Creating & Articulating Firm Culture For FINRA

FINRA executives have been speaking regularly about conflicts of interest, firm culture and professional ethics. Firm cultural values have a profound influence on how a broker-dealer conducts its business, including how it manages conflicts of interest.  A culture that consistently places ethical considerations and client interests at the center of business decisions helps protect investors and the integrity of the markets. Conversely, many of the problems observed in the financial services industry have their roots in firm cultural values and the culture inherent in the business they choose to accept.

While a focus for FINRA for many years, FINRA formalized its focus on firm cultural values earlier this year when it announced its targeted exam letter on establishing, communicating and implementing cultural values.  FINRA’s goal is not to dictate firm culture or  to develop enforcement cases, instead, their goal is to better understand industry practices and determine whether firms are taking reasonable steps to properly establish and implement their own cultural values within the firm.  Based on FINRA’s findings, and knowing firms’ practices in this area, and the challenges they face, FINRA intends to develop potential guidance for the industry and determine other steps that could be taken.

FINRA will concentrate  on the frameworks that firms use to develop, communicate and assess conformance with the culture.  The focus is on five indicators of a firm’s cultural values.

  • Whether control functions are valued within the organization;
  • Whether policy or control breaches are tolerated;
  • Whether the organization seeks to proactively identify risk and compliance events;
  • Whether supervisors are effective role models of firm culture; and
  • Whether firms identify and address sub-cultures – such as the culture at a branch office, a trading desk or an investment banking department – that may not conform to the overall corporate culture.

As FINRA is formalizing their assessment of firm and industry cultural values, they will continue to blend it with an overlay of conflicts of interest, ethics and trade practices.  Knowing this, and the fact that targeted exam letters have historically evolved into FINRA exam items, member firms need to look at their businesses and determine how they will articulate their cultural values to FINRA at some point in the future.