The Financial Industry Regulatory Authority released Thursday new guidance regarding credit for extraordinary cooperation, which provides further clarity on the differences between required cooperation with FINRA inquiries and extraordinary efforts to help the regulator.
The new Regulatory Notice 19-23 supplements prior guidance in Regulatory Notice 08-07 and comes in response to industry requests for further transparency, according to Susan Schroeder, head of FINRA enforcement.
Reg Notice 19-23 provides “additional information about what firms and individuals can do to earn credit for extraordinary cooperation, and what kinds of credit are available,” Schroeder said.
“We grant credit for extraordinary cooperation to incentivize firms and associated persons to voluntarily and proactively assist FINRA. Respondents who go beyond their regulatory obligations and take extraordinary steps to quickly identify and remediate misconduct materially aid FINRA in meeting its objectives of investor protection and market integrity,” Schroeder said.
Firms that exhibit extraordinary cooperation receive outcomes that are “materially different” than just exhibiting required cooperation.
The 2008 guidance noted the types of extraordinary cooperation by a firm or individual that could result in credit, and were 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; or (4) providing substantial assistance to FINRA’s investigation.
The broker-dealer self-regulator states that changes to FINRA’s rules since the previous 2008 guidance “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.”
Also, FINRA rules and policies — such as FINRA Rule 8210, which requires members or persons associated with a member to provide information orally, in writing or electronically upon request, and FINRA’s Sanction Guidelines — require certain levels of cooperation in every case, the self-regulator explains.
FINRA states that it will continue to look to the factors set forth in both the Sanction Guidelines and Regulatory Notice 08-70 when determining whether credit will be given for extraordinary cooperation.
Those factors include, among others, the timeliness and quality of a potential respondent’s corrective measures and other cooperative steps aimed at broadly and quickly remediating harm.
Credit for extraordinary cooperation can take many forms, according to FINRA. For example, where a problem has been fully remediated, FINRA may take no enforcement action and close an investigation or issue a Cautionary Action Letter.
In other cases, FINRA may determine that an enforcement action is appropriate to remedy or prevent harm, but will provide credit by reducing the sanctions imposed.
Credit issued in the form of a reduced fine is normally substantial, FINRA states. In appropriate cases, FINRA may also consider imposing formal discipline without any fine.
The new guidance also clarifies that credit for extraordinary cooperation is available to individuals as well as firms. “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,” FINRA states.
FINRA also plans to take additional steps to distribute information “about instances when it has deemed cooperation to be extraordinary, in ways that are more accessible and easier to identify.”
For example, in press releases, FINRA will note factors that led the respondent to receive credit, as well as the type of credit.
“When FINRA proceeds without formal action in connection with an investigation, traditionally FINRA has not made public a statement regarding the action. Going forward, when FINRA gives credit for extraordinary cooperation that results in FINRA electing to proceed without formal action, FINRA will determine, on a case-by-case basis, whether it would be useful to provide additional transparency regarding the factors that led to FINRA’s decision and, when appropriate, publish information about those individual cases.”
— Check out FINRA Developing ‘Credit for Cooperation’ Guidance; SEC Aims to ‘Bring Cases Faster’ on ThinkAdvisor.