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February 18, 2016 at 02:21 PM
The Financial Industry Regulatory Authority said Thursday that it will begin targeted exams of broker-dealers’ “culture of compliance” and that BDs must tell the self-regulator how their compliance culture mitigates conflicts of interest by March 21.
FINRA plans to meet with BD executives in firms’ business, compliance, legal and risk areas to discuss their cultural values and how the BD “communicates and reinforces” those values “directly, implicitly and through its reward system” in eight specific areas.
“Firm culture has a profound influence on how a broker-dealer conducts its business, including how it manages conflicts of interest,” FINRA stated in the targeted examination letter posted on its website.
“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,” FINRA said, whereas failures “in these areas can impose significant harm on investors and the markets as well as firms themselves.”
FINRA cited an estimate that found fines and litigation costs to firms, or their parent companies, related to cultural failures had reached more than $300 billion since 2010.
Richard Ketchum, FINRA’s chairman and CEO, told ThinkAdvisor in an interview in January that reining in brokers’ conflicts is a top exam priority for FINRA this year.
Ketchum said that “firms have failed in managing their conflicts on too many occasions,” in discussing the release of the self-regulator’s 2016 regulatory and exam priorities.
In announcing the targeted exams on Thursday, FINRA said that the review will zero in on “how firms establish, communicate and implement cultural values, and whether cultural values are guiding business conduct.”
FINRA’s targeted exams show that the self-regulator “wants firms to have the clients’ best interests at heart rather than best profits as the driving force,” said Jon Henschen of the recruiting firm Henschen & Associates.
“Stock brokers that do active trading of stocks on a transactional basis have been a good example of a culture that had [put] the reps’ profits ahead of clients’ interests, with the large volume of litigation associated with such models evidence of that conflict,” Henschen explained in an interview.
The exam letter states that “knowing firms’ practices in this area, and the challenges they face” will help FINRA “develop potential guidance for the industry and determine other steps that could be taken.”
