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.


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.


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.

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