Non-disclosure agreements (NDA) are commonly required by securities and life insurance licensed defendants as a prerequisite to settling investor and insured disputes. But when other clients have been affected by — or are potentially affected by — similar wrongdoing, there is public interest in full disclosure.
If an NDA restricts disclosure of wrongdoing or negligence, including civil allegations, then other harmed and potentially harmed clients are unlikely to know the cause of their damage or their right to seek redress. This is contrary to the public interest.
Four questions for securities and insurance regulators:
- In what circumstances are NDAs appropriate?
- What information is appropriate for an NDA to conceal from the public?
- What obligation should a licensed party have to communicate the NDA’s terms to the investor in plain language?
- If NDAs are permitted by the Canadian Investment Regulatory Organization (CIRO), then how will CIRO ensure that the dealer fulfills its duty to warn clients who have suffered harm or potentially suffered harm by its negligence or the wrongdoing of its employees and agents?
NDAs can serve a legitimate purpose. They can also be abusive. They can be used to unfairly fetter the rights of investors and the public, or to confuse investors. In practice, the concern is not simply that NDAs exist. The concern is how they are drafted, understood and enforced.
While in some cases a single investor may have been the victim of wrongdoing or affected by negligence, it is undeniable that multiple investors are often harmed by similar acts by some or all the CIRO-licensed parties.
If other investors may have been victimized or harmed, then the disclosure of the allegations and the fact of the settlement are in the public interest.
The negative impact of broad NDAs on the public interest could be addressed if licensed parties had an obligation to independently investigate and inform all potential clients who may be victims or harmed. In the absence of a regulatory duty to warn other potentially affected investors, the public interest requires public disclosure so that clients can learn of wrongdoing and negligence by licensees.
While the parties and allegations should not be subject to NDAs, there is a legitimate business interest of CIRO members, their advisors and their insurers in an NDA to keep the amount of a settlement private. That is the full extent of a reasonable NDA.
To enforce alleged breaches of an NDA, the matter should be brought before a court of competent jurisdiction, which can hear the facts and arguments and determine the appropriate redress.
Commonly, the industry substitutes the independent adjudication of potential breaches of NDAs with a punitive liquidated damages clause. This is an example of overly broad wording, which is contrary to the public interest. NDAs with liquidated damages for breach are abusive. Their primary purpose is to scare harmed investors.
NDAs should not deter the investor from sharing the facts of their claim, their allegations or the existence of a settlement.
NDA terms are inappropriate when they:
- are not drafted in plain language;
- include broad definitions of confidential information that extend beyond settlement terms or limit communications about the underlying facts and circumstances of the dispute;
- limit communications about allegations in pleadings including statements of claims or defences in statements of defences, or prohibit any statements, even when they are truthful.
That last point relates directly to abusive liquidated damages clauses.
Plain language matters
In practice, the scope of common industry NDA wording includes restrictions which are unclear to retail investors and insureds. This is particularly unfair where agreements are broadly drafted or incorporate legal terminology.
Broad drafting and legal terminology create uncertainty for all but the legally educated and trained clients. The uncertainty impacts the client’s comprehension of what can be disclosed. This achieves a chilling effect, in which investors remain silent even when disclosure would be lawful and of public interest.
While technically barred from the settlement of CIRO licensees, NDAs with liquidated damages clauses and complex, legal restrictions on sharing the facts and allegations are expected to limit the flow of information that regulators rely on. The investor is unlikely to understand the complex nuance between what they are permitted to discuss and what the NDA bars disclosing.
This is another way in which public interest is undermined. The chilling effect on regulatory reports is achieved when legal terminology is used instead of the available and reasonable alternative, which is plain language.
The complaint process is key to protecting the public. Disclosure of allegations and facts by clients is often the starting point for regulatory investigations. Sometimes this results from direct complaints by clients. Other times, regulators learn of allegations through public sources. If that information is restricted, the system becomes less effective and undermines the regulatory process.
Regulators fail if they rely upon wrongdoers and negligent parties to act against their own interest. Also, regulators negate public protection when they fail to intervene in the public interest to bar wording which may limit disclosure of wrongdoing and negligence.
Client-focused reforms
Under the client-focused reforms, regulators have established a foundational principle —licensees must put clients’ interests first and address conflicts of interest in the client’s best interest. Disclosure of allegations of wrongdoing or negligence may be in the best interests of other clients who were, or may have been, harmed.
NDAs that prevent or discourage full and plain disclosure of those allegations deliberately prefer the licensee’s interests over the interests of those other clients. Broad NDAs undermine the client-first principle.
Regulatory findings and guidance make clear that licensees cannot use contractual language to limit their responsibility or avoid accountability to clients.
There is also a practical reality. Most retail investors do not have the same resources or bargaining power as a dealer or advisory firm. At settlement, an investor may feel compelled to accept broad confidentiality terms as the price of resolution.
The result is that the investor may be unable, or may believe they are unable, to speak about what happened, warn others, seek support or obtain further advice — even where there is a legitimate reason to do so.
That is contrary to the public interest. Broad confidentiality terms silence investors without ensuring that they clearly understood the rights they were giving up or the public-interest consequences of doing so.
Regulators’ public interest mandate
Addressing this imbalance falls squarely within the consumer protection mandates of CIRO, the Ontario Securities Commission and the Financial Services Regulatory Authority of Ontario.
Each regulator is responsible, in its own sphere, for promoting fair treatment, market integrity, confidence in the financial system and protection of investors, consumers and the public. Those mandates are undermined when a licensed firm can use broad NDA language to exploit unequal bargaining power, obscure allegations of wrongdoing or negligence, or discourage affected clients from coming forward.
Regulatory intervention is not an intrusion into private settlement; it is a necessary exercise of the regulators’ public protection function. The industry, left to its own devices, seeks the maximum advantage of unequal bargaining power, regardless of whether this results in client harm.
CIRO’s historical position has been one of willful blindness to the risks associated with NDAs — abuse, enforcement interference and the avoidance of a dealer’s duty to warn clients of the harm or potential harm caused by it, its employees and its agents.
This choice by CIRO has undermined its credibility. It has defaulted on its public protection mandate. Further, this choice can reasonably be interpreted as prioritizing the interest of its members over the interest of the public.
In some cases, investors may believe they are unable to discuss their experience, even with immediate family members or support networks. The risk of harm or revictimization is compounded and particularly significant for vulnerable clients — those who cannot emotionally, intellectually, physically or financially withstand industry’s demands for NDAs, regardless of how inappropriate the NDA may be.
Vulnerable clients may accept NDAs due to their vulnerability rather than agreement with the terms. This is expected and in keeping with zealous advocacy principles that industry, left to its own devices, seeks the maximum advantage of unequal bargaining power, regardless of whether this results in harm to vulnerable clients.
Empirical research and a mountain of anecdotal evidence confirm the obvious: individuals who are unable to disclose distressing experiences may suffer adverse effects, including mental stress and isolation. Broad and inappropriate NDAs risk the foreseeable harm of preventing access to necessary support by victims and harmed clients.
These concerns are not theoretical. Legal organizations, such as the Canadian Bar Association, have publicly noted that NDAs can be used in ways that unduly suppress information, allow harmful conduct to continue without scrutiny and add to emotional stress.
Regulators have a key role in protecting consumers from accepting inappropriate NDAs.
Six steps
A balanced approach is possible, necessary and fair. NDAs should remain available to facilitate the efficient settlement of disputes. But those agreements should have clear limits. There are six steps that can address the issue.
First, regulators can provide clear guidance on what is acceptable and unacceptable. Regulators could establish acceptable wording for NDAs. The acceptable wording could include stating, in clear terms, that NDAs must not restrict disclosure in the public interest, including complaints, reporting or cooperation with oversight bodies and law enforcement. Nor should an NDA interfere with a client providing evidence in civil suits brought by other clients and involving the licensees.
Second, standard carve-outs should be required. Every NDA in the securities and life insurance businesses (often the allegations involve dual-licensed salespeople) should explicitly state that the individual can speak to regulators, law enforcement and professional advisors, including legal, financial and medical professionals.
Third, agreements should be written in plain language, at a grade 10 literacy level. Investors need to understand what they are agreeing to. If the limits and exceptions are not clear, the agreement does not function as intended.
Fourth, there should be oversight. If NDAs are used in ways that undermine fair complaint handling or regulatory reporting, that should be treated as a compliance breach.
Fifth, if there is to be a bar on public disclosure of allegations, defences and/or facts, then as a part of the bargain to permit NDAs in settling investment disputes, industry firms should be explicitly required to warn all other clients potentially affected by similar breaches, negligence or wrongdoing.
Finally, investors should be encouraged to seek independent advice before agreeing to sign an NDA. That is a practical safeguard that can reduce the risk of unfair outcomes.
None of these steps prevent firms from protecting legitimate confidential settlement information. Canada’s capital markets are built on trust. A clear regulatory framework that allows NDAs but sets firm boundaries on their use will support fair settlements and effective regulation.