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

Regulator launches target examination to assess compliance values and how they influence brokerages' ability to adhere to securities rules.
MAR 24, 2016
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.

Latest News

SEC charges Chicago-based investment adviser with overbilling clients more than $2.5M in fees
SEC charges Chicago-based investment adviser with overbilling clients more than $2.5M in fees

Eliseo Prisno, a former Merrill advisor, allegedly collected unapproved fees from Filipino clients by secretly accessing their accounts at two separate brokerages.

Apella Wealth comes to Washington with Independence Wealth Advisors
Apella Wealth comes to Washington with Independence Wealth Advisors

The Harford, Connecticut-based RIA is expanding into a new market in the mid-Atlantic region while crossing another billion-dollar milestone.

Citi's Sieg sees rich clients pivoting from US to UK
Citi's Sieg sees rich clients pivoting from US to UK

The Wall Street giant's global wealth head says affluent clients are shifting away from America amid growing fallout from President Donald Trump's hardline politics.

US employment report reactions: Overall better than expected, but concerns with underlying data
US employment report reactions: Overall better than expected, but concerns with underlying data

Chief economists, advisors, and chief investment officers share their reactions to the June US employment report.

Creative Planning's Peter Mallouk slams 'offensive' congressional stock trading
Creative Planning's Peter Mallouk slams 'offensive' congressional stock trading

"This shouldn’t be hard to ban, but neither party will do it. So offensive to the people they serve," RIA titan Peter Mallouk said in a post that referenced Nancy Pelosi's reported stock gains.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.