The Situation: In recent years, broker-dealers have been seeking further transparency from the Financial Industry Regulatory Authority ("FINRA") on what constitutes "extraordinary" cooperation with its investigations and when such cooperation will lead to reduced sanctions or, in some cases, no enforcement action at all.
The Result: On July 11, 2019, FINRA published Regulatory Notice 19-23, clarifying decade-old guidance on what constitutes "extraordinary" cooperation, and stating its intention to be more transparent in settlement announcements about when such cooperation has led to a reduction in sanctions or charges.
Looking Ahead: Firms should consider at the outset of an investigation whether to seek credit for extraordinary cooperation, based on a careful evaluation of the potential cooperation credit they might receive.
Current Standard for Cooperation Credit
FINRA's Sanction Guidelines require enforcement staff to consider several cooperation-related factors, including whether a potential respondent:
- accepted responsibility and acknowledged the misconduct;
- voluntarily employed subsequent corrective measures to avoid recurrence of the misconduct;
- voluntarily and reasonably attempted to pay restitution or otherwise remedy the misconduct; and/or
- provided substantial assistance to FINRA in its examination or investigation.
Notice 19-23 clarifies that these factors may constitute "extraordinary cooperation" beyond the ordinary expectations FINRA places on member firms or associated persons. In these situations, FINRA Enforcement may recommend a downward departure from the Sanction Guidelines' range. The Notice provides guidance on when credit will be given with respect to each of the four identified factors.
Because many of the steps required under the four factors require "timely" action, those subject to potential enforcement action should decide soon after identifying a potential violation whether to seek extraordinary credit or risk losing the opportunity to do so.
Correcting Deficient Procedures and Systems
To receive extraordinary cooperation credit for remediating deficient supervisory systems, procedures and controls, firms should remediate the problem and assess whether similar deficiencies are present in other parts of the business by:
- Conducting a wide-ranging, thorough independent investigation that identifies and remediates the immediate issue and any related issues;
- Hiring independent consultants to ensure the adoption and implementation of improved supervisory systems, procedures, and controls; and
- Making organizational changes where appropriate, including adding personnel and changing supervisory structures.
In addition to prioritizing these steps upon discovery of misconduct, firms also should consult with FINRA about whether the new systems or procedures reasonably address the discovered deficiency. Firms may still receive "extraordinary" cooperation credit even if they are unable to take these corrective actions prior to self-reporting under FINRA Rule 4530.
Making Restitution to Customers
Unless firms make timely and full restitution to all injured customers, they are unlikely to get credit for extraordinary cooperation. This is "particularly relevant in matters involving widespread, systemic failures, where identifying injured customers and calculating each individual's losses can be complex and time consuming." Firms should proactively identify time-saving methodologies for making timely restitution, and assign dedicated staff, hire temporary help, pay for overtime, and reprioritize other projects to do so while communicating closely with FINRA and other regulators involved.
Self-Reporting of Violations
Simply reporting what is required under FINRA Rule 4530 will not get extraordinary cooperation credit, but providing detailed explanations and documents or reporting misconduct not required under Rule 4530 may. Firms also may receive credit when they:
- detect misconduct themselves, rather than learning about it from third parties;
- report the issue to FINRA quickly after discovering it (without trying to complete their investigation and remediation first); and
- report the conduct to the public and other regulators, where appropriate, and cooperate with other regulators.
Providing Substantial Assistance to FINRA Investigation
Firms and associated persons may receive credit when they provide FINRA with assistance that is greater than what is normally expected in light of the size and resources of the firm, the scope of the misconduct, and remedial steps taken by the firm. Examples of such assistance include:
- volunteering information not otherwise requested;
- providing demonstrations and/or analyses that assist FINRA in understanding the systems or conduct at issue;
- volunteering relevant industry knowledge to help FINRA understand a complex product or practice;
- identifying witnesses with relevant information, including witnesses over whom FINRA lacks jurisdiction, and making those witnesses available for interviews; and
- conducting thorough, timely, and independent investigations and fully disclosing the findings to FINRA.
Types of Credit and Transparency
Based on a potential respondent's cooperation, FINRA may conclude that no action is warranted and close its investigation with no further action or issue a Letter of Caution. Even where FINRA determines an enforcement action is warranted, credit for extraordinary cooperation can lead to reduced sanctions, the imposition of formal discipline without a fine, or a decision that an undertaking (e.g., imposition of an independent compliance consultant) is not needed.
The Notice also explains that FINRA intends to be more transparent in press releases and in its standard settlement document, the Letter of Acceptance, Waiver and Consent ("AWC"), when a respondent has received extraordinary cooperation credit. Among other things, FINRA will include a new section in the AWC specifically addressing the factors resulting in credit; in other cases where extraordinary cooperation has resulted in no formal action, FINRA may provide information about factors leading to that conclusion, while respecting the privacy interests of the parties involved.