The Financial Industry Regulatory Authority issued new guidance on what firms will be expected to discuss regarding their firm’s cultural values when they meet with FINRA this month.
As Compliance Week previously reported, FINRA recently released its 2016 Regulatory and Examination Priorities letter highlighting a variety of issues, including a new focus on how firms establish, communicate and implement cultural values, and whether cultural values are guiding business conduct. “In our assessments, FINRA will focus on the frameworks that firms use to develop, communicate and evaluate conformance with their culture,” the letter stated. According to FINRA, a firm’s culture is connected to how it identifies and manages conflicts of interest and ensures the ethical treatment of customers.
In particular, FINRA said it will assess five indicators of a firm’s culture, including whether:
Control functions are valued within the organization;
Policy or control breaches are tolerated;
The organization proactively seeks to identify risk and compliance events;
Immediate managers are effective role models of firm culture; and
Sub-cultures that may not conform to overall corporate culture are identified and addressed.
In its new guidance, FINRA said it plans to meet with business, compliance, legal, and risk executive to discuss how firms communicate and reinforces values directly, implicitly and through its reward system. “We are particularly interested in how your firm measures compliance with its cultural values, what metrics, if any, are used and how you monitor for implementation and consistent application of those values throughout your organization,” FINRA stated.
In preparation for the meeting, firms must submit the following information (or indicate instances where the requested information is not available) to FINRA by March 21, 2016:
A summary of the key policies and processes by which the firm establishes cultural values. In the summary, include whether this is a board-level function at your broker-dealer or at the corporate parent of the firm. If it is a board-level function, describe the board's involvement. Also, provide a description of any steps you have initiated or completed in the past 24 months to promote, strengthen or change your firm’s culture.
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. Include a description of how executive management communicates, promotes and establishes a “tone from the top” as it relates to cultural values (to the extent not covered by the previous question). Include a description of the firm’s approach to ensure that its cultural values are adopted and applied by middle management.
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. Provide a summary of the policy statements, procedures, mission statements or other related documents that reflect your firm's assessments and measures.
A summary of the processes your firm uses to identify policy breaches, including the types of reports or other documents your firm relies on, in determining whether a breach of its cultural values has occurred. Focus your summary on those activities your firm considers to be directly related to reinforcing its culture.
A description of how your firm addresses cultural value policy or process breaches once discovered. What efforts are used to promptly address these policy or process breaches? What is the escalation process to surface and resolve such breaches?
A description of your firm’s policies and processes, if any, to identify and address subcultures within the firm that may depart from or undermine the cultural values articulated by your board and senior management?
A description of your firm’s compensation practices and how they reinforce your firm's cultural values.
A description of the cultural value criteria used to determine promotions, compensation or other rewards. Describe opportunities for promotion to the managing director or equivalent level available to personnel of your compliance, legal, risk and internal audit functions.
“This inquiry is not an indication that FINRA has concerns about your firm’s culture or has determined that your firm violated any rules or regulations,” the agency said. “Rather, our 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."
"Knowing firms’ practices in this area and the challenges they face,” FINRA added, “will help FINRA develop potential guidance for the industry and determine other steps that could be taken.”