The Financial Industry Regulatory Authority (“FINRA”) issued a Regulatory Notice on Friday, October 10, 2014, that was welcome news to financial industry whistleblowers, stating that companies must refrain from entering arbitration settlements with confidentiality provisions which fail to expressly authorize individuals to contact FINRA or other regulatory agencies to report wrongdoing, according to a Law360 report. Specifically, the FINRA Regulatory Notice states in its executive summary 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 any other documents, including confidentiality stipulations made during a FINRA arbitration proceeding, that prohibit or restrict a customer or any other person from communicating with the Securities and Exchange Commission (SEC), FINRA, or any federal or state regulatory authority regarding a possible securities law violation.”
The rule is comparable to the Securities and Exchange Commission’s (“SEC’s”) rule prohibiting companies from impeding whistleblowers in providing information to the SEC, which provides that “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications.“ Katz, Marshall & Banks partner David J. Marshall recently wrote about the SEC rule as part of his SEC Whistleblower Practice Guide. In it, Mr. Marshall described how companies often inserted confidentiality provisions into settlement and severance agreements ostensibly prohibiting whistleblowers from sharing information with any third party, in what could be construed as an attempt to chill SEC whistleblowers from reporting information regarding illegal activity to the government.
This troubling trend in settlement agreements prompted Mr. Marshall and his law partner, Debra S. Katz, to write a letter to SEC Commissioners in May 2013 detailing the issues created by these confidentiality provisions. Later, in March 2014, SEC Whistleblower Office Chief Sean McKessy stated that the SEC was on the lookout for such provisions: “[W]e are actively looking for examples of confidentiality agreements, separation agreements, employee agreements that … in substance say ‘as a prerequisite to get this benefit you agree you’re not coming to come to the commission or you’re not going to report anything to a regulator. And if we find that kind of language, not only are we going to go to the companies, we are going to go after the lawyers who drafted it. We have powers to eliminate the ability of lawyers to practice before the commission. That’s not an authority we invoke lightly, but we are actively looking for examples of that.”