Last week, Bill St. Louis, FINRA’s Executive Vice President of FINRA’s Enforcement Department, published a blog titled “Enhancing Our Enforcement Program.” The post emphasizes FINRA’s intention to improve its efficiency and enhance transparency within the enforcement process. To FINRA’s credit, we have already observed FINRA’s implementation of certain positive initiatives such as the mandatory status updates. And while some of the described measures may seem like common practice to experienced counsel (e.g., pre-Wells discussions), FINRA’s efforts to make such practices systemic will ensure consistency for members. Moreover, Mr. St. Louis announced a new pilot program that could drastically improve efficiency and previewed planned improvements, including FINRA publishing an enforcement manual for the first time.
Rule 4530(b) Pilot Program
FINRA Rule 4530(b)requires firms to promptly report to FINRA “after the member has concluded or reasonably should have concluded that an associated person of the member or the member itself has violated any securities-, insurance-, commodities-, financial- or investment-related laws, rules, regulations or standards of conduct of any domestic or foreign regulatory body or self-regulatory organization.” Historically, FINRA has generally initiated an investigation in response to such filings.
Mr. St. Louis announced a pilot program whereby in lieu of launching a formal investigation, FINRA would, in certain matters, coordinate with the reporting firm as it completes its internal review. The member firm would remain in contact with FINRA staff, giving regular status updates on the progress and ultimate outcome of its internal investigation. The pilot program is designed such that, depending on the findings and any remediation undertaken by the firm, a full Enforcement investigation may be avoided.
The program has the potential to significantly alleviate the burden of investigations and reduce unnecessary duplication of effort by both FINRA and member firms. To realize the value of the program, firms should:
- Consider the timing of the 4530(b) filing to account for the possibility that a complaint, exam or other action could trigger a FINRA investigation prior to the filing.
- Be prepared to contact FINRA to request participation in the pilot. To maximize chances of success, develop a plan to complete the internal review and demonstrate sufficient resource commitments (internal and external).
Mr. St. Louis’ post did not indicate whether participation in the program might reduce or eliminate liability relating to the relevant violations, but he did announce a plan to clarify Enforcement’s approach to granting credit for cooperation and remediation in the coming months.
Enhanced Communication Measures
Mr. St. Louis also discussed three meetings that Staff will have with potential respondents throughout the Enforcement process. Each will allow Enforcement staff to provide explanations of the investigation and its findings and give potential respondents the opportunity to be heard with regard to their view of the facts and any necessary context. The meetings will occur at the inception of a new Enforcement matter, prior to the issuance of a Cautionary Action Letter, and at the conclusion of an investigation, in a pre-Wells context. It is true that FINRA’s Enforcement staff have commonly extended the courtesy of such discussions, which have been invaluable to our clients and many others. FINRA’s shift to mandating such meetings into the enforcement program will ensure the potential value of the discussions is consistently available.
Mr. St. Louis also highlighted last year’s implementation of quarterly contact between Enforcement Staff and member firms. Regulatory investigations can extend over many months and even years. We expect these updates will not only ensure more consistent communication during the investigation but will also encourage both FINRA staff and investigation subjects to make meaningful progress between updates.
Finally, FINRA has increased the standard time to provide a Wells response from 14 days to 30 days. Once again, even though FINRA staff has generally consented to extensions in the past, the extension of the baseline reflects FINRA’s stated objective of affording potential respondents increased opportunity to communicate their positions. Conversely, of course, potential respondents and their counsel should be mindful that FINRA’s ability (or appetite) to extend the response date may be more limited.
Looking Forward
The measures discussed by Mr. St. Louis are based in Enforcement’s intentions to support FINRA Forward. Of course, good intentions don’t always bear fruit. Execution of the enhanced measures will be key. For example, will mandatory pre-Wells meetings transform them into “check-the-box” items instead of opportunities to earnestly digest the other party’s positions? Frankly, our recent experiences with FINRA’s Enforcement staff make us optimistic. We hope that the passage of time not only brings the additional planned enhancements, such as an enforcement manual, but also consistent execution designed to maximize the benefit of the new measures.
