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FINRA Sweep Letter Focuses on Firm Culture

Saturday, June 11, 2016

Earlier this year, FINRA issued a sweep letter, requesting information regarding member firms’ compliance culture.  In the letter, FINRA explained that it launched a targeted examination in which it will be reviewing how firms establish, communicate and implement cultural values, and whether those values are guiding business conduct.  FINRA has determined that firm culture has a profound influence on how a broker-dealer conducts its business, including how it manages conflicts of interest.  A firm’s failures to consistently place ethical considerations and client interests at the center of business decisions can impose significant harm on investors and the markets as well as firms themselves.  As a result, FINRA is planning to meet with executive business, compliance, legal and risk management staff to discuss cultural values.

Firm culture can be defined as “‘the set of 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.’”  Firms are allowed to have their own definition of firm culture that can be used to prepare for their meeting with FINRA and in drafting a response to the sweep letter.  FINRA Chairman and CEO Richard G. Ketchum stated in a speech at FINRA’s annual conference, that “brokers with checkered backgrounds can undermine a firm’s culture and turn it into a place that harms investors.”

Some jurisdictions have already begun following FINRA’s lead by electing to send out their own sweep letter.  For example, the Massachusetts Securities Division recently sent a sweep letter to firms asking broker-dealers to report information about their hiring policies and procedures.  Firms with more than 15% of representatives with at least one current misconduct report on their records received a letter from the Secretary of the Commonwealth William Galvin.  Galvin stated that the purpose of the sweep was to determine how the industry is meeting its responsibility to protect investors by keeping rogue brokers out of the industry.

In light of FINRA’s increased scrutiny of firms with rogue brokers, firms should carefully consider their hiring policies and practices related to brokers who have engaged in misconduct.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry. It is a comprehensive suite of SEC 17A-4 compliant features that are 100% books and records compliant and provides clients with 35% faster approvals and 70% fewer touches or better. We also offer Smart Review(SM), which solves for the storage and maintenance of disclosures, helping firms reduce risk, decrease review times, and increase the speed of distribution of marketing materials. Smart Registration(SM) automates the licensing and registration management process to help reduce regulatory risk and time spent on manual processes. Overall, Red Oak allows firms to minimize risk, reduce costs, and increase compliance review process effectiveness and efficiencies.

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