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Bates Research  |  02-26-16

FINRA and the Culture of Compliance

As foreshadowed in their 2016 Priority Letter, FINRA has begun examining--in the form of inquiry letters--the idea of a "culture of compliance." The letter, which went out to a dozen broker-dealers, provides some insights into how FINRA will be looking at the role of firm culture in preventing bad behavior. As they note: "One definition of ’firm culture’ is the set of explicit and implicit norms, practices and expected behaviors that influence how employees make and carry out decisions in the course of conducting the firm's business." The letter also makes it clear that the firms targeted were not selected because "FINRA has concerns about your firm's culture or has determined that your firm violated any rules or regulations," but that this is an information-gathering exercise only (at this point). FINRA is looking for answers to eight questions, which appear in abbreviated form below:

1. A summary of the key policies and processes by which the firm establishes cultural values.

2. A description of the processes employed by executive management, business unit leaders and control functions in establishing, communicating and implementing your firm's cultural values.

3. A description of how your firm assesses and measures the impact of cultural values (to the extent assessments and measures exist) and whether they have made a difference at your firm in achieving desired behaviors. [emphasis added - This one seems to be of particular interest for FINRA's long term goal of developing guidance for the industry, i.e., you can't control what you can't measure.]

4. A summary of the processes your firm uses to identify policy breaches, including the types of reports or other documents your firm relies on, in determining whether a breach of its cultural values has occurred.

5. A description of how your firm addresses cultural value policy or process breaches once discovered.

6. A description of your firm's policies and processes, if any, to identify and address subcultures within the firm that may depart from or undermine the cultural values articulated by your board and senior management.

7. A description of your firm's compensation practices and how they reinforce your firm's cultural values.

8. A description of 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 your compliance, legal, risk and internal audit functions. [emphasis added - It's clear FINRA believes compliance deserves a bigger seat at the table; FINRA CEO Richard Ketchum noted before that he sees progress in this area as "...compliance is more frequently being invited to participate in a more meaningful way..." but there is room to improve.]

FINRA plans to meet with "...executive business, compliance, legal and risk management staff of your firm" to discuss the "culture of compliance" after reviewing the answers to the aforementioned eight questions. In FINRA's view, firm culture, and how compliance is viewed from the top of the organization down, may be able to play a key role in ensuring that brokers do good work for their clients (beyond what can be accomplished through regulatory mandates alone). How to audit a "culture of compliance" creates an additional challenge that FINRA is now taking its first steps to understand.