United States: FINRA Issues Significant And Detailed Guidance On Credit For Extraordinary Cooperation

On July 11, 2019, FINRA issued Regulatory Notice 19-23 (2019 Notice), restating and significantly supplementing its prior guidance regarding the circumstances under which a broker-dealer or associated person may get credit for extraordinary cooperation in a FINRA enforcement investigation. The 2019 Notice delineates the differences between extraordinary cooperation and required self-reporting and cooperation under FINRA rules. The 2019 Notice also offers substantial, detailed guidance not previously provided by FINRA. Set forth below are a brief overview of FINRA's historical guidance on cooperation and key points from the 2019 Notice.

Background

FINRA first published guidance on extraordinary cooperation in 2008. FINRA Regulatory Notice 08-70 (2008 Notice) stated that firms or associated persons could receive credit for extraordinary cooperation by: (1) self-reporting before regulators were aware of an issue; (2) taking extraordinary steps to correct deficient procedures and systems; (3) providing extraordinary remediation to customers; and (4) providing substantial assistance to FINRA's investigation. At that time, self-reporting to FINRA was optional, not required.

In 2011, FINRA adopted Rule 4530(b), modeled in part on NYSE Rule 351(a), which mandated that member firms self-report certain internal conclusions of violations. Under this FINRA rule, broker-dealers must report promptly (within 30 days) to FINRA after the broker-dealer has concluded or reasonably should have concluded that an associated person or the broker-dealer itself has violated a securities law or rule or certain other laws or rules. Rule 4530 sets reporting thresholds; FINRA "expects a member to report only conduct that has widespread or potential widespread impact to the member, its customers or the markets, or conduct that arises from a material failure of the member's systems, policies or practices involving numerous customers, multiple errors or significant dollar amounts." There are similar types of thresholds for firms to self-report violations by associated persons.

In the 2019 Notice, FINRA acknowledges that the adoption of Rule 4530 in 2011 may have created uncertainty about obtaining credit for extraordinary cooperation in enforcement investigations as described in the 2008 Notice, particularly because FINRA Rule 8210 requires, and FINRA's Sanction Guidelines expect, certain levels of cooperation in all cases. The 2019 Notice is intended to dispel much of that uncertainty and to provide greater insight into FINRA's decision-making process.

Required versus extraordinary cooperation

Under its Sanction Guidelines, FINRA has always considered factors such as restitution and corrective measures in determining whether a disciplinary action is necessary, and, if so, what sanctions are appropriate. Specifically, under the Sanction Guidelines, the FINRA Enforcement Department (Enforcement) must consider whether a respondent:

  • accepted responsibility for and acknowledged the misconduct prior to detection and intervention by the firm or a regulator
  • voluntarily employed subsequent corrective measures, prior to detection or intervention by the firm or by a regulator, to revise procedures to avoid recurrence of the misconduct
  • voluntarily and reasonably attempted, prior to detection and intervention by a regulator, to pay restitution or otherwise remedy the misconduct and
  • provided substantial assistance to FINRA in its examination and/or investigation of the underlying misconduct.

The 2019 Notice reiterates that FINRA has and will continue to look to these factors, and Enforcement may recommend a sanction that is on the low end of the specified range of the Sanction Guidelines if there are such mitigating factors. In some cases, Enforcement may forgo formal disciplinary action entirely based on its assessment of these factors. 

In contrast, the criteria for credit for extraordinary cooperation is described in the 2019 Notice as follows:

Enforcement may recommend a sanction that is well below the range set forth in the Sanction Guidelines or comparable precedents when respondents have voluntarily provided such material assistance to FINRA in its investigation, or effected such expedient and effective remediation, that FINRA deems these steps to constitute "extraordinary cooperation" beyond what it requires of any member firm or associated person. Member firms and associated persons who take proactive and voluntary steps well beyond those required under FINRA rules materially assist FINRA in meeting its goals of investor protection and market integrity. To recognize and incentivize such conduct, FINRA weighs these mitigating factors so heavily that the outcome of the matter is materially different than it would have been absent the respondent's extraordinary conduct.

As examples, the 2019 Notice cites FINRA's mutual fund share class sweep cases, where no fines were imposed, and two other cases that credited the firms' cooperation. In one case, FINRA imposed no fine and issued no press release. In the second case, FINRA imposed a $3.25 million fine, which the 2019 Notice described as reflecting "substantial credit for the firm's extraordinary cooperation and remediation to customers"; a press release was issued for this case. The discussion of these cases includes a description of the extraordinary measures taken by the firms, many of which are noted the specific guidance below.

FINRA stated that it will continue to consider the factors set forth in its Sanction Guidelines and Regulatory Notice 08-70 when determining whether credit will be given for extraordinary cooperation, along with the following additional factors:

1. Steps taken to correct deficient procedures and systems

Firms must take corrective action when they identify issues involving deficient supervisory systems, procedures, and controls.  In assessing whether to credit extraordinary cooperation as to this factor, FINRA will consider whether corrective steps go beyond this baseline.  Examples of such steps are:

  • Engaging or conducting a thorough and far-reaching independent audit or investigation beyond the scope of the immediate issue, with an eye toward identifying and remediating all related misconduct
  • Hiring independent consultants to ensure the adoption and implementation of improved supervisory systems, procedures, and controls and
  • If a violation's root cause relates to organizational weaknesses such as inadequate staffing, making organizational changes to create new supervisory positions, adjust reporting lines, or remove or discipline responsible persons (noting that personnel changes are not necessarily required for extraordinary cooperation).

FINRA states that it will consider how promptly a firm takes such steps and whether the firm keeps an open dialogue with the regulator regarding improvements and provides FINRA with ready access to evaluate whether the new systems, procedures, and controls are reasonable.

The breadth of a firm's remediation will be important. Deficient procedures in a particular department or product line always must be corrected. That is the baseline. In contrast, a response may be “extraordinary” when the firm conducts a broader assessment beyond the scope of the original finding and looks for and remediates similar deficiencies in other areas.

FINRA recognizes the tension between timely self-reporting and prioritizing corrective measures that a firm takes prior to detection by FINRA or other regulators. It is understood that not all corrective measures can reasonably be completed within 30 days after a firm reaches a conclusion that self-reporting is required. Accordingly, FINRA will consider giving credit for corrective measures taken promptly after self-reporting.

2. Restitution to customers

FINRA noted that restitution for harmed customers is its highest priority and is expected inall cases. By itself, restitution will not result in credit for extraordinary cooperation. Rather, FINRA will consider whether extraordinary steps were taken proactively and voluntarily to pay restitution as quickly as possible, particularly in cases of widespread, systemic failures where the calculation of individual customer losses may be complex and time-consuming.

Examples of such steps include:

  • using methodologies or statistical approaches to meaningfully reduce the time until payment and
  • adding resources (by dedicating staff, hiring temps, paying overtime, or re-prioritizing other projects) to speed reviews.

FINRA will also consider whether the respondent is proactive about identifying the methodologies and engages in a dialogue with regulators about the proposed restitution plan.

FINRA noted that credit may still be earned if restitution is paid after FINRA becomes aware of the misconduct, for example, via Rule 4530 self-reporting. In such cases, credit will be considered when the restitution remediated all potential harm and was paid promptly on the firm's own initiative, prior to any order by FINRA or another regulator. This is a particularly helpful clarification for firms trying to assess and balance their self-reporting obligations and the challenges of accurately calculating restitution.

3. Self-reporting of violations

Given that certain self-reporting is now required, FINRA clarified that self-reporting must "go significantly beyond" what is required under its rules in order to result in extraordinary credit. There is no credit for simply complying with Rule 8210 requests. FINRA will consider awarding credit if misconduct is self-reported even though not required by Rule 4530 (ie, falls below the rule's thresholds) or if required under the rule, the firm self-reports information beyond that which is required by the rule. As an example, FINRA noted that a firm exceeds its regulatory obligation when it proactively and voluntarily asks to meet with FINRA staff, provides key fact summaries, and identifies and explains key documents. This also counts as substantial assistance, as described below.

FINRA will also consider granting credit when the firm proactively detects the misconduct through its own compliance, audits, or other surveillance, as opposed identification via a notice from third parties such customers, counterparties, or regulators. The regulator will also consider whether the firm makes diligent efforts to identify and inform FINRA of the relevant facts as soon as it discovers the issue and keeps FINRA updated as the firm learns new facts through continuing investigation.

As appropriate, FINRA will consider whether the firm reports the misconduct to the public and other regulators and the level of the firm's cooperation with those other regulators and law enforcement bodies (if applicable), particularly in matters with multiple investigators.

4. Providing substantial assistance to FINRA investigations

FINRA will consider crediting firms and associated persons for substantial assistance in investigations of misconduct. The regulator will take into account the degree of assistance that might be expected in light of a broker-dealer's size and resources, the scope of the misconduct within the firm, and measures taken by the firm to address systemic deficiencies. FINRA noted that there is no one-size-fits-all approach and credit is potentially available to any firm, regardless of size, and any individual.

To get credit for substantial assistance, respondents should "fully inform FINRA about the potential misconduct—including all relevant issues, products, markets and industry participants—in ways that go far beyond merely responding to requests made under Rule 8210."

Specific examples include:

  • volunteering relevant helpful documents or information even if not requested
  • providing analysis of trading or other activity that assists FINRA in understanding the conduct at issue
  • volunteering facts related to the involvement of persons who may have engaged in violations
  • demonstrating trading or other systems at issue
  • with respect to individual misconduct, conducting a thorough and expeditious review and promptly sharing the findings with FINRA
  • volunteering relevant industry knowledge to help FINRA quickly assimilate information about a complex product or practice
  • providing detailed summaries or chronologies of relevant events before a Rule 8210 request is received
  • voluntarily providing access to firm offices, records, or computer systems before a Rule 8210 request is received
  • identifying witnesses who possess relevant information, whether or not FINRA has jurisdiction, and making those witnesses available for interviews and
  • conducting a thorough and independent audit or investigation, using counsel or consultants as appropriate, and fully disclosing the findings to FINRA.

Types of credit for extraordinary cooperation

FINRA explained that credit may come in a variety of forms, noting that if an issue is fully remediated, FINRA often determines no action is necessary and closes the investigation.  If FINRA determines an action is necessary, credit may result in the reduction of sanctions, which could be a substantially reduced fine or a formal disciplinary action without any fine.

FINRA also may determine that an undertaking is unnecessary. As an example, the regulator stated that even if a systemic deficiency is in an extended period of remediation, the regulator may not require the firm to hire an independent consultant if the firm is taking other extraordinary steps to address the problem.

Greater transparency about credit for extraordinary cooperation

To provide more useful guidance to the industry, FINRA pledged new and greater transparency about the credit it will give for extraordinary cooperation, including the creation of two new sections in its standard Letters of Acceptance, Waiver and Consent (AWCs).

First, AWCs will now contain a specific section titled "Credit for Extraordinary Cooperation" that describes the factors that resulted in credit and the type of credit.  Second, AWCs may contain a section titled "Sanctions Considerations," as appropriate and applicable to the matter. In that section, FINRA will identify mitigating or aggravating factors from its Sanction Guidelines that affected the sanction determination. This second section should help highlight where the respondent's conduct did not exceed its regulatory obligations but sanctions determinations were materially affected by other considerations. While information described in these sections has been included in some AWCs in the past, it has not always appeared consistently or in the standardized fashion described.

FINRA cautioned that aggravating factors in its Sanction Guidelines could still outweigh extraordinary credit or mitigating factors, resulting in a more severe sanction.

Examples of such factors are:

  • prior disciplinary history
  • the nature of the underlying misconduct, including whether the misconduct was intentional or reckless, involved numerous acts or a pattern of misconduct, and continued over an extended time period
  • the nature and extent of injury to the investing public, member firms, and other market participants
  • whether the respondent profited from the misconduct and
  • whether the respondent engaged in the misconduct notwithstanding prior warnings from FINRA, another regulator, or a supervisor.

FINRA also stated that if it issues a press release about a case, it will note factors that led the respondent to receive credit and the type of credit given. This is a significant new development; FINRA has not consistently included such information in the past.

In another significant and welcome departure from current practice, the regulator stated that to provide more guidance to the industry, it will consider on a case-by-case basis whether to publish information about those cases that are resolved without formal action; any publication will be made in a manner that preserves respondents' anonymity. To date, this highly valuable information generally has been available only to FINRA and the respondents involved.

Credit for individuals

Individuals also qualify for credit for extraordinary corrective measures and cooperation. FINRA will follow the same four general factors outlined in the SEC's policy regarding cooperation by individuals:

(1) the assistance provided by the individual

(2) the importance of the underlying matter in which the individual cooperated

(3) the societal interest in holding the individual accountable for his or her misconduct and

(4) the appropriateness of credit based upon the profile of the cooperating individual.

FINRA recognized the limitations on an individual's ability to correct deficient firm procedures and systems, but noted that individuals can still self-report misconduct, provide substantial assistance during an investigation, and in certain circumstances pay restitution to customers. FINRA cautioned, however, that certain aggravating factors (such as intentional or reckless conduct, concealment of misconduct, and misconduct in the face of warnings) are more likely to be present in cases against individuals and could outweigh cooperation credit.

Conclusion

FINRA has gone a long way toward reducing uncertainty that followed the adoption of its mandatory self-reporting rule in 2011 and clarifying what firms and individuals should do to receive credit for extraordinary cooperation. The 2019 Notice provides a helpful roadmap with specific details about how such credit may be earned.

Firms and their counsel addressing possible violations (particularly those that may require self-reporting) and facing enforcement investigations should carefully review the 2019 Notice and evaluate each factor to inform themselves how best to position the firm so that it is able to earn extraordinary cooperation credit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions