New FINRA Culture Reviews May Be Well-Intentioned, but They Are Also Flawed

Maintaining a strong culture is important, but many finance experts have doubts about FINRA's approach.
By Nick Fera ,

As the Financial Industry Regulatory Authority (FINRA) explained in a January priorities letter, 2016 is the year that firm culture needs to take center stage. To address the issue, the industry self-regulator unveiled a review process to assess broker-dealer culture. The formalized process was designed to examine all angles of a firm's culture, including how it's established to the way it's communicated across a firm.

But while maintaining a strong culture should be a priority for all firms, finance industry experts are skeptical of FINRA's approach. Given the nebulous, subjective nature of firm culture, some argue that FINRA's proposal to regulate it through a uniform set of standards seems counterintuitive. In addition, critics argue that the authority's cultural reviews don't seem likely to eradicate or change significantly the non-compliant firm subcultures they were partly designed to address.

Still, because these culture reviews are an impending reality for broker-dealers, firms must proactively prepare through concrete steps that include implementing a top-down awareness program and expanding and enhancing the role of chief compliance officer.

The Intent of Culture Reviews

FINRA's outgoing CEO Richard Ketchum explained the agency's decision to implement culture reviews grew from a perceived link between culture and compliance. In a May address at a FINRA conference, Ketchum argued that an assessment of a firm's cultural values can provide key insight into how a firm would handle a compliance event. By reviewing firm culture, Ketchum suggested, FINRA can help preempt "compliance breakdowns."

While maintaining robust firm culture is important, many brokerage industry experts feel FINRA's response -- to implement formal cultural assessments based on a predetermined list of factors -- is problematic. Critics argue that the hazy nature of culture makes it impossible to evaluate in the same way that FINRA approaches its other responsibilities like trade regulation. For its part, FINRA acknowledged in a February letter that firm culture doesn't have a single definition, and that broker dealers can foster an individual culture while preparing for reviews.

Another problem FINRA faces in its cultural reviews is the issue of cultural subjectivity -- namely, that the variability across firm cultures makes it challenging to deem one firm's culture objectively sound and another's noncompliant. How can firms be guaranteed a fair, direct assessment when culture itself is subjective? FINRA seems to address this concern by focusing its review-related criteria on qualitative instead of quantitative considerations. One of the questions for those being evaluated, for example, asks for "a description of how your firm assesses and measures the impact of cultural values."

But critics are skeptical of the ability of culture reviews to actively reduce compliance issues. That's because violations often arise not from a firm-wide culture of noncompliance, but instead from the rule-breaking actions of a few individuals. The majority of the time, these individuals act deliberately, and they carefully calculate and conceal their transgressions. Firm-wide cultural standards would be unlikely to deter these bad apples from noncompliant activity.

Prioritizing Cultural Compliance

While FINRA's culture review process has its critics, it remains an impending reality for broker-dealers. Here are three key steps firm leaders can take to position themselves for a successful culture review:

  • Implement a top-down program: A strong firm culture begins at the top with a leadership team that devises a robust cultural vision and delivers that vision through every level of the organization. Without this top-down structure in place, firms won't be able to achieve a cohesive culture.
  • Build out the CCO role: The role of the Chief Compliance Officer is evolving, with CCOs playing an increasingly visible role in firm operations. Firm leaders should harness this expanded role to ensure that CCOs help instruct firm employees in compliance culture best practices.
  • Enact better trade surveillance: Finally, firm leaders should take advantage of trade surveillance solutions, since these resources can go a long way toward identifying and eliminating rogue noncompliant practices.

Next Steps for Broker-Dealers

There's no denying the importance of a firm's culture. The atmosphere that exists within a firm directly impacts how it conducts business and meets its clients' needs. Yet it remains to be seen whether FINRA's culture reviews can effectively address the security adherence problems that they were designed to curb. The reality of cultural reviews should prompt broker-dealers to approach firm culture with more energy and attention.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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