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FINRA to Assess Member Firms’ Culture

Securities Transactions and Compliance   |   Financial Services Regulatory   |   Securities and Derivative Litigation   |   FINRA Litigation, Enforcement and Investigations   |   June 30, 2016
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Speaking at the Brookings Institution this April, FINRA head Richard Ketchum emphasized the importance of a broker-dealer having a "culture" that favors the firm’s customers when their interests conflict with those of the firm or its personnel.

Ketchum’s remarks echoed FINRA views expressed in a variety of contexts over many months. For example, FINRA’s January 5 "Regulatory and Examination Priorities Letter" for 2016 stated that it would "formalize" its assessment of firm culture, which it defined as“the set of 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.

In February, FINRA did formally initiate an assessment via a targeted examination letter that it sent to several firms. The letter advised that FINRA planned to meet with a broad spectrum of the firm’s executives to discuss the firm’s cultural values and how the firm "communicates and reinforces those values directly, implicitly and through its reward system."

To provide background for these discussions, the letter asked the firm a series of specific questions. FINRA is "particularly interested in how [the] firm measures compliance with its cultural values, what metrics, if any, are used and how you monitor for implementation and consistent application of those values throughout your organization."

FINRA’s objective is to "develop potential guidance for the industry and determine other steps that could be taken." Although the January 5 letter says FINRA "does not seek to dictate firm culture," it also states that an understanding of a firm’s culture will "inform" FINRA’s evaluation and the "regulatory resources" it devotes to the firm. And Ketchum told Brookings: "[W]e will continue to work with firms to ensure the industry fully embraces a culture that puts investors first." 


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