FINRA to Review BDs’ Cultural Values, Adherence to Them

How do broker-dealers establish and apply their cultural values? And do they guide those firms’ business conduct? The Financial Industry Regulatory Authority (FINRA) is conducting an inquiry to find out.

FINRA recently announced that it has sent a targeted exam letter to some firms in order to learn more about firm culture, which it defines as “explicit and implicit norms, practices and expected behaviors that influence how employees make and carry out decisions in the course of conducting the firm's business.” It is interested in firm culture because it believes that one that “consistently places ethical considerations and client interests at the center of business decisions” is best.

FINRA says that another reason for the inquiry is to help it to develop guidance and determine what other steps it could take. “Knowing firms’ practices in this area, and the challenges they face, will help FINRA,” says the announcement. It also wants to learn how firms communicate and reinforce cultural values directly, implicitly and through their reward systems.

According to McGuireWoods, the study is not universal; FINRA is targeting its inquiries.

The letters ask for the following information:

• a summary of the key policies and processes by which the firm establishes cultural values;

• a description of the processes executive management, business unit leaders and control functions employ in establishing, communicating and implementing the firm's cultural values;

• a description of how the firm assesses and measures the impact of cultural values (to the extent assessments and measures exist) and whether they have made a difference in achieving desired behaviors;

• a summary of the processes the firm uses to identify policy breaches;

• a description of how the firm addresses cultural value policy or process breaches once discovered;

• a description of the firm's compensation practices and how they reinforce its cultural values; and

• a description of the cultural value criteria used to determine promotions, compensation or other rewards.

The inquiries, which FINRA asks be returned by March 21, are a preparatory step before it meets with executive, business, compliance, legal and risk management staff of targeted firms to discuss cultural values.