FINRA Arbitration and Confidentiality: the Exception Not the Rule

Monday, July 27, 2015

Arbitration is typically "private" in the sense that there is no First Amendment right of the public to access to arbitration hearings or arbitration documents, but that doesn't mean that arbitration is strictly confidential either.  Just the opposite, confidentiality in arbitration is the exception not the rule, according to guidance available from FINRA here.

While arbitrators and FINRA staff have an obligation to "respect the privacy of the parties before whom they serve" and not to "personally disclose the details of arbitration proceedings" -- much the same obligation applicable to Judges and clerk's offices in civil litigation in court -- the parties themselves "are generally free to disclose details of their own proceeding as they see fit."  Arbitrators should rarely, if ever, grant orders requiring that everything pertaining to a dispute be kept confidential by the parties to the dispute.  So-called "blanket orders of confidentiality" may be entered only upon a showing of truly exceptional circumstances.

Although discovery in arbitration is often conducted according under agreed-to confidentiality orders, the parties may not always agree on what documents or information deserves to be treated as confidential.  When the arbitrators are called upon to decide whether particular information should be treated as confidential, they must engage in "a serious and case-by-case consideration of the issues."

Why? Unnecessary secrecy is burdensome and contrary to important public interests.  According to FINRA, "A ruling that documents are confidential may impose burdens and limitations on the receiving party, such as requiring special handling or limiting the ability of the party to discuss the documents with witnesses and others who may assist in developing the case. Likewise, such a ruling may keep regulatory officials from learning of conduct in violations of statutes and rules."

What factors should be considered?  According to FINRA, in considering questions about confidentiality, the arbitrator should consider such factors as:
  1. Is the information so personal that disclosure would constitute an unwarranted invasion of personal privacy (e.g., an individual's social security number, tax return, or medical information)?
  2. Is there a real threat of injury attendant to disclosure of the information?
  3. Is the information proprietary containing confidential business plans and procedures or a trade secret?
  4. Are there essential competing interests at stake that require confidential treatment of certain portions of the proceedings?
  5. Is the information already public (e.g., has it previously been published or produced without confidentiality) or is it already in the public domain?
  6. Would an excessively broad confidentiality order be against the public interest in disclosure? Keep in mind that securities arbitration is highly regulated by the Securities and Exchange Commission. The former SEC Director of Enforcement, William R. McLucas, has stated: "[P]rivate [securities] actions will continue to be essential to the maintenance of proper investor protection."
  7. Are there first amendment or other issues which might be raised by excessive restrictions on the ability of parties to comment freely upon matters in which they are involved?
  8. Would an unduly extensive confidentiality order impair the ability of counsel to represent other clients?
"Arbitrators should not routinely designate all discovery as confidential. Where confidentiality is appropriate, bear in mind that it should generally be accomplished in the least restrictive manner."

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