CONFIDENTIALITY CLAUSE: A SETTLING CONDITION IN SECURITIES ARBITRATION

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Confidentiality clauses in securities arbitration settlement agreements are normally requested by brokerage houses and agreed to by claimants as a condition of settlement of a securities arbitration dispute.  Claimants are prohibited from disclosing anything regarding the settlement, particularly the facts underlying the arbitration and the amount of money being paid.

This may seem to be an arcane issue important only to lawyers like myself but confidentiality clauses go to the heart of transparency in the arbitration system and have wider implications of brokerage conduct.

Normally cases involving egregious conduct are settled before hearing.  Brokerage houses are advised by counsel that they are better off settling if it looks like that there is a good chance that they will lose before a panel.  In addition, they can deny any liability, avoid any publicity, and seal the deal by requiring confidentiality.

On the other side of the table, claimants also often would prefer a settlement. Settlement is generally a better option than the risk, cost, and stress of a hearing.

Over the years, FINRA (the Financial Industry National Regulatory Authority) has chipped away at confidentiality clauses.  For example, there is an exception, incorporated into every confidentiality clause, that every FINRA or any state regulatory investigation is excepted.  In addition, if a broker is mentioned in a statement of claim, even if not being sued directly, the fact of a claim will appear on the Central Reporting Depository (CRD).

Confidentiality clauses, however, allow brokerage houses to hide and keep the worst behavior secret.  The public remains unaware.  The behavior continues because the claims are treated only as a cost of doing business. It makes business sense to pay the claim on the occasional case and continue as business as usual. Only the fact of a settlement is reported.

As a matter of policy, claimants’ lawyers, such as myself, can decry confidentiality clauses.  Unfortunately, our ethical obligations supersede our policy views when it conflicts with a particular client’s case.

Currently FINRA is considering a rule change that would prohibit confidentiality clauses in securities arbitration settlements. Only by prohibiting those clauses can the abuse be eliminated and full transparency of the arbitration system be revealed and the worst behavior be deterred.

Your Call to Action:  Please contact FINRA to let them know your views on this matter.