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.