FINRA’s Focus on Firm Culture

What’s Happening:

FINRA’s February Targeted Exam Request letter focused on firm culture and its relationship to conflicts of interest. The letter has raised concerns among some firms that there is an expectation there should be a defined statement about the culture of the firm, a process to assess the status of the firm culture in the activities of employees, and documentation of breaches of the firm culture.

In a recent meeting of the San Francisco Compliance Roundtable with members of FINRA and the SEC, the concerns of members were somewhat allayed by the regulators.  Members were concerned that regulators were expecting culture to be defined and assessed with violations tracked with a reporting process in place at all firms. In other words, are written supervisory procedures for culture required?

Members were told FINRA is really trying to gain an understanding of how firms define culture, if there is any process to assess the acceptance of that culture throughout the firm, and to consider any breaches of the culture when considering employee performance. Firms should expect FINRA to provide a report about this request.

While the recent Roundtable led members to believe FINRA will not require written policies and procedures specific to firm culture, the members did agree that culture is established at the top and flows down through all levels of the firm’s employees, and is extremely important. Culture, or the firm’s ethical basis – because culture is the other side of the ethics coin – will inform an understanding and awareness of potential conflicts of interest.

What You Should Do:

In anticipation of this regulatory focus on culture, firms should consider ensuring that a formal statement of the firm’s culture and ethics is reviewed and acknowledged by all employees.

Firms should consider how to define their culture:

  • What culture does the firm want employees to represent internally with colleagues, and externally with clients?
  • Does management want to write any of its “culture” imperatives down?
  • How much dialog and discussion about culture will take place?
  • How will that relate to the identification and management of the conflicts of interest?

Oyster Consulting can assist a firm in creating and documenting a code of ethics or culture statement that discusses more than rules, and develop a program to manage conflicts of interest. This program will include an inventory of potential conflicts and a process for education and ultimately management of those conflicts.

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