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Tuesday, February 23 2016

FINRA Exams Look at Compliance Culture

Last month FINRA announced their exam priorities for 2016. One of the more notable priorities was that they would be looking at the firms’ commitment to a strong ethical culture.  How exactly does FINRA plan to examine this firm culture? I am sure many people have posed this same question so FINRA recently released guidance regarding this new examine priority.

FINRA will be reviewing how firms establish, communicate and implement cultural values, and whether these cultural values are guiding business conduct. To help accomplish this, FINRA will meet with executive business, compliance, legal and risk management staff to discuss cultural values and how the firm communicates and reinforces those values to everyone through its reward systems. FINRA will be looking specifically to see if the firm has metrics in place to measure compliance with their cultural values and to monitor implementation and consistent application of compliance values throughout the organization.

In preparation for these meetings, FINRA has stated they will be requesting the following information:

  1. “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.
  2. 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.
  3. 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.
  4. 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. Please focus your summary on those activities your firm considers to be directly related to reinforcing its culture.
  5. 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?
  6. 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?.
  7. A description of your firm’s compensation practices and how they reinforce your firm’s cultural values.
  8. 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.”