The Financial Industry Regulatory Authority advised some broker-dealers through a targeted exam letter that it will soon meet with them to learn how they establish, communicate and implement their cultural values. In particular, FINRA seeks to determine how BDs reinforce their cultural values through compensation and how they monitor “for implementation and consistent application of those values” throughout the organization. FINRA implied it considers a good firm culture one “that consistently places ethical considerations and client interests at the center of business decisions.” FINRA has requested from each BD with whom it will meet, among other documents, a summary of key policies by which the BD establishes cultural values, and a description of the processes by which the firm (1) communicates and implements cultural values; (2) assesses and measures the impact of such values; (3) identifies breaches; (4) employs compensation to reinforce cultural values; and (5) identifies and remedies subcultures within the firm that do not follow the firm’s cultural standards. All documents must be provided to FINRA by March 21, 2016, or a selected firm must disclose that such documents do not exist. Identified BDs were alerted by FINRA that “[t]his inquiry is not an indication that [it] has concerns about your firm’s culture or has determined that your firm violated any rules or regulations.” Instead FINRA suggested it is solely seeking information to develop potential industry guidance.
Culture and Ethics: FINRA’s reflection on the elements of what constitutes an exemplary compliance culture superficially sounds good, but saying that a good compliance culture is one “that consistently places ethical considerations and client interests at the center of business decisions” is fraught with danger. Regrettably, not all client interests are legitimate, and a broker that only does what clients want will likely run into regulatory problems at some point. At a minimum, only legitimate client interests should be honored. In addition, elevating ethical considerations to the center of business decisions sounds noble, but, in the end, there may be disagreement among reasonable persons as to what constitutes appropriate ethical standards. It is far better for companies to mandate that their employees endeavor at all times to comply with the spirit let alone the letter of all applicable legal and regulatory requirements. But, in any case, the danger of regulating and micromanaging (including quantifying) compliance culture is that something surely will be missed and the proverbial forest will be lost but for the trees. Firms should mandate the application of a far more simple and direct test to ensure good culture: the grandmother test. If you would be embarrassed to sit at breakfast with your 90-year-old grandmother when she picks up her morning tabloid and reads about your conduct on the front page, don’t do it! It’s simple, but it works – at least for most grandmothers!