An irreverent Wall Street Blog
FINRA Issues An Extraordinary and Cynical Release
July 12, 2019
The way I understand it, Moses went up a mountain and God gave him two stone tablets consisting of Ten Commandments. On those two stones was the Law. Do this. Don't do that. Amazingly, those few words seemed to work and folks lived their lives by figuring out which of the 10 do's and don'ts they had (or had not) broken. Many years later, someone apparently had far too much time on his hands and figured we ought to tinker with the majestic simplicity of the whole two tablets and ten commandments thing. That resulted in the promulgation of Deuteronomy, which means the "Second Law," or, as modern lawyers would likely phrase it, the "Restatement of Law." What previously took two stones and 10 commandments, mushrooms in Deuteronomy in the form of Chapters 12 - 26. In offering a more up-to-date guidance as to the Ten Commandments, we expanded to 15 chapters. Clearly, Deuteronomy marks the beginning of bureaucracy. Over the ensuing millennia, we have expanded upon the original two stone tablets and gone way beyond the restatement of Deuteronomy. Title 18 of the United States Code is man's effort to promulgate a criminal code and the attendant criminal rules of procedure. At last glance, Title 18 ended with Chapter 601, and with Section 6005. Anyone have any idea how many stone tablets it would take to enter 6005 sections of law?
08-70 Notice: 6 Pages (no tablets)
Over a decade ago, FINRA published the six-page "FINRA Investigations / FINRA Provides Guidance Regarding Credit for Extraordinary Cooperation" (FINRA Regulatory Notice 08-70 / November 2008) (the "08-70 Notice").
https://www.finra.org/sites/default/files/NoticeDocument/p117452.pdf As set forth in the "Executive Summary" portion of the 08-70 Notice:
FINRA is issuing this guidance to apprise firms of the circumstances in which extraordinary cooperation by a firm or individual may directly influence the outcome of an investigation. The types of extraordinary cooperation by a firm or individual that could result in credit can be 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; and (4) providing substantial assistance to FINRA's investigation. These steps alone or taken together can be viewed in a particular case as extraordinary cooperation and, depending on the facts and circumstances, can have an impact on FINRA's enforcement decisions.
As noted in the "Conclusion" section of the 08-70 Notice:
Crediting extraordinary cooperation by firms and individuals in appropriate situations advances important regulatory goals. Among other things, it can shorten investigations, thereby reducing regulatory burdens on firms and FINRA resources, as well as apprise FINRA staff of wrongdoing beyond the scope of the original investigation and alerting staff to industry-wide, systemic problems. Encouraging firms and individuals to take immediate, proactive and meaningful steps and appropriately acknowledging the cooperative conduct in settlement documents may encourage others to take similar steps and will provide transparency into sanction terms and how the conduct was actually credited.While FINRA staff will continue to assess the particular facts and circumstances in each case, including the nature of the conduct, the extent of customer harm, the duration of the misconduct and the existence of disciplinary history, the extent of a firm's extraordinary cooperation will be an important factor in determining the appropriate disciplinary action and the sanctions that will be sought by FINRA Enforcement.
19-23 Notice: FINRA's Deuteronomy
On July 11, 2019, FINRA published the 12-page "FINRA Investigations / FINRA Supplements Prior Guidance on Credit for Extraordinary Cooperation" (FINRA Regulatory Notice 19-23) (the "19-23 Notice")
http://www.finra.org/sites/default/files/notice_doc_file_ref/regulatory-notice-19-23.pdf
As set forth in the "Summary" portion of the the 19-23 Notice:
As set forth in the "Summary" portion of the the 19-23 Notice:
FINRA is issuing this Notice to restate and supplement prior guidance regarding the circumstances under which a firm or individual may influence the outcome of an investigation by demonstrating extraordinary cooperation. This Notice incorporates FINRA's prior guidance and provides clarification and additional information about how FINRA assesses whether a potential respondent's cooperation is "extraordinary" and distinct from the level of cooperation expected of all member firms and their associated persons.
Twice the Length. Half the Clarity?
How is it that roughly a decade later, FINRA needed to publish a 12-page so-called supplemental guidance for its earlier 6-page plain-old guidance? As explained in part under the "Background & Discussion" portion of the the 19-23 Notice:
Subsequent changes to FINRA's rules, including the adoption of FINRA Rule 4530(b)-which requires member firms to report internal conclusions of violations of certain laws, rules, regulations or standards of conduct-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. In addition, other FINRA rules and policies-such as FINRA Rule 8210 and FINRA's Sanction Guidelines-expect certain levels of cooperation in every case.To provide further clarity on the differences between required cooperation and extraordinary efforts, and in response to comments from the industry requesting further transparency, FINRA is issuing this Notice, which incorporates its prior guidance and provides additional information regarding the circumstances under which credit for extraordinary cooperation will be awarded and the nature of credit available. In doing so, FINRA hopes to incentivize firms and associated persons to voluntarily and proactively assist FINRA. This, in turn, will aid FINRA in meeting its objectives of investor protection and market integrity by quickly identifying and remediating misconduct.
Required Cooperation
FINRA Rule 4530(b) requires member firms to report internal conclusions of violations of certain laws, rules, regulations or standards of conduct. Let's call that required cooperation.
Expected Cooperation
But wait . . . we're also told that in addition to the required cooperation of Rule 4530(b), "other FINRA rules and policies-such as FINRA Rule 8210 and FINRA's Sanction Guidelines-expect certain levels of cooperation in every case." Howsabout we call that expected cooperation?
Extraordinary Cooperation
Hold on, though, because FINRA acknowledges that it "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." So, now we add extraordinary cooperation to required cooperation and expected cooperation. But, don't go away mad or anything because there's more.
Extraordinary Efforts
Why did FINRA issue the 19-23 Notice? As explained in the update:
To provide further clarity on the differences between required cooperation and extraordinary efforts, and in response to comments from the industry requesting further transparency, FINRA is issuing this Notice . . .
Oh my! Now there's a whole new class of "extraordinary." Not just extraordinary cooperation but also the fascinating extraordinary efforts. What's the difference between extraordinary cooperation and extraordinary effort? Maybe it was explained in those 5 Commandments that the multi-verse Moses dropped on Mt. Sinai.
REEE View
Unfortunately for those of us in the FINRA defense bar, we are now confronted with ever-expanding versions of "cooperation" and "extraordinary":
- Required Cooperation
- Expected Cooperation
- Extraordinary Cooperation
- Extraordinary Efforts
You get the sense that FINRA is simply making up all of this nonsense as it goes along? My expectation is that in the event that you and FINRA disagree on whether some disputed conduct rises to the level of "extraordinary" cooperation, that the self-regulator will decline to give you credit. The Regulator may argue that you're only raising the exitence of an extraordinary effort when the 19-23 Notice clearly explained that credit is only afforded for extraordinary cooperation.
The Weight
On pages 2 - 4 of the 19-23 Notice, is the promising heading of "What is Extraordinary Cooperation?" That's short and to the point. I read on with the hope that what would follow would be definitive. Unfortunately, there is not a single useful, workable definition under that heading. Spread out across some three pages is a rambling discussion exemplified by this double-talk:
Enforcement may recommend a sanction that is well below the range set forth in the Sanction Guidelines or comparable precedents when respondents have voluntarily provided such material assistance to FINRA in its investigation, or effected such expedient and effective remediation, that FINRA deems these steps to constitute "extraordinary cooperation" beyond what it requires of any member firm or associated person. Member firms and associated persons who take proactive and voluntary steps well beyond those required under FINRA rules materially assist FINRA in meeting its goals of investor protection and market integrity. To recognize and incentivize such conduct, FINRA weighs these mitigating factors so heavily that the outcome of the matter is materially different than it would have been absent the respondent's extraordinary conduct.
Yeah, I'm sure that FINRA will be weighing the above factors heavily. Of course, in order to get my client's request for a more compassionate sanction before FINRA, I have to prove that my client's conduct consisted of "proactive and voluntary steps" that "went well beyond those required under FINRA rules . . ." Where does "well beyond" begin? And while you're pondering that Zen haiku, consider:
When is enough, enough?If your cooperation is required, then how can you go well beyond required cooperation?If FINRA weighs factors "so heavily that the outcome of the matter is materially different," then doesn't that suggest FINRA's scales are rigged?
Stepping Stones
Beginning in 2015 through 2018, FINRA ordered a number of 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. FINRA did not impose fines in those matters based on the firms' extraordinary cooperation. . . .[W]hile FINRA fined the firm $3.25 million, this reflected substantial credit for the firm's extraordinary cooperation and remediation to customers. . . .[T]he 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.[A]lthough the impact of extraordinary cooperation depended upon the facts and circumstances of each particular case, these matters demonstrate, among other things, that the receipt of substantial credit depended on corrective measures and cooperation aimed at broadly and quickly remediating harm.
Pages 3 - 4 the 19-23 Notice
As you may have noticed in the four extracts above, FINRA has conflated extraordinary "steps" with extraordinary "cooperation" and extraordinary "efforts." Such a multi-tasking use of one word is . . . what's the word, I'm looking for . . . ummm . . . oh yes, "extraordinary." Which raises the question as to whether I can take certain extraordinary steps but either separately or taken together, those steps do not amount to extraordinary cooperation; and then there's that metaphysical conundrum of when an extraordinary effort may be deemed by FINRA to have risen to an extraordinary cooperation. If you think that I'm highlighting a FINRA distinction without a difference, then you better consider this:
When a firm identifies a problem involving deficient supervisory systems, procedures and controls, the firm must take corrective steps to fully remediate the problem. In considering whether to provide substantial credit for extraordinary cooperation, FINRA will consider whether a firm's steps to correct deficient systems and procedures go beyond these baseline requirements. Examples of corrective steps that may result in credit for extraordinary cooperation include:
- Engaging or conducting an independent audit or investigation that is thorough and far-reaching in scope beyond the immediate issue, with an eye toward identifying and remediating all related misconduct that may have occurred.
- Hiring independent consultants to ensure the adoption and implementation of improved supervisory systems, procedures and controls.
- Where the root cause of a violation relates to organizational weaknesses such as where a firm dedicated inadequate staff to the supervision of a particular business line, making organizational changes by, for example, creating new supervisory positions, adjusting reporting lines or, if necessary, removing or disciplining responsible individuals, including those in supervisory roles (although personnel changes are not necessarily required to achieve extraordinary cooperation). . . .
Page 5 of the 19-23 Notice
FINRA Film Noir
If your head is spinning with FINRA's written explanations, you don't have to wait for the video. FINRA's beautifully produced and captivating: "Credit for Extraordinary Cooperation"
http://www.finra.org/industry/credit-extraordinary-cooperation:
FINRA Executive Vice President and Head of Enforcement Susan Schroeder sits down with Senior Vice President of Member Relations and Education Chip Jones to discuss new guidance on credit for extraordinary cooperation in investigations, as described in Regulatory Notice 19-23. (7 min. 11 sec.)
BrokeAndBroker.com SRO Movie Review: I laughed. I cried. Incredible costumes and production value. Wonderful CGI water glasses on the table. Chip Jones nailed his role as the modest yet assertive host. Watch out for emerging star Susan Schroeder, who delivers a stunning performance. Her nuanced depiction of a regulator uncomfortably forced to explain the unexplainable is delivered with subtlety. Sadly, the performances are overshadowed by the far more compelling street traffic in the background. I'm not criticizing the Director's choices but perhaps the next release: "Extraordinary Credit for Extraordinary Cooperation: The Extraordinary Final Chapter," could be filmed in a studio? Or someone could pull the blinds?
Under the Bus
Listen, when you big boys screw up, you know, like when you almost destroyed the world with your Great Recession, we don't want you coming to us too soon. We all know that no Wall Street regulator is ever ahead of the curve. We all know that Wall Street regulation isn't proactive but simply reading the toe tags in the morgue. As such, when you realize that you've really, really screwed up, first, go out and hire an outside consultant. Preferably a former senior FINRA executive or, if you must, a former SEC executive, or, sure, if it's that bad, maybe a former U.S. Attorney or some Attorney General. Then have that consultant prepare a report detailing what went wrong and how you should fix it (even though we all know that you're not really going to follow all the advice). Then go through some of the motions of implementing some of the consultant's proposals. Then, throw a few execs under the boss. Not anyone in a C-Suite, mind you, but, maybe an old fart who's more than happy to get an early retirement, or, if that's not an option, go for the old reliable ploy of blaming it all on the most senior woman or minority executive. After you've done all of that, then notify us that you want to self report a violation. We will then make a lot of noise about our displeasure. We'll all agree on a large fine but, what's the big deal with that -- you're a public company and its coming out of the shareholders' pockets. When we publish the press release about the fines, we'll do it after-the-Close on a Friday or, even better, we'll bury it just before a big holiday.
One Size Doesn't Fit All
There's really no way that the 19-23 Notice will get used to benefit the industry's working men and women, or FINRA's Small Member Firms. Like I said, this is a bit of mutual back-scratching between FINRA and its powerful Large Member Firms. Frankly, even FINRA knows what this is all about. Consider the discomfort with which the regulator posed the following question and answered it [Ed: footnotes omitted]:
Can Individuals Also Receive Credit for Extraordinary Cooperation?Credit for extraordinary corrective measures and cooperation is available to individuals as well as firms. FINRA believes many of the principles discussed above may apply equally to individuals. For example, 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. However, the presence of aggravating factors may weigh against credit for extraordinary cooperation, and certain aggravating factors are more likely to be present in cases involving individuals, such as intentional or reckless misconduct, attempts to conceal misconduct from a member firm, and misconduct notwithstanding prior warnings from a supervisor.In evaluating whether to give credit to an individual, FINRA also will consider the same four general factors outlined in the SEC's policy regarding cooperation by individuals: (1) the assistance provided by the individual; (2) the importance of the underlying matter in which the individual cooperated; (3) the societal interest in holding the individual accountable for his or her misconduct; and (4) the appropriateness of credit based upon the profile of the cooperating individual.
Pages 10 - 11 of the 19-23 Notice
I always love it when someone asserts a fact as if the mere act of stating it renders it true. Interesting that FINRA asserts that "certain aggravating factors are more likely to be present in cases involving individuals, such as intentional or reckless misconduct, attempts to conceal misconduct from a member firm, and misconduct notwithstanding prior warnings from a supervisor." So, let me get this: Aggravating factors that would cancel out credit for extraordinary cooperation are "more likely to be present in cases involving individuals" (in contradistinction to large banks or broker-dealers). Says who? Did FINRA learn nothing from the Great Recession? Does FINRA truly believe that only an associated person would ever engage in "attempts to conceal misconduct"? Should I dredge up the Madoff and Stanford frauds? Does FINRA not understand the attempts to conceal misconduct was the cornerstone of all the illegal, unauthorized account openings by its major firms? Where does FINRA think the impetus came for bid rigging? Where does FINRA think the idea to look the other way arises when AML concerns attach to a huge client? FINRA's bias against the little guy and in favor or its larger firms is on full display with its inept and clumsy exposition of what constitutes extraordinary cooperation and when such conduct qualifies for sanction mitigation. What insincere crap it is for FINRA to claim that it will take into consideration "the societal interest in holding the individual accountable for his or her misconduct." The little guy and small firm never get a fair break in self regulation. The system is rigged against them. Time and time again, when FINRA can and should show some leniency with imposing sanctions against smaller firms or individuals, FINRA never quite issues the credit. For a better sense of how FINRA's scales are unfairly balanced, take a look at FINRA's dealings with the likes of;
http://www.brokeandbroker.com/index.php?a=topic&topic=sharemasterhttp://www.brokeandbroker.com/index.php?a=topic&topic=burrishttp://www.brokeandbroker.com/index.php?a=topic&topic=botkin