Confidentiality agreement

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Also known, to those for whom the glass is half-empty, as a non-disclosure agreement. An agreement whereby you promise not to tell. If Robert Plant were writing one, he would write it like the box on the right.

Anyhoo. Here are the main parts of a normal financial markets confidentiality agreement.

What’s in a confi?

Confis can be “one way”, where one party discloses and the other receives, or “two way”, where both parties disclose sensitive information. A broker’s template will tend to be far more generous when it is receiving only, than when it is giving information up.

Length

Firstly, let’s be blunt about this: there is a special place in hell for any advisor who serves up a confidentiality agreement more than 3 pages long. Even three pages is purgatorially tedious. GET TO THE POINT. It’s a goddamn confi, not the sale of your soul. Oh hang on. Why are the parties sharing the information in the first place? Typically, you’ll want to restrict use of the information to matters relevant to the project. This is likely to be defined as the “Purpose” or the “Project”. Expect to see this kind of definition, and this is somewhere you can let your sales guy go wild.

“So, legal eagles, what should I put for the “Purpose”?”
“I dunno, you tell me. What is the purpose?”
“What?”
“...You know, the purpose that you want the confidential information.”
“Ohh, right. [Pause] Well, looking at a sample portfolio to put some pricing together with a view to pitching financial services, I suppose.”
“Okay, so put that.”
“What?”
“Put that.”
“Just, that?”
“Sure.”
“Like, “looking at a sample portfolio to put some pricing together with a view to pitching a PB service, I suppose”?”
“Well, I woudn’t put, “I suppose”. but otherwise, yes.”

Sales will go away happy, any quietly believing he could have been a lawyer. And you know what? He probably could have.

What is in scope?

Parties give each other all kinds of information. Not all of it is sensitive. Seeing as an NDA imposes onerous obligations, you should carefully define the “confidential information” that’s in scope. Consider the following:

• Personal information: Personal information about individuals is particularly tricky in this age of big data and fake news. There may be additional provisions concerning storage, processing and rights to access and correct that information. Especially now the EU General Data Protection Regulation (GDPR) is in force. Hoo boy.
• Client-identifying information: some data is interesting and sensitive only to the extent it is identifiable with the client. Trading data, for example. That a vodafone trade was executed at close on the 1st of September at a price of 103 isn't especially sensitive. It isn't susceptible to copyright. Not until you can refer it to the client for whom the order was executed. Then it is sensitive. Market abuse and insider trading lie this way. Careful, soldier.
• Proprietary IP and technology: Trading data tends to be valuable insofar as it relates to a given client. Other types of information (especially intellectual property: patents, copyrights, designs, trade secrets, secret sauce and so on) is valuable irrespective of the identity of the client.

What is out of scope?

What information that otherwise would be in scope, is out of scope? Even within the definition of confidential information, you’ll need to make exceptions:

• Information the receiver already held at the time of disclosure
• Information the receiver receives separately from someone else other than in breach of a confidentiality undertaking
• Information the receiver develops independently of the disclosure and without reference to information disclosed

Other tricks for young players

Information disclosed to a Regulator is still confidential information

Don’t make the schoolboy error of excluding “information required to be disclosed to regulators or government authorities” from the definition of “confidential information”. Now, to be sure, this is a legitimate exception to a fellow’s general covenant not disclose confidential information to anyone — but it shouldn’t disqualify the information from being “confidential information” altogether. If it did, once you were required to give any information to a regulator, it would suddenly be open season and you could tell everyone about it. Not the intention.

One misconceived argument we have seen for this approach is as follows: “if I give information to a regulator then I cannot control what the regulator does with it. Regulators are all-powerful. They may publish sensitive information in the Luxembourger Wort for all I can do about it. Therefore your information, once I have rightly given it to a regulator, can no longer be treated as confidential.”

Not so fast: If you disclose my information legitimately to a regulator, and the regulator then discloses it to the world (whether or not legitimately) you have complied with the terms of your contract. Unless you have independently covenanted to procure that the regulator keeps it confidential (don’t do that: regulators are all-powerful, and you make yourself a hostage to fortune), you have not breached your NDA, and you cannot therefore be liable for resulting losses. They are regrettable externalities: obstreporous actions of impish third parties. On the other hand, if you disclose my information legitimately to a regulator, and then you separately disclose it to someone else, then you absolutely can and should remain liable for losses. If by disclosure to a regulator the information is deemed "no longer confidential" you would be free to disclose it to someone else without that sanction.

Proprietary information

If your definition starts with “information belonging to the discloser” or “proprietary information” then you have excluded most of the data you are seeking to protect. “Belonging to” implies “possession”, implies “property” implies “intellectual property”. Intellectual property subsists in creative works — copyright, patent and trademarks — but not in facts or raw data. To be yours, you have to have created it. Your trading data, your client lists, your employees — this is not information belonging to you. It is information relating to you which (QED) the receiving party wants but does not have, which is why it is worthy of protection by contract even though no intellectual property rights attach to it.

What is the confidentiality obligation?

Now you know what counts as confidential information, what can you do with it and what’s not allowed?

You’ll often see:

• Keep the information confidential. Don’t disclose it except to a limited group of people — and you may be required to ensure that these people only receive the information subject to an equivalent duty of confidentiality:
  • Inside the organisation: In a large organisation this may be to a small group of people in the organisation (for example, credit, legal or the on-boarding team). There may be specific restrictions to prevent it getting to trading desks or front office personnel who may use the information to profit from it (this will usually be illegal: it’s likely to constitute insider trading or market abuse, but no harm is specifying in the contract).
  • Outside the organisation: you may be allowed to share it with your professional advisers, and to regulators and quasi regulatory authorities (stock exchanges etc) where required by law (or you reasonably consider it expedient). There may be some tiresome details about only giving in formation that is reasonably necessary, and taking what steps are necessary to take legal action to prevent disclosures to regulators. One classic common error is to classify information that must be disclosed to courts or regulators as no longer confidential. This is wrong: It is still, in you hands, confidential. Obviously you cannot be blamed for miscreants in the public regulatory system who then misuse it, but you must still keep to your own word.
• Only use it to carry out the “purpose” or “project”: This is somewhat hard to enforce — it’s nebulous, right? — and in practice you’ll never know what goes on behind closed doors, but in the English law-speaking world this is pretty uncontroversial precisely because it isn’t practically actionable. But our North American cousins — and those on the private side of the investment banking wall — can get very worked up over it.
• Not make unnecessary copies: Not the sort of thing to argue about, but not necessary either: you can xerox the information a thousand times, if that floats your boat, and that won’t cause me any more damage than had you only xeroxed it once — unless you then give it to someone you shouldn’t. It is not the act of copying it that causes the loss, but your subsequent carelessness with the copies. But, still, would you strike that out of a draft? No.

Obligation to notify provider of regulator requests

This is a common and oft accepted provision: where you are obliged to disclose to a regulator, you must first notify the provider of the information, to allow them to make

• Trade/transaction reporting: Brokers will be obliged to disclose a lot of trade-specific client information to regulators and exchanges every day on account of MiFID/EMIR trade and trade reporting. We are not going to repeatedly tell the client that.
• Ad-hoc general information requests: Outside trade/transaction reporting, when regulators ask for ad hoc information from a broker, it is usually for a wide-ranging data set across whole trading books and sectors, covering multiple clients. It is unrealistic to accept Brokers to monitor which clients within that population have confis, much less a right to be specifically notified beforehand. Nor will they want to go to the trouble of getting all those consents. Why? BECAUSE LIFE IS TOO SHORT.
• Ad-hoc client-specific information requests: Where a regulator specifically asks for data on a single client, it is likely the regulator will also have made equivalent disclosure requests to the client at the same time (or copied the client on those requests to the broker) — if the request is benign — and if it has not, the investigation is likely to be one where the regulator would not allow the broker to alert the client anyway, and indeed where such notification could be a criminal offence (market abuse, etc). Even where the notification clause carves out where “notification being illegal” this leaves the empty set of circumstances where the broker would have to give info about a specific client and the client doesn’t, but was entitled to know about it.
• Commercial sensitivity: Lastly, the legitimate point of a confi is to respect the client’s legitimate interest in protecting the commercial value of non-public information. It is not to keep silent about behavioural turpitude; indeed a broker’s regulatory obligations may oblige it to report, without invitation, bad acts it observes, whether the client likes it or not and whether there is a confidentiality agreement or not. Generally, client information a broker holds is not legally or professionally privileged. Since, by definition, passing information to a regulator should not prejudice the commercial value of that information, it is hard to see when client would have a valid reason to seek injunctive relief to prevent disclosure of information to a competent regulator.

And that is borne out by the JC’s tawdry personal experience (anecdotal though it may be, it does span 22 years and four different investment banks): the JC has never ever, ever seen anyone take injunctive relief to prevent disclosure of confidential information to a regulator.

Return of information

The disclosing party will want rights to get the information back at the end of the project. In this modern era of distributed network computing, the old entreaties to “return all copies of information” are faintly absurd: as if they’ve been kept in a manila folder in a filing cabinet somewhere, only inspected by chaperoned employees wearing white cotton gloves. Of course everything will have been transmitted electronically, will exist on servers all around the world, and the very action of attempting to return it will oblige it to be copied onto other servers. Some of these copies will be stored for years under document retention policies. So the real ask ought to be “to put beyond practical use” and have an exception for regulatory retention. There’s also a conceptual issue with information the receiving party has derived from the confidential information — this may include information which is confidential to the receiver, and should not have to be offered up to the discloser.

Possibility of injunctions

Some people like to acknowledge that the potential consequences of breach of confidence are so severe that ordinary contractual damages might not be adequate and equitable relief might be the only means of protecting your position. Injunctions, dawn raids and so on. Whatever floats your boat. Really an acknowledgment so that the poor wronged person who goes to the courts of chancery seeking injunctive relief can point to M'lud and say, “You see, your honour? That rascal knew perfectly well I might need an injunction here.”

Like I say, whatever floats your boat.

No representations or warranties

Another one for the “I never said it was” file, a clear disclaimer that when giving you this information, I never said it was accurate or good for anything. so you can’t sue me if you rely on it and lose money.

Term

Some folks will insist on a hard stop, say two years, after which supplied information ceases to be confidential. Inhouse lawyers may profess themselves to be immutably bound to have such a term by internal policy]]. While the commercial value of much information does go stale over time (blueprints fo a BetaMax, anyone?), this isn’t universally true — a client list is valuable however long you hold it — and the usual justification for the hard stop (“we don't have the systems to indefinitely hold infoirmation subject to confidence and don't want indeterminate liability for breach”) is a canard. Whatever information security systems you do have don’t suddenly stop working after three years. And as for indeterminate liability — well, no harm no foul: if the information really is stale then no loss follows from a breach, right? No loss, no damages.

What a confi shouldn't have

The following often make their way into a confi agreement, though none really have any business being there.

• An Exclusivity clause
• A Mon-solicitation clause
• An indemnity

Special AKA

The same as a:

• Non-disclosure agreement
• NDA
• Confi

See also

• Confidence
• Confidentiality Agreement - Rock 'n' Roll Style