Regulatory Notice 19-23 (the Notice) emphasizes that such efforts generally must go well above and beyond what is already required under the Financial Industry Regulatory Authority (FINRA) rules. Firms and individuals should carefully consider whether, and how, to provide such extraordinary cooperation and to engage FINRA early on in an investigation to increase the chances of demonstrating that they have provided extraordinary cooperation, which can benefit the firm in any resolution with FINRA.
On July 11, 2019, FINRA released the Notice, which supplements and adds to FINRA’s decade-old Regulatory Notice 08-70, which enumerated certain factors FINRA considers when providing credit to recognize extraordinary cooperation. In the more than 10 years since 08-70, member firms and individual respondents have raised questions about how creditable “extraordinary cooperation” differs from regulatory obligations under Rule 8210, Rule 4530 (adopted three years after NTM 08-70) and cooperation under the Sanction Guidelines. The Notice is FINRA’s attempt to distinguish between these concepts and provide concrete examples of extraordinary cooperation. In particular, and consistent with FINRA’s mandate to protect investors and market integrity, the Notice emphasizes the importance of self-detection of issues, prompt and thorough reporting to FINRA and speedy and complete remediation. The Notice directs questions to the Counsel to Head of Enforcement, indicating that the Office of Counsel to Head of Enforcement (OCHE), created in July 2018, will likely have a role in determining credit given for “extraordinary cooperation”.
What is extraordinary cooperation? The Notice reminds members that compliance with regulatory requests for testimony or information is the baseline for a self-regulatory investigative and enforcement regime. However, “extraordinary cooperation” occurs when member firms and associated persons take proactive and voluntary steps well beyond answering FINRA’s requests, whether by voluntarily and materially assisting FINRA in its investigation or by effecting expedient and effective remediation.
The Notice highlights recent enforcement matters where such actions were taken into account. In one matter, the size of the fine reflected substantial credit for material cooperation, including a firmwide internal investigation and the retention of an outside consultant to assist with the analysis. In the other examples, FINRA did not impose a fine at all in light of the proactive steps the respondents took. In one set of matters relating to failure to waive certain mutual fund sales charges, these included promptly establishing a plan of remediation and employing subsequent corrective steps such as revising policies and procedures before regulatory detection or intervention. In the other matter, FINRA noted the respondent’s “extraordinary” steps to remediate, including hiring additional staff and changing its billing structure to avoid similar issues in the future.
The Notice states that these examples demonstrated, “among other things, that the receipt of substantial credit depended on corrective measures and cooperation aimed at broadly and quickly remediating harm.”
The Notice further provides that FINRA will continue to identify in any public releases the factors that led the firm or individual to receive credit, including the type of credit received. In a related video posted on FINRA’s website, Director of Enforcement Susan Schroeder noted that public settlement documents (AWCs) will have a new section on extraordinary cooperation, identifying if possible the specifics steps taken to meet this standard. Further, FINRA noted that it will determine on a case-by-case basis whether to discuss publicly (but anonymously) matters where no enforcement action was brought because of a potential respondent’s extraordinary cooperation.
Supplementing 08-70. The Notice restates, and makes clear that FINRA will continue to consider, the guidance in Notice 08-70, such as self-reporting before regulators are aware of an issue, taking extraordinary steps to correct deficient procedures, extraordinary remediation to customers, and providing substantial assistance with FINRA’s investigation. The Notice also refers to FINRA’s considering the Sanction Guidelines, which primarily govern adjudicators on Hearing Panels and the National Adjudicatory Council (NAC), but may be used by FINRA staff in crafting settlements. Many of the factors in Regulatory Notice 08-70 and in this Notice appear in the Principal Considerations of the Sanction Guidelines.
The Notice provides further context as to how these factors affect FINRA’s decision making:
- Providing credit for steps taken to correct deficient procedures and systems. FINRA will consider whether firms took corrective steps promptly, such as engaging in a thorough and far-reaching audit with the goal of total remediation; hiring independent consultants to implement improved procedures; and, when relevant, making organizational changes, such as creating new supervisory positions. FINRA will also consider the breadth of the firm’s remediation and whether the firm maintained an open dialogue with the staff on this topic. To address the tension between the requirements of prompt reporting and the credit for prioritizing corrective measures, in appropriate cases FINRA will give credit for corrective measures taken after self-reporting.
- Providing credit for speedy restitution to customers. The Notice states plainly that it will be difficult to receive credit for extraordinary cooperation without “making complete and timely restitution to injured customers.” Because restitution of harmed customers is expected, to receive credit firms will have to proactively, quickly and voluntarily take extraordinary measures to effect restitution. FINRA will focus on whether respondents proactively identified and proposed an efficient restitution method and were willing to engage openly with FINRA on this topic. Determining the “efficiency” of complete remediation to customers could include consideration of whether consultants were hired, overtime was authorized or — where precise determinations of harm would take significant time — a statistical approach was applied.
- Self-reporting of violations. FINRA Rule 4530, adopted in 2011, requires, among other things, self-reporting by a firm when it has concluded that the firm has violated any securities-, insurance-, commodities-, financial- or investment-related laws, rules, regulations or standards of conduct of any domestic or foreign regulatory body, or self-regulatory organization. Pursuant to the Notice, the staff will consider whether to award credit when a firm self-reports misconduct not falling within the rule’s reporting requirements. In matters where the rule requires self-reporting, FINRA will consider whether the industry participant self-reports above and beyond what the rule requires. FINRA will also consider whether misconduct was self-detected, whether the firm made diligent efforts to inform FINRA a timely fashion of the relevant facts and whether the firm reported the misconduct to the public and to other regulators.
- Providing substantial assistance to FINRA investigations. FINRA will consider the degree of assistance proportional to a firm’s size and resources and the scope of the misconduct. According to the Notice, potential respondents should fully inform FINRA about the potential misconduct above and beyond merely responding to FINRA requests, which may include providing information about other participants in the misconduct, identifying potential witnesses, and producing detailed summaries or chronologies. Importantly, the Notice states that FINRA will also credit a firm for conducting a thorough investigation using counsel and fully disclosing the findings to FINRA, while at the same time noting that the “waiver or non-waiver of [the attorney-client] privilege itself will not be considered in connection with granting credit for cooperation.”
What about individuals? Individuals are also eligible to receive credit for their extraordinary cooperation, which may include self-reporting misconduct, providing substantial assistance in investigations and paying restitution to customers. As referenced in the Notice, FINRA will look to the same general factors set out by the Securities and Exchange Commission in its 2010 policy statement with regard to cooperation by individuals: (1) the assistance provided, (2) the importance of the underlying matter in which cooperation was provided, (3) societal interests in holding the individual accountable for misconduct and (4) appropriateness of credit based on the cooperating individual’s profile. What type of credit will firms or individuals receive in return for providing extraordinary cooperation? Credit for extraordinary cooperation may take several forms. If a firm can demonstrate that the problem has been fully remediated, FINRA may determine not to bring an enforcement action at all or to close the investigation with a cautionary action letter. Where an enforcement action is brought, the extraordinary cooperation might cause FINRA to provide credit by reducing the fine imposed or, in appropriate cases, imposing no fine at all. FINRA also may give credit by declining to require an undertaking. For example, FINRA may forego requiring a firm to hire an independent consultant. Takeaways. The Notice assists members by providing specific examples to distinguish between expected cooperation and creditable “extraordinary cooperation,” with the latter emphasis on self-detection of issues, prompt and thorough reporting to FINRA, and speedy and complete remediation and restitution to investors. Firms intending to benefit from the meaningful credit FINRA describes in the Notice should discuss strategy with counsel and consider having conversations with the Staff about extraordinary cooperation early in the process and documenting such cooperation.