Earlier this year, FINRA released its annual Examination Priorities Letter, which offers its members a glimpse into what they can expect from examinations during the coming year. Click here for a link to the letter itself. For firms and individuals who are members of FINRA, this annual letter can also be a guide to the cases and issues that will shape FINRA enforcement actions in the future.
FINRA’s letter places its strongest emphasis on what it describes as “firm culture.” FINRA defines firm culture as a set of “explicit and implicit norms, practices and expected behaviors that influence how firm executives, supervisors and employees make and implement decisions in the course of conducting a firm’s business.” FINRA explains that it intends, through examinations, to understand how firm culture affects compliance and risk management practices. FINRA intends to focus on five questions in assessing a firm’s culture:
- Whether control functions are “valued” within the firm;
- Whether policy or control breaches are “tolerated” within the firm;
- Whether the firm seeks to identify risk and compliance events;
- Whether supervisors are effective role models of firm culture; and
- Whether sub-cultures (for example, at a particular trading desk or branch office) fail to confirm to firm culture.
The letter notes that a firm’s culture is “both an input to and product of its supervisory system.”
FINRA’s Emphasis on Culture in Exams, 8210 Requests and Enforcement Actions
Although FINRA’s emphasis on culture is not new, its prominence in the 2016 Priorities Letter represents a change. It seems reasonable to expect FINRA exams, Rule 8210 requests, and enforcement actions in 2016 (and beyond) to focus on a firm’s culture by seeking a responding firm’s policy or mission statements. FINRA will also likely seek information about how that culture is communicated and enforced. Member firms may want to consider which documents they would provide in response to a “culture” exam or 8210 request from FINRA. Then, once assembled, consider how the firm’s internal supervision and discipline looks in light of the statements about the firm’s culture. Future enforcement actions for alleged failure to supervise will likely include charges for either failing to create a culture of compliance or for failing to enforce a culture of compliance.