FINRA Issues New Guidance on Credit for Extraordinary Cooperation in Investigations

December 5, 2008

Position on Waiver of Attorney-Client Privilege Follows Trend of DOJ, SEC

The Financial Industry Regulatory Authority ("FINRA") has recently provided guidance on the extent to which "extraordinary cooperation" by a firm or individual in an investigation can influence FINRA’s enforcement decisions.  In particular, with respect to waiver of the attorney-client privilege, the guidance states that waiver or non-waiver of the privilege will not be considered in whether to grant credit for cooperation, but rather it is the assistance in "uncovering the facts in an investigation" that will yield credit for cooperation.  In this respect, FINRA follows the trend recently set by the Securities and Exchange Commission and the Department of Justice.  Despite the guidance, however, questions remain whether a firm seeking to cooperate can provide to FINRA "facts" obtained in an internal investigation without risking waiver of the privilege.

Factors in Assessing Cooperation

FINRA has recognized extraordinary cooperation as an important factor in determining appropriate disciplinary action and sanctions.  FINRA’s guidelines recognize the following types of cooperation by a firm or individual:

  • Prompt, detailed, complete, and straightforward self-reporting of violations before any regulatory inquiry has begun and before the violation otherwise comes to the attention of the regulator.  What is envisioned here is self-reporting beyond regulatory reporting requirements.
  • Immediate, proactive steps to correct deficient procedures and systems, either before or after detection by FINRA.  For post-detection remediation, credit is limited to situations where the firm promptly and completely remediates the problem without prompting by FINRA (or another regulator or law enforcement agency), and where the remediation is taken early on, well before the completion of FINRA’s investigation.
  • Extraordinary remediation to customers, including promptly identifying injured customers and making investors whole, as well as proactively identifying and providing restitution to injured customers beyond FINRA’s investigation.
  • Substantial assistance to FINRA investigations.  Examples include: providing access to individuals or documents outside FINRA’s investigation; providing extraordinary assistance with the investigation, such as briefing FINRA on findings from internal investigations; and cooperating to uncover industry-wide or systemic wrongdoing, or apprising FINRA of wrongdoing beyond the scope of the original investigation.

For the most part, the factors identified by FINRA mirror those promulgated by the SEC[1] and DOJ[2] and continue a policy promulgated by the New York Stock Exchange.[3]  FINRA’s guidance is more detailed on the requirements for remediation of deficient procedures and systems than the SEC and DOJ have been, a fact reflective of FINRA’s role as a regulator.  Moreover, FINRA gives more concrete cooperation credit to "whistleblowers" that bring to FINRA’s attention a pattern or practice of which FINRA was unaware, or that are the first to come forward to cooperate in a widespread, industry-wide investigation.[4] 

On Waiver of the Attorney-Client Privilege

Like the SEC and DOJ guidance, FINRA’s new guidelines encourage companies to share the results of internal investigations, even those conducted by counsel, thus raising privilege concerns.  As explained in a recent Gibson Dunn client update, in response to increased Congressional pressure to ensure that corporations do not feel compelled to forfeit the protections of the attorney-client privilege and work product doctrine in order to receive full cooperation credit, DOJ recently issued sweeping changes to the factors federal prosecutors may consider in determining whether to bring criminal charges against business organizations.  The SEC also recently released new guidance on this issue, as part of its new Enforcement Manual, but the SEC guidance is less comprehensive than the DOJ’s. 

FINRA’s guidance, in line with that of DOJ and SEC, makes clear that FINRA recognizes the significance of the attorney-client privilege, and that accordingly, the waiver or non-waiver of the privilege itself will not be considered in connection with granting credit for cooperation.  What is important is that the relevant facts are disclosed to FINRA staff, and it is the extraordinary assistance to staff from uncovering these facts that warrants credit, not the waiver of any privilege.  Therefore, firms could still receive credit for cooperation if they find other ways to inform FINRA of pertinent facts related to internal investigations, without waiving the attorney-client privilege.

While the FINRA guidance on the question of privilege is not as thorough or detailed as that of DOJ, it leaves little doubt that FINRA recognizes the importance of the attorney-client privilege and that corporations can receive full credit for cooperating without having to waive the attorney-client privilege (we note that FINRA does not address the work product doctrine).  However, like the DOJ and SEC guidance, FINRA’s guidelines also make clear that a corporation may be required to disclose facts unearthed during an internal investigation, even when that investigation was conducted by counsel.  Disclosure of relevant facts learned in an attorney-led investigation could result in a judicial finding of waiver of privilege in future civil litigation.  Plaintiffs in such suits likely would argue that by disclosing facts learned during interviews of employees by the corporation’s lawyers—interviews that are traditionally protected as attorney-client communications and by the attorney work product doctrine—the corporation has waived privilege or work-product protection for any other aspect of those interviews or for the same subject matters covered by the witness statements. This risk should be carefully evaluated before such information is released for the sake of earning cooperation credit.

The FINRA guidance can be found on their website. 

 [4]   Even before the latest guidance, the NASD has stated in press releases announcing particular cases that it took into account a firm’s cooperation in determining the appropriate sanctions.  See, e.g.,

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Gibson, Dunn & Crutcher attorneys are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work or any of the following: 

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John H. Sturc
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New York
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