FINRA recently warned that firms could face disciplinary action if they enter into settlement agreements that bar customers or former employees from reporting wrongdoing at the firm. Although FINRA recognized that confidentiality provisions were acceptable, it noted that they have to be written in such a way to authorize the individual to contact FINRA or another regulator to report improper activity.
Similarly, FINRA announced that any confidentiality stipulation that at arbitration panel enters in a case would not apply to sending information to regulators about the firm. The timing of this announcement coincided with the SEC approving a FINRA rule change that allows arbitrators to make a referral to enforcement before the end of a case. This was certainly not coincidence.
So what is the take away from these policies? For one, it could embolden whistleblowers to reach a resolution with a member firm, only to then report the firm to FINRA or another regulatory body.
In the end, this may result in more litigation and enforcement proceedings. It may also result in more FINRA arbitrations being tried to award. In other words, the firm may as well try to get exonerated by a panel if the claimant could just report the firm to FINRA regardless of a settlement.
The other side of this coin is FINRA’s push for transparency. By restricting these agreements and allowing arbitrators to report firms to enforcement during arbitration, FINRA is stepping up its oversight of member firms.
The cynic in me says that the lawyers will be the one that will ultimately benefit from these policies because firms may be forced to litigate claims to a conclusion and fight more enforcement matters.
One unfortunate outcropping of these policies may also be frivolous reports to FINRA to use as settlement leverage. Compounding that issue, making a whistleblower report is at least entitled to a qualified privilege such that firms may have little recourse for a whistleblower that makes a bogus report.
So what should firms do? The key is leadership from the top that promotes a culture of compliance. This may be cliché, but solid firm leadership that has a no-nonsense approach to compliance and supervision will stand in a better position than firms that deal with compliance and supervision on an ad hoc basis.
Life for member firms and registered representatives is becoming more challenging, and FINRA is not making it any easier. Nonetheless, you should take a hard look at yourself. Are you doing enough to create a culture of compliance to avoid the sting of whistleblowers?
* photo from freedigitalphotos.net