News & Insights

Finra Issues Guidance On Cooperation By Broker Dealers And Brokerage Firms During Regulatory Investigations

FINRA recently issued Regulatory Notice 19-23 addressing “extraordinary cooperation” by broker dealers and broker dealer firms.  The Notice highlights FINRA’s hopes to incentivize broker dealers and broker dealer firms to take “proactive and voluntary steps beyond those required under FINRA rules” by crediting such cooperation in FINRA’s regulatory enforcement decisions. The Notice also clarifies the difference between “required cooperation” and “extraordinary cooperation” by broker dealer and broker dealer firms, in light of FINRA rules and policies that already require cooperation in regulatory investigations.

The types of extraordinary cooperation by a broker dealer or broker dealer firm that may result in lenient enforcement by FINRA include: “(1) self-reporting before regulators are aware of the issue; (2) extraordinary steps to correct deficient procedures and systems; (3) extraordinary remediation to customers; and (4) providing substantial assistance to FINRA’s investigation.” The Notice provides a few examples of extraordinary cooperation by member firms and FINRA’s consideration of such cooperation in their enforcement decisions.

For example, in October 2018, FINRA sanctioned, but did not fine, a firm due to the firm’s self-reporting, hiring of new staff to address the issues, implementing new controls, and its comprehensive review of all wealth management accounts to identify impacted investors. Extraordinary cooperation is determined on a case-by-case basis, but is nonetheless, consider by the FINRA Enforcement Department when determining appropriate sanctions and fines.

We urge our broker dealer and investment adviser clients to fulfill their cooperation responsibilities as required by FINRA rules and policies, but also to exhibit extraordinary cooperation where possible, including engaging or conducting an independent audit or investigation that is thorough and far-reaching in scope prior to detection of any regulatory issues by FINRA.