In its January 2016 annual exam priorities letter, FINRA announced that it would examine the "compliance culture" at member firms.
In furtherance of that goal, in February 2016, FINRA issued a "sweep letter" to members requesting information that is designed to inform FINRA about how member firms establish, communicate and implement cultural values.
In announcing the sweep, FINRA stated:
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, failures in these areas can impose significant harm on investors and the markets as well as firms themselves.
FINRA plans to meet with executives from across a recipient firm's business, including compliance, legal, and risk management staff, to discuss cultural values. In preparation for these meetings, FINRA has requested explanations and materials relating to a variety of matters that FINRA believes relate to firm culture before March 21, 2016.
FINRA states that its goal is to better understand industry practices and determine whether member firms are taking reasonable steps to properly establish and implement their cultural values. Knowing firms' practices in this area, and the challenges firms face, will help FINRA develop potential guidance for the industry and determine other steps that could be taken.
Culture, it seems to us, is an ill-defined concept which is difficult to mandate, so it will be interesting to see what conclusions FINRA draws from this sweep. Ultimately, the issues that appear to be driving this sweep are longstanding concerns about the duties that broker-dealers owe their customers, and how compensation and management systems impact dealings with customers. In the meantime, recipient firms should take the time to ensure that executives across the firm can speak knowledgeably about what the culture is — including the compliance culture — and why it makes sense for that firm.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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