FINRA is issuing this guidance to apprise firms of the circumstances in which extraordinary cooperation by a firm or individual may directly influence the outcome of an investigation. The types of extraordinary cooperation by a firm or individual that could result in credit can be categorized as follows: (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 steps alone or taken together can be viewed in a particular case as extraordinary cooperation and, depending on the facts and circumstances, can have an impact on FINRA's enforcement decisions.
Crediting extraordinary cooperation by firms and individuals in appropriate situations advances important regulatory goals. Among other things, it can shorten investigations, thereby reducing regulatory burdens on firms and FINRA resources, as well as apprise FINRA staff of wrongdoing beyond the scope of the original investigation and alerting staff to industry-wide, systemic problems. Encouraging firms and individuals to take immediate, proactive and meaningful steps and appropriately acknowledging the cooperative conduct in settlement documents may encourage others to take similar steps and will provide transparency into sanction terms and how the conduct was actually credited.While FINRA staff will continue to assess the particular facts and circumstances in each case, including the nature of the conduct, the extent of customer harm, the duration of the misconduct and the existence of disciplinary history, the extent of a firm's extraordinary cooperation will be an important factor in determining the appropriate disciplinary action and the sanctions that will be sought by FINRA Enforcement.
FINRA is issuing this Notice to restate and supplement prior guidance regarding the circumstances under which a firm or individual may influence the outcome of an investigation by demonstrating extraordinary cooperation. This Notice incorporates FINRA's prior guidance and provides clarification and additional information about how FINRA assesses whether a potential respondent's cooperation is "extraordinary" and distinct from the level of cooperation expected of all member firms and their associated persons.
Subsequent changes to FINRA's rules, including the adoption of FINRA Rule 4530(b)-which requires member firms to report internal conclusions of violations of certain laws, rules, regulations or standards of conduct-may have created uncertainty around the continued impact that self-reporting may have on a potential respondent's ability to receive credit for extraordinary cooperation. In addition, other FINRA rules and policies-such as FINRA Rule 8210 and FINRA's Sanction Guidelines-expect certain levels of cooperation in every case.To provide further clarity on the differences between required cooperation and extraordinary efforts, and in response to comments from the industry requesting further transparency, FINRA is issuing this Notice, which incorporates its prior guidance and provides additional information regarding the circumstances under which credit for extraordinary cooperation will be awarded and the nature of credit available. In doing so, FINRA hopes to incentivize firms and associated persons to voluntarily and proactively assist FINRA. This, in turn, will aid FINRA in meeting its objectives of investor protection and market integrity by quickly identifying and remediating misconduct.
To provide further clarity on the differences between required cooperation and extraordinary efforts, and in response to comments from the industry requesting further transparency, FINRA is issuing this Notice . . .
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.
When is enough, enough?If your cooperation is required, then how can you go well beyond required cooperation?If FINRA weighs factors "so heavily that the outcome of the matter is materially different," then doesn't that suggest FINRA's scales are rigged?
Beginning in 2015 through 2018, FINRA ordered a number of firms to pay more than $75 million in restitution, including interest, to affected customers for failing to waive mutual fund sales charges for certain charitable and retirement accounts. FINRA did not impose fines in those matters based on the firms' extraordinary cooperation. . . .[W]hile FINRA fined the firm $3.25 million, this reflected substantial credit for the firm's extraordinary cooperation and remediation to customers. . . .[T]he extraordinary steps the firm took to remediate, including weekly meetings with the vendor's CEO and COO, hiring two full-time employees to implement controls, and assigning a dedicated manager to oversee the vendor; changing its billing structure to avoid similar issues; and conducting a comprehensive review of all its wealth management accounts to identify impacted investors, whom it voluntarily paid $4.6 million in restitution.[A]lthough the impact of extraordinary cooperation depended upon the facts and circumstances of each particular case, these matters demonstrate, among other things, that the receipt of substantial credit depended on corrective measures and cooperation aimed at broadly and quickly remediating harm.
When a firm identifies a problem involving deficient supervisory systems, procedures and controls, the firm must take corrective steps to fully remediate the problem. In considering whether to provide substantial credit for extraordinary cooperation, FINRA will consider whether a firm's steps to correct deficient systems and procedures go beyond these baseline requirements. Examples of corrective steps that may result in credit for extraordinary cooperation include:
FINRA Executive Vice President and Head of Enforcement Susan Schroeder sits down with Senior Vice President of Member Relations and Education Chip Jones to discuss new guidance on credit for extraordinary cooperation in investigations, as described in Regulatory Notice 19-23. (7 min. 11 sec.)
BrokeAndBroker.com SRO Movie Review: I laughed. I cried. Incredible costumes and production value. Wonderful CGI water glasses on the table. Chip Jones nailed his role as the modest yet assertive host. Watch out for emerging star Susan Schroeder, who delivers a stunning performance. Her nuanced depiction of a regulator uncomfortably forced to explain the unexplainable is delivered with subtlety. Sadly, the performances are overshadowed by the far more compelling street traffic in the background. I'm not criticizing the Director's choices but perhaps the next release: "Extraordinary Credit for Extraordinary Cooperation: The Extraordinary Final Chapter," could be filmed in a studio? Or someone could pull the blinds?
Listen, when you big boys screw up, you know, like when you almost destroyed the world with your Great Recession, we don't want you coming to us too soon. We all know that no Wall Street regulator is ever ahead of the curve. We all know that Wall Street regulation isn't proactive but simply reading the toe tags in the morgue. As such, when you realize that you've really, really screwed up, first, go out and hire an outside consultant. Preferably a former senior FINRA executive or, if you must, a former SEC executive, or, sure, if it's that bad, maybe a former U.S. Attorney or some Attorney General. Then have that consultant prepare a report detailing what went wrong and how you should fix it (even though we all know that you're not really going to follow all the advice). Then go through some of the motions of implementing some of the consultant's proposals. Then, throw a few execs under the boss. Not anyone in a C-Suite, mind you, but, maybe an old fart who's more than happy to get an early retirement, or, if that's not an option, go for the old reliable ploy of blaming it all on the most senior woman or minority executive. After you've done all of that, then notify us that you want to self report a violation. We will then make a lot of noise about our displeasure. We'll all agree on a large fine but, what's the big deal with that -- you're a public company and its coming out of the shareholders' pockets. When we publish the press release about the fines, we'll do it after-the-Close on a Friday or, even better, we'll bury it just before a big holiday.
Can Individuals Also Receive Credit for Extraordinary Cooperation?Credit for extraordinary corrective measures and cooperation is available to individuals as well as firms. FINRA believes many of the principles discussed above may apply equally to individuals. For example, although individuals may not be able to correct deficient firm procedures and systems, they may still self-report misconduct, provide substantial assistance during an investigation, and pay restitution to customers with appropriate notice to and involvement by a member firm. However, the presence of aggravating factors may weigh against credit for extraordinary cooperation, and certain aggravating factors are more likely to be present in cases involving individuals, such as intentional or reckless misconduct, attempts to conceal misconduct from a member firm, and misconduct notwithstanding prior warnings from a supervisor.In evaluating whether to give credit to an individual, FINRA also will consider 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.