CSG Law Alert: The Truth About Credit for Cooperation in FINRA-Land
Last week, the Acting Director of the SEC’s Division of Enforcement, Sanjay Wadhwa, gave a speech in which he highlighted the Division’s ongoing efforts to encourage the industry to cooperate in its investigations by awarding credit for cooperation. Wadhwa touted the benefits of the Division’s approach to handing out credit for cooperation:
It benefits the firms who will likely resolve an SEC investigation more quickly and with reduced sanctions; it benefits the Division to resolve cases more quickly and efficiently so we can focus resources elsewhere; but most importantly, it benefits investors who are no longer at risk from the conduct at issue and who are protected from improved proactive compliance efforts going forward.
In his accompanying written remarks, Wadhwa cited a dozen cases in fiscal year 2024 alone in which the SEC awarded credit for cooperation. The message of these cases, according to Wadhwa, is: “work with us and we’ll work with you.”1
Wadhwa’s remarks beg the question of whether FINRA has followed suit in awarding credit for cooperation. The short answer is no.
FINRA advertised its credit for cooperation policy to “incentivize” cooperation.
On July 19, 2019, FINRA issued a press release announcing that it had updated its guidance concerning when, and under what circumstances, it would award credit for a respondent’s “extraordinary cooperation.” In the related notice, Regulatory Notice 19-23, FINRA stated that it had updated its guidance to “incentivize firms and associated persons to voluntarily and proactively assist FINRA.” FINRA stated that in each case where it gave such credit, it would include a new section in the Letter of Acceptance, Waiver, and Consent (AWC), entitled “Credit for Extraordinary Cooperation,” to demonstrate to the industry the benefits of cooperation.
FINRA, however, rarely gives credit for cooperation.
Since its July 2019 press release, FINRA has brought more than 3,500 disciplinary actions. It has granted credit for cooperation 25 times. In other words, FINRA has granted credit for cooperation in less than 0.8% of the cases it has filed. Even that number is likely inflated as 10 of the 25 cases in which FINRA granted credit for cooperation were brought pursuant to FINRA’s 529 Share Class Initiative, a legacy program FINRA launched in January 2019 in which FINRA offered credit for cooperation to firms that self-reported pursuant to the terms of the initiative. Putting that special, one-time initiative aside, FINRA has granted credit for cooperation in just 15 cases, or less than 0.3% of its disciplinary actions.
FINRA does not give credit for cooperation to small firms.
Statistically, small FINRA member firms outnumber large firms by a ratio of 19 to 1.2 Yet, since July 19, 2019, FINRA has granted credit for cooperation to 23 large firms and only one small firm. Notably, that “small” firm was a subsidiary of a large, multi-national financial services and consulting firm with more than $50 billion in annual revenue.
Upon closer inspection, credit for cooperation seems to be reserved almost exclusively for the largest of the large firms. FINRA has awarded credit for cooperation to 18 total firms since July 19, 2019. Eight of those 18 firms are among the largest FINRA member firms—the so-called “wirehouses.” Indeed, two wirehouses received credit for cooperation four times, each. Put another way, two wirehouses received credit for cooperation eight times in five years while, during the same period, nearly 3,000 small firms received credit for cooperation just once.
FINRA does not give credit for cooperation to individuals.
Since July 19, 2019, FINRA has issued more than 2,000 AWCs against individuals. In that time, FINRA has never granted credit for cooperation to an individual. In fact, although FINRA historically granted cooperation credit to individuals, it has not done so in more than a decade.
What does this all mean?
The numbers strongly suggest that FINRA rarely gives credit for cooperation and, even then, only bestows it upon the largest of its member firms. Does this mean that FINRA is biased towards large firms? Not necessarily. There are several reasons why FINRA could grant credit for cooperation more often to large firms. For example, it might be that large firms more frequently find themselves in the crosshairs of FINRA Enforcement. And cases against large firms are more likely to involve complicated restitution analyses, a fact pattern often implicated in cases where credit for cooperation is given.
However, if FINRA’s goal in issuing Regulatory Notice 19-23 was to “incentivize” firms and associated persons to cooperate, its actions have not matched its words. As the above numbers demonstrate, the odds that FINRA will award credit for cooperation to an average member firm are about the same as the odds of an average person being struck by a meteorite.3 The odds of FINRA awarding credit for cooperation to an individual are even worse than that.
1 Remarks at Securities Enforcement Forum D.C. 2024 (Nov. 6, 2024).
2 FINRA separates its member firms into three categories—small, medium, and large—based on the firms’ population of representatives: small firms = 1-150 representatives; medium firms = 151-499 representatives; and large firms = 500 or more representatives. According to FINRA’s 2024 Industry Snapshot, in 2023, there were 2,945 small firms and 155 large firms.
3 Meteorites, Impacts, and Mass Extinction, Stephen A. Nelson (April 27, 2018) (“It is estimated that in any given year the odds that you will die from an impact of an asteroid or comet are between 1 in 3,000 and 1 in 250,000.”).