New Rules for Broker-Dealer Confidentiality Provisions


By: John H. Goselin, II

FINRA's Notice to Members 14-40 revises the regulator’s position on the permissible scope and nature of confidentiality provisions that broker-dealers can agree to relating to the discovery process in legal proceedings or as a term in a settlement agreements ostensibly designed to resolve disputes and obtain peace. Although FINRA pays lip service to the concept that broker-dealers are free to enter into acceptable confidentiality provisions, FINRA has now staked out the position that any resolution with a customer that restricts the customer from initiating contact with a regulator is “inconsistent with just and equitable principles of trade” in violation of FINRA Rule 2010 and subjects the broker-dealer to a regulatory disciplinary action. Thus, NTM 14-40 dramatically re-writes the prior guidance provided by FINRA in 2004 in NTM 04-44 .

Prior to October 2014, a confidentiality provision was consistent with just and equitable principles of trade so long as the customer (or the customer’s lawyer) was free to respond to an inquiry from a regulator without requiring the regulator to obtain a subpoena or invoke some court process. Under the new guidance, the customer (or the customer’s lawyer) must be free to initiate contact with the regulators. NTM 14-40 provides the “magic words” which FINRA has deemed (at least for the moment) to be acceptable for confidentiality provisions:

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 S.E.C., FINRA, any other self-regulatory organization or any other state or federal regulatory authority, regarding this settlement or its underlying facts or circumstances.

Why the sudden change in policy regarding the scope of confidentiality provisions? NTM 14-40 provides no hint as to the rationale. What is clear is that it just got more difficult for a broker-dealer to obtain a complete and final resolution of a customer dispute. Even after agreeing to a monetary settlement, a customer or a customer’s lawyer will be free to contact regulators in an effort to stir the pot and encourage the regulator to intervene in some manner in what the broker-dealer had hoped was a resolved issue.



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