The Flaws and Implications of FINRA Culture Reviews

At the beginning of the year, when FINRA released its annual priorities letter, firm culture was set to take center stage for the 2016 year. FINRA laid out a review process more recently so it could have a more formal system for assessing broker-dealer culture.

But some finance industry experts aren’t completely on-board with FINRA’s approach, largely due to the subjective nature of culture.

Secondly, cultural reviews may not be an effective solution for eroding the non-compliant subcultures within firms that they are designed to address. But because these culture reviews are an approaching reality for broker-dealers, firms should start to prepare by implementing a surveillance solution and expanding the role of chief compliance officers.

Here’s how FINRA’s Culture Agenda Began

According to FINRA CEO Richard Ketchum, the agency’s decision to implement culture reviews came from a perceived link between culture and compliance. At a FINRA conference in May, Ketchum argued that a firm’s cultural values can provide key insights into how a firm would deal with compliance events, and he suggested that FINRA can help anticipate “compliance breakdowns” through culture reviews.

But many brokerage industry experts feel FINRA’s move to evaluate firm culture is problematic. The subjective nature of culture makes it impossible to evaluate. Regulatory bodies can’t lay down set boundaries in the same ways they approach things like trade regulations. The variability across firm cultures makes it challenging to deem one firm’s culture objectively sound and another’s noncompliant.

FINRA even acknowledged in a February letter that firm culture doesn’t have a single definition, but it seems to address this concern by focusing its review-related criteria on qualitative considerations. One of the questions for evaluees, for example, asks for “A description of how your firm assesses and measures the impact of cultural values.”

Many critics are also skeptical of the ability for culture reviews to actively reduce compliance issue, mainly because violations typically from a few rogue individuals instead of a firm-wide culture of noncompliance.

Three Steps for Creating a Compliant Culture

While culture is still highly subjective and FINRA’s reviews are criticized, it’s still important for compliance leaders to position their firms for good reviews, since culture is very much in the limelight.

Here are three key steps firms can take to improve culture:

  • Implement a top-down program: A strong firm culture begins with the leadership team. Firm leaders need to create and communicate a strong cultural vision throughout every level of the organization. Without a top-down structure, there won’t be a cohesive culture.
  • Build out the CCO role: As compliance continues to become more and more of a priority for firms, CCOs play an increasingly visible role in firm operations. Firm leaders should harness this evolving role to ensure that CCOs help instruct firm employees in compliant culture best practices.
  • Implement a trade surveillance solution: Firm leaders and CCOs should take advantage of trade surveillance solutions to identify and eliminate rogue, noncompliant trading practices.

There’s no denying the importance of a firm’s culture, but it’s still unclear whether FINRA’s culture reviews can effectively address compliance issues throughout firms. However, the reality of cultural reviews should prompt broker-dealers to place a greater importance on firm culture and the CCO role.