WASHINGTON -- FINRA's enforcement officials are willing to cut a break for firms that demonstrate "extraordinary cooperation."

Jessica Hopper, a senior vice president with FINRA's enforcement division, is urging firms to take the difficult but important step of informing the regulator when they detect serious compliance failures. Doing so, she said, not only fulfills a firm's regulatory responsibilities, but it can also mean the difference between a slap on the wrist and a steep fine, should the infraction elevate to an enforcement case.

"If a firm self-reports before FINRA shows up at [its] doorstep... that is meaningful," Hopper said here at FINRA's annual conference.

Hopper acknowledged that she understands a firm's "hesitation to raise your hand and come to FINRA," but she attributes part of that reluctance to a poor understanding about FINRA's policies.

"We're taking a fresh look at credit for cooperation and how we are going to be handling it," Hopper said. "I don't think there's as much clarity as people would like on the credit for cooperation."

Julie Glynn, general counsel at JPMorgan Chase, observed that firms really don't have a viable option apart from reporting the discovery of serious deficiencies, particularly given FINRA's Rule 4530, which "requires firms to promptly report specified events" within 30 days.

"I don't think that the calculus should ever be, will this get us out of an enforcement action, or an enforcement action without a fine, or any of those things," Glynn said. "There's an obligation -- a regulatory obligation -- to report, self-identify issues, full stop. And so that's really what firms should do, and you take your lumps as they come."

Still, FINRA officials acknowledged that many firms are wary of the regulator's enforcement process, and sought to offer reassurances that they are judicious and measured in the cases they bring.

Quote
In part, industry concerns about FINRA enforcement are stoked by the involvement of attorneys in cycle exams,

Christopher Kelly, regional chief counsel with FINRA's enforcement division, said that when a firm is referred to his team, the investigation is only beginning. Kelly, who served for nine years as a federal prosecutor before coming to FINRA, said that charging decisions at the regulator are vetted "at least as much as at the U.S attorney's office, if not more."

"One thing I think you should take comfort in is the amount of deliberation that goes into every one of the cases, even the small cases," Kelly said. "We understand that asking a broker to sit out for 30 days is a big deal for that broker, his family, potentially to his or her career, and something we give a lot of thought about."

In part, industry concerns about FINRA enforcement are stoked by the involvement of attorneys in cycle exams, as some observers have seen with the SEC.

But Hopper urged an audience of brokers to "understand proportion here," noting that enforcement attorneys often are brought in early on to help examiners focus their questioning and document requests "on the salient points, and not have a shotgun approach where we're asking for way more than we need or could use." But even those cases are a slim minority of FINRA's overall examination work.

"Let me give you some comfort that relative to the total volume of exams that happen during a year, a very, very, very, very small portion have enforcement attorneys who are going to be involved," Hopper said.

"On those matters," she added, "not every matter that has an enforcement attorney involved turns into a formal action."

FINRA offers a number of windows into the areas its areas of concern, including its annual the priorities letter that enumerates issues that exam staff will be scrutinizing.

Jeffrey Levine, managing director of legal and compliance at Mesirow Financial, also keeps a close eye on the cases that FINRA brings against other brokers as a measure of how his firm is doing.

"To me, enforcement cases are as valuable, if not more valuable, than the priority letters or anything else," Levine said. "It tells you where the problems are in the industry and it can make you think about not only just the actual issues being litigated, but really the principle behind it, [and] use it to fix your own program."

FINRA also makes a practice of publicly calling attention to certain issues when it announces sweeps, targeted exams that zero in on a particular industry practice, such as conflicts of interest or cybersecurity.

But Kelly admits that those somewhat "generic" announcements only go so far, and that it may not be readily apparent to a compliance officer how to incorporate the exam findings into the firm's operations.

In those instances, FINRA is offering its regional staff as a resource.

"Sometimes it can be hard to read into what exactly FINRA's looking at," Kelly said. "I think it's perfectly appropriate for you to call either the district director in your region or your regulatory coordinator and say, ‘Hey, what is FINRA really looking at here?’"

Register or login for access to this item and much more

All Bank Investment Consultant content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access