The Financial Industry Regulatory Authority will continue to put a firm’s culture “front and center,” the self-regulator’s CEO, Richard Ketchum warned Monday, stressing that from an exam perspective, FINRA counts “culture as a factor that influences a firm’s risk profile” and that there’s also a “direct line between culture and the probability or severity of an enforcement action.”
Ketchum noted at FINRA’s annual conference in Washington that if a firm “does not produce requested documents and information on time, or fails to address examination exceptions, we view these as indicators of a poor culture.”
Also, he stressed, “the response or lack of response [from firms to examiner inquiries] certainly increases the likelihood of an enforcement action. Similarly, recidivist behavior can be an indicator of poor culture, and is certainly likely to result in more severe penalties.”
Ketchum also told reporters during a press briefing at the event that FINRA plans to consider in the “next month or two” further increasing BrokerCheck disclosures as well as acting on recommendations put forth by FINRA’s arbitration task force, particularly those dealing with expungement.
Speaking during a wide-ranging media briefing at FINRA’s annual conference in Washington, Ketchum – who said that his successor could be named as early as June — also said that while the Securities and Exchange Commission’s recent projected April 2017 date to release a fiduciary rule proposal “is a long way away,” it does suggest that SEC Chairwoman Mary Jo White “believes work on [the rule] should continue.”
Rules alone, Ketchum noted during his remarks, “cannot address the very real challenges that financial firms have in ensuring that ‘good people’ do not take actions that harm their clients and expose their firms. We know that the pressure to conform is powerful. If a group engages in unethical behavior, individuals are far more likely to participate in or condone that behavior rather than risk standing out. This idea suggests that institutional culture — and not just ‘a culture of compliance’ — is really important at firms.”
Ketchum — who will retire from his post this year once a successor is named — noted some preliminary results of the targeted exams of broker-dealers’ “culture of compliance” that the self-regulator announced in February.
BDs were told to tell FINRA by March 21 how their compliance culture mitigates conflicts of interest.
The review of culture will help the self-regulator “understand the behaviors and practices that can influence or permit compliance breakdowns,” Ketchum said.
FINRA is assessing five indicators of a firm’s culture: whether control functions are valued within the organization; whether the organization proactively seeks to identify risk and compliance events; whether policy or control breaches are tolerated; whether supervisors are effective role models of firm culture; and whether subcultures — such as those at a branch office, a trading desk or an investment banking department — that may not conform to overall corporate culture are identified and addressed.
“We are only at the beginning of our culture review, so it’s premature to draw any broad judgments,” Ketchum said. “While I can tell you that we have observed that many firms are paying more attention to their culture and how they manage conflicts of interest, there is still a lot of work to be done.”
He noted that as the review progresses, FINRA will incorporate what it learns from the review into “more articulated, formalized review procedures related to culture that examiners can draw on.”
FINRA’s exam team “will determine the specific areas of a firm that we look at using a risk-based approach,” he said.
Data analytics will also continue to be an “important tool” FINRA uses to address “poor culture and compliance breakdowns that influence a poor culture,” he said.
“Some firms in their responses to our culture review discuss the role of data and analytics in helping them measure and monitor their cultures. This might include, for example, creation of a ‘dashboard’ or similar type of tool that firms can use to assess culture. As we learn more about the approaches firms are taking, we will share effective practices that we observe.”
Ketchum noted during the press briefing the two compliance dates under the Department of Labor’s fiduciary rule — April 10, 2017, and January 2018. April “seems to me the right time to have an across-the-board fiduciary requirement. I’m glad it’s on the [SEC’s regulatory] agenda and I hope the Commission moves forward.”
However, “the differences in the [DOL and SEC] regulatory structures will be marked and difficult.”
FINRA will enforce DOL’s fiduciary rule, Ketchum continued, “but nevertheless questions remain.” The Securities Industry and Financial Markets Association along with the U.S. Chamber of Commerce, the Financial Services Institute and five other trade groups sent a letter to Senate leaders the same day asking them to pass S.J. Resolution 33, which would overturn DOL’s rule. The House has passed a similar resolution. Any measure to kill the rule that makes it to President Barack Obama’s desk will likely be vetoed.
FINRA’s Past, Future
Ketchum cited at the press briefing the most memorable achievements FINRA has made during his seven-year tenure as CEO. He noted FINRA’s “rethinking of its exam program, how we use data analytics” and the self-regulator’s progress in ensuring “escalation of serious fraud.”
However, “there’s tons more to go,” he added. “Regulation in the next five years is going to be about rapid response. We should be in an environment – and no that won’t happen with a centralized CARDS database — but we should be in an environment where we are pulling down more information on firms, identifying more quickly risks with respect to firms, whether it’s persons or products.”
Ketchum also noted that FINRA’s follow-up review of conflicts in compensation practices launched in 2015 “suggests that firms can do more to manage and mitigate conflicts related to compensation.”
FINRA is “nearing the end” of that review, he continued, “and while there’s still more work to do, we have found that the quality of new or amended policy, control and surveillance efforts that firms deploy in response to identified compensation conflicts of interest vary widely.”
As to the request from Sen. Elizabeth Warren, D-Mass., that Ketchum tell her by June 15 how the self-regulator plans to rein in broker misconduct, Ketchum told reporters that “the questions in the letter are completely fair,” and “we look forward to trying to respond to it.”
Warren was responding to a study of BrokerCheck data finding that more than 7% of advisors had a record of misconduct over a 10-year period. At certain firms, the percentages were much higher. At Oppenheimer & Co., the researchers found, nearly 20% of brokers had black marks on their records.
— Check out 6 DOL Fiduciary Tasks to Tackle Before First Deadline on ThinkAdvisor.