Most of us know that culture is a topic that is regularly discussed in the C-suites of many companies. Rightly so, if you want to build a firm that is successful in recruiting, retaining employees and servicing clients’ financial needs. The tricky thing about culture is this: We all want a good one, but how do you quantify it? Can you create it? And, more importantly, can it be audited?
FINRA believes all of the above are possible, and the organization has recently launched a target examination of over a dozen broker/dealers to do just that—a fairly audacious attempt by most standards. The information request, released on the regulatory side of the FINRA website, asks for eight pieces of information and provides a specific definition of culture to set the stage for the exam: “...the set of explicit and implicit norms, practices and expected behaviors that influence how employees make and carry out decisions in the course of conducting the firm’s business.”
Compliance culture has been an area of concern in FINRA’s Annual Exam Priorities for years, not to mention any speech given by FINRA boss Richard Ketchum in the years since we learned that banks weren’t too big to fail, after all. Culture, and therefore compliance, must come from the top down. The regulators are aware that no number of draconian rules written by lawyers in Washington can ensure that representatives do good work for their clients like a firm’s intolerance of unethical behavior. In short, if firms did not put up with questionable business practices or mendacious representatives, there would be none.
The questions asked in this target exam are a window into FINRA’s expectations on how firms must develop “cultural values,” which the savvy will read as “compliance culture.” Below are the eight items of information FINRA is requesting in the exam and the compliance interpretation of each request.
A summary of the key policies and processes by which the firm establishes cultural values.
FINRA is not looking for your written supervisory procedures, but how your firm sets the framework for addressing rules, risk management and values. Has your executive management or your board of directors published specific values or principles that employees and supervisors can incorporate into your firm’s day-to-day policies and procedures? If there are a set of written core values that everyone in the firm can rely on, corporate direction and decisions should be consistent and predictable.
A description of the processes employed by executive management, business unit leaders and control functions in establishing, communicating and implementing your firm’s cultural values.
Does your CEO publicly require a standard ethical approach of business managers, or is your CCO developing policy and struggling to have units within the firm maintain adherence to it? Is the boardroom invested in developing principles that representatives and employees need to conform to, or is leadership only interested in the expansion of revenue projections? The most important takeaway of this item is that FINRA wants to see the boardroom and C-suite leading by example in living the corporate culture so that the importance of culture is seen and felt by everyone in the firm. Anything less cheapens the message.
A description of how your firm assesses and measures the impact of cultural values (to the extent assessments and measures exist) and whether they have made a difference at your firm in achieving desired behaviors.
If you cannot measure something, it doesn’t exist. Culture needs to be assessed like any other metric. Is your culture helping your business? Hurting it? FINRA is looking for insight on how firms assess the business impact of their culture. The unasked question here is how committed is a firm to its ethical culture if the culture constricts income.