate directly with or in response to an inquiry” from a regulatory organization. Interestingly, however, Part B does not offer any recommended language for such a provision, nor does it state any requirement for an explicit statement preserving a person’s ability to initiate disclosures to the regulators. This distinction may be very important for member firms as they consider how to maximize the effectiveness of confidentiality provisions in compliance with FINRA’s stated guidance and rules.
 
Conclusion
 
As a result of NTM 14-40, member firms should carefully review their current forms for settlement agreements, non-disclosure agreements and confidentiality provisions to be certain they comply with FINRA’s latest guidance. FINRA has strongly reiterated and emphasized its rule that confidentiality and non-disclosure restrictions may not prevent signatories from responding to regulatory inquiries regarding settlements or arbitration matters. In addition, a member firm’s future settlement agreements should also satisfy FINRA’s new requirement to explicitly inform customers that confidentiality and non-disclosure provisions in such agreements do not prevent the signatories (or their counsel) from initiating contact with a regulator regarding the settlement or related matters. 
 
This advisory has been prepared by Rogers & Hardin for informational purposes only and should not be considered as legal advice. Additional information on Rogers & Hardin’s services is available on our website under Broker-Dealer Litigation & Arbitration Practice.
 

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