On July 11, 2019, FINRA provided long-awaited supplemental guidance on crediting member firms and individuals for extraordinary cooperation in a FINRA investigation – a practice first outlined in Regulatory Notice 08-70 (November 2008), and one for which the industry has frequently requested greater transparency and clarification. While the new guidance in Regulatory Notice 19-23 describes examples of cooperation that FINRA has considered “extraordinary,” those who have been hoping for concrete figures or ranges quantifying the effect that a firm’s extraordinary cooperation can have on a potential fine will be disappointed.
The main takeaways in Reg. Notice 19-23 are:
- FINRA has and will continue to primarily consider the four factors provided in the Sanction Guidelines, and the Reg. Notice 08-70, which ask whether the respondent, before the intervention of the regulator or the firm: (i) accepted responsibility for the misconduct; (ii) voluntarily employed subsequent corrective measures to revise procedures and avoid recurrence of the misconduct; (iii) voluntarily and reasonably attempted to pay restitution or otherwise remedy the misconduct; and (iv) provided substantial assistance to FINRA’s examination or investigation of the misconduct.
- Rule 4530(b) requires firms to self-report certain violations. FINRA will consider “self-reporting” as a factor for awarding credit only when the reporting goes “significantly beyond” what is required by Rule 4530(b). In addition, FINRA will consider how the firm discovered the misconduct – whether discovery resulted from compliance, audit or other surveillance functions or whether the firm identified the misconduct only after receiving a complaint or regulatory inquiry.
- Reg. Notice 19-23 explicitly recognizes that self-reporting may complicate the consideration for other “extraordinary cooperation” factors, such as remediation and restitution. In cases where a firm self-reports, credit can still result where remediation and restitution are achieved promptly and at the firm’s own initiative.
- Corrective measures should be applied broadly and quickly with a view towards remediating customer harm. If a firm discovers a deficient procedure or system, FINRA will consider whether the firm independently conducted a broad assessment of its systems - beyond the scope of the original issue or investigation in terms of business lines and processes.
- When a violation causes customer harm, firms should have detailed restitution plans at the ready, and be willing to engage with regulators to develop a strategy for efficiently identifying the affected customer pool.
- FINRA evaluates “substantial assistance” on a facts-and-circumstances basis, accounting for a firm’s size and resources, and the breadth of the misconduct. In general, FINRA may consider a firm’s assistance to be “substantial” when a firm: (1) consistently provides documents and information that go beyond FINRA specific requests; (2) provides demonstrations, analyses, or case summaries that aid FINRA’s understanding of the misconduct; (3) voluntarily provides access to branch locations, records and systems; or (4) retains independent investigators and outside counsel to investigate the misconduct and disclose their conclusions to FINRA.
FINRA noted that it will strive for greater transparency by issuing press releases that highlight individual cases of extraordinary cooperation “worthy of public attention.” FINRA will also continue its recent practice of explicitly identifying in the AWC when and why a firm or individual earned credit for extraordinary cooperation.
While we welcome FINRA’s additional guidance, Reg. Notice 19-23 still allows considerable discretion on FINRA’s part concerning whether and under what circumstances it will provide credit for “extraordinary cooperation.” Firm’s should continue to take note of the guidance provided in Reg. Notice 19-23 as they identify, investigate, remediate and report securities violations.