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How Firms Under Investigation Can Sometimes Avoid Harsher Sanctions

By Rita Raagas De Ramos July 12, 2019

Finra has revealed how firms under investigation might sometimes be able to avoid harsher sanctions.

The self-regulator has clarified what it considers to be “extraordinary efforts” when member firms and individuals help in investigations. The clarification comes as a response to requests to clear up the ambiguity of what’s extraordinary as opposed to “required cooperation.”

Finra’s Department of Enforcement credits “extraordinary cooperation” when the efforts of an individual or firm help make the outcome of the investigation “materially different than it would have been absent the respondent's extraordinary conduct.”

Finra says it provides such credit to recognize and incentivize firms and individuals to take proactive and voluntary steps beyond those required under its rules.

In previous guidance issued in 2008, Regulatory Notice 08-70, Finra identified the following types of extraordinary cooperation by a firm or individual that could result in credit, which still stand:

  • Self-reporting before regulators are aware of the issue
  • Extraordinary steps to correct deficient procedures and systems
  • Extraordinary remediation to customers, or
  • Providing substantial assistance to the investigation.

“You know, every case is going to be different based on the facts and circumstances of that unique case,” Susan Schroeder, head of Finra’s Department of Enforcement, says in a video interview posted on Finra’s website.

“And so while sometimes we might deem that it is appropriate to forego any fine, there will be situations where we believe a fine is appropriate. But we will assess a fine that is materially different, significantly lower than the fine that we otherwise would have assessed. There are times we may choose not to bring any action at all,” she adds.

Finra says subsequent changes to its rules “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.”

Thus, on Thursday Finra issued Regulatory Notice 19-23, which provides additional information about the extraordinary cooperation respondents can provide to substantially assist Finra in meeting its investor protection and market integrity goals.

Finra reiterated that its rules and policies — such as Finra Rule 8210 and its Sanction Guidelines — require certain levels of cooperation in every case.

Rule 8210 gives Finra the following rights for the purpose of an investigation, complaint, examination or proceeding:

  • Require a registered representative or associates to provide information orally, in writing, or electronically and to testify under oath on any matter involved in the investigation, complaint, examination or proceeding, and
  • Inspect and copy the books, records and accounts of that registered representative or associates also in any matter involved in the investigation, complaint, examination or proceeding.

Finra reiterates that it will continue to look to the factors listed in 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, according to the SRO.

Finra says the credit for extraordinary cooperation may take many forms.

For example, when a problem has been fully remediated, Finra says it may conclude that no enforcement action is warranted and close an investigation with no further action or with a Cautionary Action Letter.

In other cases, Finra says it might determine that an enforcement action is appropriate to remedy or prevent harm but will provide credit by reducing the sanctions imposed. When credit is given in the form of a reduced fine, the reduction normally will be substantial; in appropriate cases, Finra says it may also consider imposing formal discipline without any fine.

Schroeder says Finra tries to “walk through a lot of examples of steps that firms and respondents have taken in the past that we deemed to be extraordinary” in its Regulatory Notice 19-23.

Here are two examples.

Finra

From 2015 through 2018, Finra ordered several 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. But Finra didn’t impose fines because of the firms’ extraordinary cooperation. Firms initiated, prior to detection or intervention by a regulator, investigations to identify whether the misconduct existed; promptly established a plan of remediation for affected customers; promptly self-reported the conduct to Finra; promptly took action and remedial steps to correct the violative conduct; and employed subsequent corrective measures, prior to detection or intervention by a regulator, to revise their procedures to avoid recurrence of the misconduct.

In October 2018, Finra sanctioned a firm for failures to supervise firm functions it outsourced to a vendor. Finra didn’t impose a fine, acknowledging, among other things, the firm’s self-reporting, which extended beyond its obligation to self-report; the 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.

In the future, Finra’s letters of acceptance, waivers and consent will include a section called “Credit for Extraordinary Cooperation,” where the SRO will describe not only the nature of the credit but also describe in detail the steps the respondent took to get the credit, Schroeder says.