Richard Ketchum, Chairman and CEO of the Financial Industry Regulatory Authority, announced in FINRA’s 11th annual Regulatory and Examination Priorities Letter, published earlier this week, that “firm culture, ethics and conflicts of interest … remain a top priority for FINRA.” Mr. Ketchum elaborates further about the importance of “culture.” He says: “A firm’s culture contributes to, and is also a product of, a firm’s supervision and its approaches to identifying and managing conflicts of interest and the ethical treatment of customers. Given the significant role culture plays in how a firm conducts its business, this year the letter addresses how we will formalize our assessment of firm culture to better understand how culture affects a firm’s compliance and risk management practices.”
As today is TBT—Throw-back Thursday—all of his references to “culture” made us think about Culture Club, the UK rock band formed in 1981 (that’s 35 years ago!). According to various histories of the band, with Boy George, an Irish cross-dresser, as the lead singer, a black Briton on bass, an Anglo-Saxon on guitar and keyboards, and a Jewish drummer, the group decided to call themselves Culture Club. Certainly that puts an exclamation point on the importance of culture!
The Wall Street Journal, reporting on the Priorities Letter, commented that the “heightened focus on culture is meant to go hand-in-hand with a deeper dive into sales practices at [brokerage] firms, including how firms are managing conflicts of interest that arise from selling certain investment products.” The article states that “another area of firm culture that has raised regulatory eyebrows has been how discipline is meted out among high-producing and low-producing advisers.” FINRA’s scrutiny may cause firms to shy away from giving their registered reps second chances when violations of the firm’s policies and procedures are discovered.
Mr. Ketchum also said that FINRA’s emphasis on culture is closely aligned with supervision, another area of focus for 2016. He urges brokerage firms to review their supervisory, risk management and control systems as part of their overall compliance programs. At the same time, Ketchum insists that FINRA is not going to be overly prescriptive or attempt to hold brokers to a one-size-fits-all standard for what an appropriate culture should look like. He said, “Our goal is not to dictate a specific culture, but rather to understand how each firm’s culture affects compliance and risk management practices.”
In an attempt to provide some objective criteria to evaluate firm culture, the Priorities Letter states that FINRA will focus on five indicators of a firm’s culture: whether control functions are valued within the organization; whether policy or control breaches are tolerated; whether the organization proactively seeks to identify risk and compliance events; whether the supervisors are effective role models of firm culture; and whether sub-cultures (such as at a branch office or trading desk) that may not conform to overall corporate culture are identified and addressed.
With FINRA’s promise to closely examine firm culture, brokerage firms may be well advised to consider adopting as their theme song Culture Club’s 1982 hit, “Do You Really Want to Hurt Me?”