Background
Over a decade ago in 2008, FINRA published Regulatory Notice 08-70, which enumerated four factors FINRA considers when determining whether to credit firms and individuals for cooperating in a FINRA investigation. These factors are: (1) self-reporting violations; (2) correcting deficient procedures and systems; (3) providing restitution to customers; and (4) substantially assisting FINRA’s investigation. FINRA’s Sanction Guidelines also direct FINRA’s Department of Enforcement to consider the same factors. If FINRA finds that one or more of these mitigating factors are present, it may recommend a sanction that is on the lower end of the specified range in the Sanction Guidelines.
Notice 19-23 reiterates these general factors and makes clear that FINRA will continue to look to them when assessing sanctions in disciplinary matters. However, Notice 19-23 provides additional guidance regarding what counts as “extraordinary cooperation,” in light of the requirement of member firms to self-report violations in accordance with FINRA Rule 4530(b), and other FINRA rules and policies (such as Rule 8210 and FINRA’s Sanction Guidelines), which require a certain level of cooperation in every investigation.
What counts as extraordinary cooperation?
1. Self-reporting violations
In 2011, FINRA adopted Rule 4530, which requires member firms to self-report internal conclusions regarding violations of certain laws, rules, regulations, or standards of conduct. Notice 19-23 makes clear that member firms remain eligible to receive cooperation credit for conduct that goes over and above what is required under Rule 4530. For example, cooperation credit will be given for the following acts of extraordinary cooperation:
- Self-reporting information beyond what is required by FINRA Rule 4530;
- Proactively and voluntarily asking to meet with FINRA staff;
- Making diligent efforts to identify and inform FINRA of the relevant facts as they are discovered, and keeping FINRA updated throughout the investigation;
- Providing summaries of key facts;
- Identifying and explaining key documents; and
- Reporting the misconduct to the public and other regulators, as appropriate.
2. Correcting deficient procedures and systems
FINRA will give extraordinary cooperation credit for the following conduct related to correcting deficient procedures and systems:
- Conducting an independent investigation that exceeded the scope of the original investigation (including looking for and remediating similar deficiencies in procedures that govern other aspects of the business);
- Hiring independent consultants to ensure that improved supervisory systems are adopted and implemented; and
- Making organizational changes by creating new supervisory positions or disciplining responsible individuals.
3. Providing restitution to customers
When assessing whether FINRA should provide an extraordinary cooperation credit for remediating customers, FINRA considers whether the firm:
- Proactively and voluntarily took extraordinary steps to ensure that restitution was paid as quickly as possible, in a manner that ensured that all harmed customers were made whole;
- Proactively identified and proposed an expeditious methodology (such as using a statistical approach, hiring additional personnel, or dedicating personnel to assist with an internal investigation or review); and
- Willfully engaged in a dialogue with FINRA and other regulators about the appropriate way to identify the pool of affected customers and to calculate the amount of restitution to pay back customers as swiftly as possible.
4. Providing substantial assistance to FINRA’s investigation
Finally, FINRA will award extraordinary cooperation credit for providing substantial assistance to an investigation. FINRA considers the firm’s (or individual’s) size and resources, as well as the scope of the misconduct within the organization.
FINRA looks to see whether the subject’s conduct materially exceeds merely responding to requests made under FINRA Rule 8210. Examples of providing substantial assistance include:
- Providing analysis of trading or other activity that assists FINRA in understanding the conduct at issue;
- Providing demonstrations of trading or other systems at issue;
- Volunteering relevant industry knowledge to help FINRA quickly assimilate information about a complex product or practice. This can include providing information about the considerations or other issues that would affect an industry-wide common practice; and
- Voluntarily assisting FINRA in obtaining effective access to firm offices, records, or computer systems prior to receiving a Rule 8210 or other regulatory request.
Steps toward increasing transparency
In an attempt to provide more transparency to the industry, FINRA will also take additional steps to explain when it has deemed cooperation to be extraordinary. In instances where FINRA determines that extraordinary cooperation credit will be granted, FINRA will include a new section in the Letter of Acceptance, Waiver, and Consent (AWC) called “credit for extraordinary cooperation.” This section will describe the type of credit granted and the factors that resulted in the credit being given.
In instances where FINRA grants an extraordinary cooperation credit and proceeds without taking any formal action, it may issue a press release noting which factors resulted in the subject receiving the credit, along with the type of credit that was granted. When publishing such press releases, FINRA has the discretion to disclose information regarding the factors, as well as information regarding the individual case.
Client Alert 2019-192
