Finra asks 8 questions to assess a firm's 'culture'

Regulator launches target examination to gauge values and how they influence brokerages' ability to adhere to securities rules

Feb 18, 2016 @ 1:10 pm

By Mark Schoeff Jr.

Finra has launched a target examination designed to evaluate brokerages' “firm culture.”

The Financial Industry Regulatory Authority Inc. posted on its website Thursday the examination letter, which outlines eight questions the organization's examiners will use to assess a firm's “cultural values” and how they influence its ability to adhere to securities rules.

Firms will be asked to summarize how they establish, implement and measure policies that form their culture, how they find and respond to compliance violations, and how they identify rogue “subcultures.”

Finra also will analyze how a firm's compensation practices influence culture as well as how culture determines promotions.

“Finra is reviewing how firms establish, communicate and implement cultural values, and whether cultural values are guiding business conduct,” states the examination letter, which was sent out on Wednesday. “We are particularly interested in how your 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.”

In the letter, Finra said there is not a set definition of culture and the agency is not targeting firms it believes are deficient in this area. Rather, it is trying “to better understand industry practices.”

The deadline for responses is March 21. The letter was sent to more than a dozen firms, according to Finra spokeswoman Nancy Condon. In addition, a culture review will be included in some other exams, she said.

In its examination priorities letter last month, Finra emphasized firm culture. Evaluating such an amorphous concept is “a brave new world,” said Todd Cipperman, principal at Cipperman Compliance Services.

“I have never heard of a regulator trying to regulate firm culture,” he said. “That's a lot for a regulator to bite off. It's tough because it's so subjective.”

Finra is taking the right approach by conducting a benchmarking exercise to determine where the industry stands, rather than launching right into enforcement efforts, said Mitch Kraskin, chief executive of Compliance Science.

“It's a good, very measured, thoughtful way of looking at this topic,” Mr. Kraskin said.

A top concern for Finra is compensation practices. The regulator will zero in on the practice of paying brokers more for placing clients in high-fee products, said Brynn Rail, counsel at Ropes & Gray.

“Finra will be interested in knowing that firms aggressively monitor the recommendations that their representatives are making and that the firm has policies and procedures in place to ensure that the recommendations are suitable for the customer to whom they are made,” Ms. Rail said.

She's not surprised by Finra's follow through on cultural questions, given the emphasis placed on them at Finra's annual conference last year.

“I probably heard the word 'culture' a thousand times,” Ms. Rail said. “It was the biggest theme of the conference.”

Brokerages should take the hint.

“If you haven't already been thinking about this, there's no better time than the present,” Mr. Kraskin said.


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