FINRA Turns Up Focus on the Values of a Firm

Firm culture—the attitudes that affect client interests and shape ethical considerations—has a profound impact on investor outcomes and market integrity, according to the Financial Industry Regulatory Authority (FINRA). Broker/dealers will be receiving letters that request a self-exam on the firm’s own values, as well as the practices and processes the firm uses to conduct itself.

In January, FINRA posted a letter about culture, conflicts of interest and ethics. While definitions of “firm culture” can depend on an organization’s specific definition, the self-regulatory organization explains that they use the term to refer to “explicit and implicit norms, practices, and expected behaviors that influence how firm executives, supervisors and employees make and implement decisions in the course of conducting a firm’s business.” One initiative FINRA has set for this year is formalizing its assessment of firm culture, while continuing its focus on conflicts of interest and ethics. 

On Thursday, FINRA outlined its priority for 2016: scrutinizing firm culture at broker/dealers, stating that how they conduct business, including managing conflicts of interest, is a direct outcome of the firm’s own culture. Ethic failures put both investors and the markets at risk, not to mention the firms themselves, FINRA says in “Establishing, Communicating and Implementing Cultural Values.” Failures in these areas can impose significant harm on investors and the markets as well as firms themselves. One estimate places fines and litigation costs to firms, or their parent companies, related to cultural failures at more than $300 billion since 2010—underscoring how critical it is for firms to establish and implement their own strong cultural values. 

FINRA says it will be reviewing how firms establish, communicate and implement cultural values, and whether cultural values are guiding business conduct. The self-regulatory organization plans to meet with executive business, compliance, legal and risk management staff at broker/dealers to discuss cultural values. FINRA also wants to discuss how the firm communicates and reinforces those values directly, implicitly and through its reward system.Of particular interest: how firms measure compliance with its cultural values; what metrics, if any, are used; and how they monitor for implementation and consistent application of those values throughout the organization.

This inquiry is not an indication that FINRA has concerns about a firm’s culture or has determined that the firm violated any rules or regulations, the self-regulator says. Rather, FINRA says, “our goal is to better understand industry practices and determine whether firms are taking reasonable steps to properly establish and implement their own cultural values within the firm. Knowing firms’ practices in this area, and the challenges they face, will help FINRA develop potential guidance for the industry and determine other steps that could be taken.”

FINRA requests firms to supply the following summaries and descriptions by March 21:

• A summary of the key policies and processes by which the firm establishes cultural values. In the summary, include whether this is a board-level function at the broker/dealer or at the corporate parent of the firm. If it is a board-level function, describe the board’s involvement. Also, provide a description of any steps initiated or completed in the past 24 months to promote, strengthen or change the firm’s culture.
• A description of the processes employed by executive management, business unit leaders and control functions in establishing, communicating and implementing the firm’s cultural values. Include a description of how executive management communicates, promotes and establishes a “tone from the top” as it relates to cultural values (to the extent not covered by the previous question). Include a description of the firm’s approach to ensure that its cultural values are adopted and applied by middle management.
• A description of how the firm assesses and measures the impact of cultural values (to the extent assessments and measures exist) and whether they have made a difference at the firm in achieving desired behaviors. Provide a summary of the policy statements, procedures, mission statements or other related documents that reflect the firm’s assessments and measures.
• What processes the firm uses to identify policy breaches, including the types of reports or other documents the firm relies on, in determining whether a breach of its cultural values has occurred. The summary should focus on those activities the firm considers directly related to reinforcing its culture.
• How the firm addresses cultural value policy or process breaches, once they are discovered. How are policy or process breaches addressed? What is the escalation process to surface and resolve such breaches?
• The firm's policies and processes, to identify and address subcultures in the firm that may depart from or undermine the cultural values articulated by the board and senior management.
• The firm's compensation practices and how they reinforce the firm’s cultural values.
• The cultural value criteria used to determine promotions, compensation or other rewards. Describe opportunities for promotion to the managing director or equivalent level available to personnel of the compliance, legal, risk and internal audit functions.