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“It’s Not a Culture War” – Yet?

Posted in Broker-Dealer Regulation, FINRA Enforcement, Investment Adviser Regulation

On May 23, 2016, at FINRA’s annual conference in Washington, D.C., Richard Ketchum, FINRA’s chairman and CEO, delivered a speech that shed a little light on FINRA’s recent sweep letter relating to firm culture (see our recent blog post for more information regarding the sweep letter).

According to Mr. Ketchum, FINRA remains principally in a fact-finding posture at present, and is not yet ready to enact culture-related rules or engage in culture-related disciplinary actions.  It remains to be seen, of course, whether such developments may occur in the future.

Mr. Ketchum stated that “While it isn’t FINRA’s goal to prescribe the culture for the industry or to determine the values a firm and reps should have, we think it’s essential that the securities industry embrace a culture that puts investors first.”  He noted that the “fiduciary evolution” impacts how firms interact with clients, and placed FINRA’s interest in firm culture in the context of its recent focus on conflicts of interest and compensation practices.

Mr. Ketchum emphasized the importance of firm culture, stating that “a culture that doesn’t value ethical behavior has led to compliance failures for firms and significant harm to investors.”  In addition, he noted that “[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,” thereby helping to maintain investor confidence in the markets.

In particular, Mr. Ketchum said FINRA continues to examine:

  • how a firm identifies and addresses deviations from its standards of conduct;
  • hiring practices that result in some firms having substantial concentrations of representatives with a  history of disciplinary problems;
  • whether a firm’s executive officers lead by example, setting the “tone at the top” and establishing and maintaining a proper culture; and
  • compensation arrangements and supervisory structures that may be more likely to lead to a poor culture, with resulting harm to customers.

Notwithstanding the lack of clear guidance regarding what a firm’s culture should look like, it is clear that a firm’s culture will remain an important part of FINRA’s future monitoring of broker-dealers.