On July 11, 2019, FINRA provided additional guidance on obtaining extraordinary cooperation credit to supplement its prior enforcement guidance. FINRA Regulatory Notice 19-23, FINRA Investigations: FINRA Supplements Prior Guidance on Credit for Extraordinary Cooperation (July 11, 2019). The new guidance does not represent a significant expansion or material change from previous guidance, but rather seeks to clarify areas of potential uncertainty.
In its previous guidance, issued in 2008, FINRA provided several criteria by which respondents subject to investigation could obtain extraordinary cooperation credit. Specifically, FINRA’s original guidance explained that extraordinary cooperation credit would be granted based on “(1) self-reporting before regulators are aware of the issue; (2) extraordinary steps to correct deficient procedures and systems; (3) extraordinary remediation to customers; and (4) providing substantial assistance to FINRA’s investigation.” These criteria clearly seek to incentivize firms and individuals to engage with and assist FINRA’s investigations, but any doubt within the industry about the terms, or obscurity regarding the concrete steps respondents should take in order to qualify for this potential reprieve, may run counter to this objective. FINRA’s recent release attempts to address some of these issues.
First, FINRA’s new guidance elaborates on the nature of full remediation of “deficient supervisory systems, procedures and controls” and provides examples of such remediation. The guidance suggests measures such as conducting an independent investigation that is “thorough and far-reaching,” as well as engaging independent consultants to ensure the adoption of improvements to supervisory systems, or otherwise addressing organizational weaknesses that are identified as the “root cause” of a violation. FINRA also further distinguishes the types of remediation it requires in the normal course from what it would consider “extraordinary” and deserving of a penalty reduction—identifying the timeliness and breadth of remediation as key factors. It acknowledges the potential tension between timely self-reporting and remediation, noting that credit may be given for remediation even after a member firm reports misconduct—a point that had been previously subject to uncertainty.
Second, FINRA emphasizes that “restitution for harmed customers is our highest priority.” Efforts to “accelerate” and use a “statistical approach” to identify and provide restitution to harmed customers will militate in favor of extraordinary cooperation credit. However, “it will be difficult for [a] respondent to obtain credit for extraordinary cooperation without making complete and timely restitution to injured customers,” and “mere payment of restitution” is not eligible for credit. Instead, firms will need to show that they went above-and-beyond in their efforts to provide prompt restitution to all customers harmed as the result of a violation.
Third, FINRA clarifies that not all self-reporting will meet its requirements for extraordinary cooperation credit. Indeed, firms must “go significantly beyond” any self-reporting obligation imparted by state or federal regulations. In determining whether a firm has exceeded basic self-reporting requirements, FINRA will consider the firm’s proactivity and the depth of information it has provided as key factors. It will also consider whether the firm has reported the misconduct to other regulators and the public (where applicable), and the level of cooperation with other regulators or law enforcement agencies.
Fourth, the new guidance provides numerous examples of what “substantial assistance” to FINRA “might include.” While FINRA notes that “there is no one-size-fits-all approach,” the suggestions, as can be expected, are strongly geared towards voluntarily providing value-added information, explanation, and analysis to FINRA.
Finally, the guidance indicates that FINRA is undertaking two specific efforts to provide transparency into its process for awarding credit for cooperation: (1) firms can expect to see a new section in FINRA’s disciplinary documents describing the factors that resulted in credit being given, where applicable; and (2) FINRA will consider reporting, on a case-by-case basis and in a way that preserves respondents’ anonymity, instances where it has determined not to bring a formal action as a result of extraordinary cooperation. Separately, the guidance also notes that FINRA may identify mitigating or aggravating factors in its AWCs more expressly, in a separate section of the document.
Overall, the guidance clarifies FINRA’s prior credit requirements and provides a somewhat more defined path for firms and individuals to follow in the hopes of obtaining extraordinary cooperation credit. FINRA’s effort to clarify uncertainty and further incentivize cooperation parallels similar efforts by the U.S. Department of Justice, which has made multiple efforts over the past few years to formalize and clarify its enforcement policies, especially relating to the requirements for obtaining reduced penalties and declinations.
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