Self-Reporting and Other Extraordinary Assistance Can Reap Benefits

FINRA and other regulators have long purported that substantial cooperation and self-reporting are given favorable consideration during the disciplinary phase after an investigation.

For over 15 years, FINRA (and its predecessor agencies) have encouraged member firms and associated persons to cooperate with them during exams and investigations in a candid manner, promising at least some level of leniency for those who do so. In July of this year, FINRA provided yet another public notice on this topic, Regulatory Notice 19-23 (“RN 19-23”).

RN 19-23 reiterates that pursuant to FINRA Rules 4530(b), 8210, and FINRA's Sanction Guidelines, a certain level of cooperation is expected any time FINRA is performing an examination, inquiry, or investigation. FINRA recognizes “extraordinary cooperation” as cooperation that is beyond “required cooperation” and does one or more of the following:

1. Shows an acceptance of responsibility and an acknowledgment of the misconduct at issue prior to detection and intervention by a firm or regulator,
2. Voluntarily employees initiatives to correct the issues prior to detection and intervention by a firm or regulator,
3. Voluntarily attempts to remedy the misconduct by restitution or another appropriate remedies prior to detection and intervention by a firm or regulator,
4. Voluntarily provides substantial assistance to FINRA during its examination and/or investigation of the misconduct at issue.

Per FINRA's Sanction Guidelines, “Sanctions in disciplinary proceedings are intended to be remedial and to prevent the recurrence of misconduct.” To the extent that member firms and associated persons show initiative in meeting this goal, FINRA states it will consider that fact when determining what, if any, disciplinary action they issue for misconduct. RN 19-23 provides three examples of FINRA adjusting its disciplinary decision based on what it deemed to be “extraordinary cooperation.”

FINRA also announces certain initiatives from time to time to further its goals of “investor protection and market integrity.” Once example of such an initiative is their “529 Plan Share Class Initiative” where FINRA encouraged member firms to review their 529 plan sales for common supervisory issues. To encourage firms to do this and to report their findings, FINRA stated they would issue settlement agreements for misconduct with no fines to remedy any identified and reported misconduct.

While there is always a risk when self-reporting, there is also a substantial risk in not doing so. Reviewing FINRA's RN 19-23 with counsel versed in securities regulations would be a wise first step in determining if and how you may wish to self-report or self-audit specific activity. Both member firms and associated persons can find themselves in a position where self-reporting should be considered. Taking that step can be daunting. Cosgrove Law Group, LLC has the experience to offer guidance and representation in such matters. Please give us a call!