Government-Regulatory-and-Criminal-Investigations.jpgOn February 18, 2016, Financial Industry Regulatory Authority (FINRA) announced that it had issued a targeted exam letter, or sweep, to firms seeking information about how firms establish, communicate and implement cultural values.  FINRA’s stated goal “is to better understand industry practices and determine whether firms are taking reasonable steps to properly establish and implement their own cultural values within the firm.”  FINRA previously identified firm culture as one of its examination priorities for 2016, and the sweep is FINRA’s first step in focusing on the issue.

The exam letters ask the targeted firms to provide FINRA with eight categories of information before March 21, 2016, and to indicate instances where the requested information is not available. Those eight information requests can be broken down into three broad categories:

  • First, does the firm have policies and procedures to establish cultural values that create a “tone from the top”? The first two requests focus on setting policies on cultural values at the board-level and communicating those policies down the management chain.
  • Second, does the firm have metrics to assess compliance with the policies and procedures to deal with breaches of the cultural value policies? The next four requests focus on what firms have done to assess the success of their cultural value policies, how firms identify policy breaches, how firms deal with policy breaches, and how firms identify and address subcultures within the firm that might undermine the cultural value polices.
  • Third, does the firm incentivize compliance with the cultural policy? The final two requests focus on compensation related to compliance with cultural value policies, including whether “cultural value criteria” are used to determine promotion and set compensation.

The sweep letter is not meant to correct the targeted firms’ past practices, but instead FINRA has indicated that the information will “help FINRA develop potential guidance for the industry and determine other steps that could be taken.” Thus, firms should be aware that FINRA is actively taking steps to develop guidance in the area of firm culture, and firms should be thinking about their own firm culture.

Why is FINRA interested in firm culture? FINRA has stated 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. Firms also have an interest in ensuring that they have a strong firm culture.  FINRA cited a study that estimated fines and litigation costs related to cultural failures have cost firms more than $300 billion since 2010.

What is FINRA looking for? FINRA offered one definition of firm culture:  “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 should also take note that FINRA eschews applying a one-size fits all approach, noting that firms may have their own definition of firm value which they can use in responding to the sweep letter.

Given FINRA’s focus on the firm culture, now is a good time for all firms to take a look at their own policies and procedures to determine whether the firm has policies or processes in place that establish the firm’s cultural values.