The Financial Industry Regulatory Authority (“FINRA”) issued a Regulatory Notice 08‑70 (the “Regulatory Notice”), which provides guidance regarding circumstances in which FINRA may provide credit to firms or individuals for “extraordinary cooperation” in FINRA investigations. The Regulatory Notice indicates that while the FINRA Sanction Guidelines, which govern the decisions of FINRA adjudicators in contested matters, have served as the basis for the guidance in the Regulatory Notice, that guidance applies only to the factors considered by FINRA Enforcement in the context of settlement discussions when deciding what sanctions to assess. The broad categories of conduct that may be considered extraordinary cooperation include the following: (1) self-reporting before regulators become aware of the violation (i.e., before regulatory inquiry into the conduct at issue has begun and before the violation otherwise comes to the regulator’s attention); (2) extraordinary efforts to correct deficient procedures and systems; (3) extraordinary remediation to customers; and (4) providing substantial assistance to FINRA’s investigation. The Regulatory Notice includes additional detail for each category with examples and discussion of issues such as the waiver of attorney/client privilege.The Regulatory Notice makes clear that for conduct to be considered extraordinary cooperation it must be well beyond that which a firm or an individual is otherwise required, obligated or even prompted to undertake. The credit provided for extraordinary cooperation may include reductions in fines imposed, eliminating the need for or otherwise limiting an undertaking, including language in settlement documents and press releases that notes the cooperation and its positive effect on the final settlement and, in unusual cases, determining to take no disciplinary action at all. FINRA makes clear that the level of cooperation in an investigation is just one factor to be considered in determining the appropriate disciplinary action and sanctions. While FINRA notes that the extent of extraordinary cooperation will be an “important factor” in determining the appropriate regulatory response, other factors will also affect the choice of enforcement action to be taken in any matter, including the nature of the conduct, the extent of customer harm, the duration of the misconduct and any prior disciplinary history.
Alert December 23, 2008