Firm Settles Charges for Impermissible Language in Confidentiality Agreements
Commentary by Glen Barrentine
An introducing broker-dealer settled FINRA charges for including confidentiality provisions in settlement agreements that could impede investigations by regulatory agencies.
According to the AWC, the firm entered into a number of settlement agreements that restrict a customer's ability to communicate with regulators. FINRA said (i) one provision prohibited a customer from disclosing settlement terms to regulatory bodies without a court order or order from a regulatory body; (ii) one broad confidentiality provision did not provide express permission to the customer to engage with securities regulators, should the regulators inquire about the settlement agreement; and (iii) one provision, while generally allowing disclosure to FINRA, "[prohibited] disclosure to one specified department within FINRA."
FINRA found that the firm violated FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade").
To settle the charges, the firm agreed to (i) a censure and (ii) pay a $50,000 fine.
Commentary
This AWC points out the importance of firms having procedures in place to ensure that confidentiality agreements, both in the context of settlement agreements and more generally, comply with FINRA rules. Firms should also keep in mind SEA Rule 21F-17 ("Staff communications with individuals reporting possible securities law violations"). The Rule, which relates to whistleblower incentives and protections, prohibits any person from taking any action to impede any individual from communicating directly with the SEC about a possible securities law violation. The SEC interprets Rule 21F-17 broadly. Violations of Rule 21F-17, which may arise in a variety of contexts, including employment, severance, settlement and confidentiality agreements, and applies not only to employees, are a perennial source of SEC enforcement actions.