On July 11, FINRA issued Regulatory Notice (RN) 19-23, providing new details on how member firms and associated persons can receive credit for “extraordinary cooperation” with an investigation. RN 19-23 expands on RN 08-70, issued during 2008, by providing specifics as to what actions an investigated party could undertake to support its efforts in seeking this credit.
Other prior rules in place regarding reporting and cooperation requirements gave rise to uncertainty about what qualifies as extraordinary cooperation. For example, FINRA Rule 4530(b) requires member firms to self-report internal conclusions of violations; meanwhile, FINRA Rule 8210 requires cooperation in every investigation. Ultimately, FINRA’s Sanction Guidelines outline the principal considerations when FINRA is determining appropriate sanctions.
FINRA had previously provided four categories of conduct for which firms can receive credit for extraordinary cooperation:
- Self-reporting violations to FINRA before a regulator becomes aware of it;
- Proactively taking steps to correct deficient procedures and systems;
- Proactively and voluntarily providing full restitution to impacted customers; and
- Providing substantial assistance to FINRA during its investigation.
FINRA continues to use these four categories and the newly issued guidance to determine whether a respondent’s cooperation qualifies as extraordinary so as to earn credit. RN 19-23 was issued in response to the uncertainty over what specific conduct falls into each of the four categories.
RN 19-23 stresses that the most important factor in determining whether cooperation is extraordinary is whether a firm promptly and proactively identified affected customers and provided them with restitution. Examples of this include voluntarily ensuring that restitution is paid quickly, in a manner that ensures all harmed customers are made whole, and doing so prior to an order from FINRA or another regulator. RN 19-23 also emphasizes prompt and voluntary corrective action, such as conducting independent audits or investigations, hiring outside experts or consultants to implement improved procedures, or making internal changes to prevent future violations. Further, this corrective action can take place both before and after a self-report, and a firm may qualify for credit based on either action. RN 19-23 also provides additional examples of substantial assistance to FINRA, such as production to FINRA of analyses of various data and providing information or summaries of events prior to receiving a FINRA Rule 8210 request to cooperate. Examples of extraordinary self-reporting include reporting any potential misconduct which falls outside of the FINRA Rule 4530 reporting requirements, or proactively identifying misconduct prior to notice from regulators or customers.
In exchange for this extraordinary cooperation, respondent member firms will be eligible for credit in a number of forms. For example, FINRA may determine not to proceed with any disciplinary action or may decide not to publish the violation. If full remediation has occurred, FINRA may also conclude that no enforcement action is necessary and will thus close an investigation with no further action or with only a Cautionary Action Letter. There can also be significantly reduced, or completely eliminated, fines and sanctions.
Ultimately, RN 19-23 provides long-awaited guidelines on how a FINRA member firm may qualify for credit for extraordinary cooperation.
Troutman Sanders’ Consumer Financial Services litigation practice, the Law360 Consumer Protection Practice Group of the Year for 2018, represents and advises clients in FINRA regulatory matters and arbitrations, including customer, employee, and intra-industry disputes.