Client Alert: FINRA Enforcement Program Enhancements

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As part of FINRA’s efforts to improve effectiveness and efficiency through its “FINRA Forward” initiative, FINRA’s Department of Enforcement recently implemented “common-sense improvements” to its program. The improvements, announced by Enforcement Head Bill St. Louis, are guided by Enforcement’s goals to drive transparency, improve efficiency, and provide firms with more opportunities to be heard.

For Enforcement’s transparency goal, there will be clearer expectations and open communications at every stage of an enforcement matter, with St. Louis stating that there “should be no surprises throughout the process.” Specific enhancements implemented under this goal include:

• An introductory meeting between potential firm respondents and Enforcement staff so that Enforcement can provide an overview of its process and initial focus areas. During this meeting, firms can have questions answered and share their observations and concerns.
• Status updates to potential respondents at least every 90 days; and
• For investigations, an additional meeting at or near the conclusion of Enforcement’s fact-finding (prior to resolution), where its investigative findings and underlying evidence will be shared in order to “eliminate surprises” when formal charges are proposed. During this additional meeting, Firms can advocate their positions based on factual evidence, mitigating factors, or other additional context. St. Louis noted that this meeting does not replace the Wells process.

To improve efficiency, Enforcement has introduced:

• A specialization program for complex matters (including systemic anti-money laundering and market-related issues).
• A new pilot program emphasizing the prompt self-reporting of certain rule violations under FINRA Rule 4530(b) and, in “appropriate matters” such as those that do not involve ongoing customer or market harm, communicating with firms about the self-report before launching an investigation. In these matters, firms may be able to conduct their internal review without a concurrent FINRA investigation by giving FINRA status updates, and based on the particular facts and circumstances, without a full enforcement investigation. This would allow firms to better remediate issues and empower compliance.

To provide firms with more opportunities to be heard, FINRA Enforcement will now:

• Communicate with firms and individuals before issuing Cautionary Action Letters so that those firms and individuals can hear preliminary findings and provide context or challenge any conclusions prior to the determination of the informal disciplinary resolution.
• Reach out to firms or their counsel in non-exigent matters prior to issuing Rule 8210 requests for information to give those parties an opportunity to clarify the scope of the requests, set expectations, and ask questions.
• Increase the time for Wells responses to 30 calendar days so that potential respondents can make more meaningful submissions. 

St. Louis indicated that the above are “just initial steps” and that Enforcement has future plans to clarify its approach for granting credit for cooperation and remediation, update information on its website about checks and balances in the enforcement process, describe how it seeks information through Rule 8210 requests, explore alternatives to on-the-record testimony as appropriate, and publish an enforcement manual.

The improvements can be viewed in more detail here.