Quantifying a “Culture Of Compliance”

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By Alex Russell, Head of Research

We’ve often been asked the question, “Which securities product causes the most enforcement actions?” To formulate our answer, we undertook a deep analysis of the data available to us in our RegTelligence® database.  In examining all the available regulatory enforcement actions through year end 2015, it became clear that “No Product” was actually the “product” that caused the most enforcement actions. With regulators shifting their attention to the culture of financial services firms, this insight gains additional importance.

What are “No Product” cases?

No Product cases often involve Supervision and Reporting issues. For example, in 2015, one firm settled a matter for $650,000 where FINRA alleged that the firm “failed to establish, maintain and enforce reasonable supervisory systems and written procedures regarding outgoing wire transfers and branch check disbursements from customer accounts.” On the reporting side, another firm settled a FINRA matter in 2015 for $2,000,000 related to the impact of intercompany transfers on the firm’s Net Capital position. Other common culprits of “No Product” cases are communications/advertising, commissions/fees, anti-money laundering issues, and misrepresentation of investment risk/strategy.

Culture of Compliance

“No Product” cases regularly account for one third of all enforcement actions, and we expect that number to rise, as one of FINRA’s stated 2016 priorities revolves around assessing firm culture. FINRA also recently released a letter requesting information regarding firm culture, including:

 A description of how your firm addresses cultural value policy or process breaches once discovered. What efforts are used to promptly address these policy or process breaches? What is the escalation process to surface and resolve such breaches?

Many aspects of firm culture show up in “No Product” cases, such as Supervisory and Procedural deficiencies and Improper Use of Information, as shown in the graphic below. As a result, if FINRA does in fact bring “culture of compliance” enforcement actions in 2016, we expect the “No Product” category to grow as a share of all cases.

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We invite you to visit Bates Group’s Booth #24 at the 2016 National Society of Compliance Professionals (NSCP) Conference on October 17-19th in Washington D.C., or contact us to speak with a Bates Compliance Solutions representative.