In 2020, the Financial Industry Regulatory Authority Inc. (FINRA) settled alleged rule violations with various large investment firms, including Merrill Lynch, Citigroup Global Markets Inc. (CGMI), Transamerica Financial Advisors, Inc. (TFA), and RBC Capital Markets, LLC (RBC), with the majority of the Letters of Acceptance, Waiver, and Consent in those matters being signed in just the past two months. What is notable is not that these firms were found to have violated FINRA’s rules but rather that the firms received what appeared to be significant credit for their “extraordinary cooperation” in identifying the disclosure violations, taking measures to correct them, and then reporting them to FINRA, all prior to detection or intervention by FINRA. Their actions mitigated whatever typical sanctions FINRA would assess for those rule violations.
FINRA provides credit for extraordinary cooperation. The organization has laid out what it deems to constitute extraordinary cooperation–i.e., proactive steps a member organization can take, both prior to and after FINRA intervention, that can reduce or completely eliminate sanctions that would otherwise be assessed for offending conduct–in a series of regulatory guidances, most recently in Regulatory Notice 19-23:
- Identifying and taking steps to correct deficient procedures and systems.
- Providing restitution to customers.
- Self-reporting violations.
- Providing substantial assistance to FINRA investigations.
The extraordinary cooperation credit can take many forms; if, for example, a problem has been fully remediated, FINRA may conclude that no enforcement action is necessary. In other matters, even if enforcement action is taken, the sanctions may be reduced–be it a reduced fine, formal discipline without a fine, or even FINRA forgoing an undertaking (such as requiring a member to hire an independent consultant to oversee the member’s operations) that might have otherwise been imposed. Whether credit is awarded depends on the specific facts of each case.
In Merrill Lynch’s case, the company engaged an outside consultant to identify customers who did not receive appropriate rebates and fee waivers, and it proactively made restitution to those individuals. The matter was resolved without a fine. TFA likewise was able to avoid a fine for its rule violations. TFA engaged an outside consultant to help identify customers who received misstatements about investment opportunities in 529 plans and provided FINRA with detailed information about the challenges associated with collecting and assessing 529 plan data. As for RBC, the company proactively discovered supervisory deficiencies in connection with its 529 plan offerings, revised its systems, and engaged an outside consultant to formulate an action plan to provide customers with restitution. The company received credit for its efforts. And CGMI received a corresponding credit for taking measures to identify and correct various disclosure violations and was also commended for offering substantial assistance to FINRA in investigating those violations by maintaining open, transparent lines of communication with the organization throughout the process and providing access to documents and information.
Whether or not to self-report is a fact-specific inquiry and should be guided by legal counsel familiar with the business and regulatory history of the firm. However, in order to be in a position to take advantage of the extraordinary cooperation credit, member firms should develop an internal system of guidelines providing for periodic self-audits to identify potential rule violations and internal procedures for reporting (internally) a suspected FINRA violation. It also bears mentioning that efforts to conceal misconduct, on the other hand, can cause FINRA to impose strict penalties for violations and should be discouraged.
