FINRA has sent a sweep letter to selected broker dealers in order to learn more about how firms “establish, communicate and implement cultural values,” and whether those values are guiding business conduct.  FINRA conducts sweeps like this periodically in order to gather information that it can then use in focusing its regulatory response to emerging or priority issues, and it specifically identified “firm culture” as an area of emphasis in its 2016 examination priorities letter.  Although the concept of firm culture was left undefined in the exam priorities letter, FINRA noted in the sweep letter that “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 firms’ business.”  The sweep letter appears designed to investigate what those norms and practices look like at present in the industry, as the regulator has expressed its desire to “better understand industry practices” and to “determine whether firms are taking reasonable steps to properly establish and implement their own cultural values within the firm.”  The issuance of the sweep letter appears to be FINRA’s first step towards what it described in the exam priorities letter as “formalizing” its assessment of firm culture.

As part of its review, FINRA will meet with executives, compliance and legal personnel and risk management staff at a small number of brokerage firms to discuss cultural values and how those firms communicate and reinforce their values within their organizations.  FINRA is “particularly interested” in how individual firms measure compliance with their own cultural values, what metrics (if any) are used, and how the firms “monitor for implementation and consistent application of those values” throughout the organization.  In advance of those meetings, FINRA has asked the firms selected for the targeted exam to provide it with a significant amount of thought-provoking information, including:

  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 the firm’s cultural values;
  3. A description of how the firm assesses and measures the impact of cultural values (to the extent assessments and measures exist) and whether they have made a difference at the firm in achieving desired behaviors;
  4. A summary of the processes the firm uses to identify policy breaches, including the types of reports or other documents on which the firm relies, in determining whether a breach of its cultural values has occurred;
  5. A description of how the firm addresses cultural value policy or process breaches once discovered, such as “what efforts are used to promptly address these policy or process breaches?” and “what is the escalation process to surface and resolve such breaches?”
  6. A description of the 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 the board and senior management; and
  7. A description of the firm’s compensation practices and how they reinforce the firm’s cultural values, including a description of the cultural value criteria used to determine promotions, compensation or other rewards.