The Financial Industry Regulatory Authority has issued supplemental guidance clarifying how companies and individuals that demonstrate “extraordinary cooperation” in investigations can receive enforcement credit.
Revised Regulatory Notice 19-23, published July 11, 2019, supplements prior guidance (Regulatory Notice 08-70), issued by FINRA in November 2008. FINRA said it published the original Regulatory Notice 08-70 “to apprise industry participants of the factors FINRA considers in determining whether and how to award credit for ‘extraordinary cooperation’ in a FINRA investigation.”
At a high level, the guidance clarifies FINRA’s prior requirements for receiving cooperation credit and provides greater comfort to firms that are weighing whether to self-report violations to FINRA in seeking credit. These measures—to bring further clarity to companies and further incentivize cooperation—parallel similar efforts by other agencies, including the Department of Justice and the Commodity Futures Trading Commission Division of Enforcement.
FINRA noted the types of extraordinary cooperation that could result in credit can be categorized as follows: (1) self-reporting before regulators are aware of the issue; (2) extraordinary steps to correct deficient procedures and systems; (3) extraordinary remediation to customers; and (4) providing substantial assistance to FINRA’s investigation.
Changes to FINRA’s mandates, like the adoption of Rule 4530(b), which requires member firms to report internal conclusions of violations of certain laws, rules, regulations or standards of conduct, “may have created uncertainty around the continued impact that self-reporting may have on a potential respondent’s ability to receive credit for extraordinary cooperation,” FINRA acknowledged. “In addition, other FINRA rules and policies—such as FINRA Rule 8210 and FINRA’s Sanction Guidelines—expect certain levels of cooperation in every case.”
The new guidance seeks to clarify areas of potential uncertainty. Thus, Regulatory Notice 19-23 “incorporates FINRA’s prior guidance and provides clarification and additional information about how FINRA assesses whether a potential respondent’s cooperation is ‘extraordinary’ and distinct from the level of cooperation expected of all member firms and their associated persons,” FINRA states.
When a firm identifies a problem involving “deficient supervisory systems, procedures and controls,” it must take corrective steps to remediate the issue. In considering whether to provide substantial credit for extraordinary cooperation, FINRA said it will consider “whether a firm’s steps to correct deficient systems and procedures go beyond these baseline requirements.”
Examples of corrective steps that might result in credit for extraordinary cooperation include “engaging or conducting an independent audit or investigation that is thorough and far-reaching in scope beyond the immediate issue,” and “hiring independent consultants to ensure the adoption and implementation of improved supervisory systems, procedures and controls.”
A third example of a corrective measure that might result in credit is making organizational changes where the root cause of a violation is related to organizational weaknesses. This could include “creating new supervisory positions, adjusting reporting lines or, if necessary, removing or disciplining responsible individuals, including those in supervisory roles,” FINRA said.
FINRA further distinguishes between what constitutes ordinary versus extraordinary remediation. If a firm identifies deficient procedures that affect a particular department or product line, it must review and correct the identified procedures. In contrast, FINRA said it “may consider the firm’s responses ‘extraordinary’ when the firm conducts a broader assessment, which goes beyond the scope of the original investigation, and looks for and remediates similar deficiencies in procedures that govern other aspects of its business.”
Providing credit for restitution
In its notice, FINRA emphasized restitution for harmed customers is its “highest priority,” and that “mere payment of restitution will not result in credit for extraordinary cooperation.”
Rather, FINRA said it will consider whether a firm or associated person has “proactively and voluntarily taken extraordinary steps to ensure that restitution is paid as quickly as possible, in a manner that ensures all harmed customers are made whole,” particularly involving widespread, systemic failures.
FINRA clarifies credit will not be awarded to firms merely for complying with their reporting obligations. Nor will firms and associated persons be given credit for complying with their obligations to provide information or testimony in response to regulatory requests.
Firms must “go significantly beyond” any self-reporting obligation imparted by state or federal regulations. “For example, a firm exceeds its regulatory obligation when it proactively and voluntarily asks to meet with FINRA staff, provides summaries of key facts, and identifies and explains key documents,” FINRA said.
FINRA said it also will consider whether the firm:
- Proactively detected the misconduct through compliance, audits or other surveillance;
- Made diligent efforts to identify and inform FINRA of the relevant facts as soon as it discovered the issue and kept FINRA apprised of new discovers; and
- Reported the misconduct to the public and other regulators, as appropriate.
Providing substantial assistance
“There is no one-size-fits-all approach,” FINRA says. Most of the suggestions have to do with voluntarily providing relevant information, facts, and analysis to FINRA. Other suggestions include “identifying witnesses who possess relevant information” and “conducting a thorough and independent audit or investigation, using counsel or consultants where appropriate and fully disclosing the findings to FINRA.”
Clarity on credit and transparency
Compliance and legal professionals will also be interested to know what sort of credit may be given to firms for extraordinary cooperation. According to FINRA, “credit may take many forms.” Of course, best-case-scenario is no enforcement action.
In other cases, FINRA said it “might determine that an enforcement action is appropriate to remedy or prevent harm, even where a firm has provided extraordinary cooperation. In those matters, FINRA may provide credit by reducing the sanctions imposed. When credit is given in the form of a reduced fine, the reduction normally will be substantial.”
Finally, FINRA described how it plans to be more transparent about credit moving forward. Firstly, firms can expect to see a new section in FINRA’s disciplinary documents, “Credit for Extraordinary Cooperation,” describing the factors that resulted in credit being given, as well as the type of credit received.
Going forward, when FINRA gives credit that results in the regulator electing to proceed without formal action, FINRA said it will determine in a way that preserves the firm’s anonymity, “whether it would be useful to provide additional transparency regarding the factors that led to FINRA’s decision and, when appropriate, publish information about those individual cases.”
Guidance aside, those in the FINRA community still have some questions that need answers. According to legal commentary from law firm Eversheds Sutherland, FINRA’s settlements, thus far, have not provided details about the percentage reduction in fines that FINRA has applied for extraordinary cooperation. “Until FINRA provides additional transparency so that firms can weigh the advantages and costs of extraordinary cooperation,” the client alert states, “it is unclear whether this new policy will be the beginning of a beautiful friendship between FINRA and self-reporting firms.”