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It’s the Culture, Stupid: Additional Observations on Finra’s 2016 BD Guidance

By Paris Novinni of Shustak Reynolds & Partners, P.C. posted on Monday, January 11, 2016.

As we posted last week, FINRA has just published its 11th annual Regulatory and Examination Priorities Letter addressing emerging and existing risks that could have potentially adverse effects on investors and market integrity in 2016.

Some of the topics discussed this year echo concerns that FINRA has previously raised. In its letter, FINRA emphasizes that firm culture, ethics and conflicts of interest remain a top priority for the organization. Please see our recent article “How Can Firms Insure Against Affinity Fraud?” to compare last year’s letter and learn more about broker-dealer system and process issues which bear on firm culture.

In 2016, FINRA intends to formalize its assessment of firm culture in an attempt to better understand how culture affects business, compliance and risk management practices. FINRA will evaluate a firm’s culture using five metrics: whether control functions are valued within the organization; whether policy or control breaches are tolerated; whether the organization proactively seeks to identify risk and compliance events; whether supervisors are effective role models of firm culture; and whether sub-cultures that may not conform to overall corporate culture are identified and addressed.

In our view, this guidance reflects not only seemingly good “Management 101” practices at FINRA [at least at the top and near-top levels], but also a clear announcement to firms that they must also design and execute fundamental management system and process [including effective supervision and compliance] in order to achieve a culture consistent with a firm’s overarching obligations to its constituents. The fundamental point in our aforementioned Affinity Fraud article was that such practices by firms are also in their clear self-interest.

FINRA Rule 2010, ‘Standards of Commercial Honor and Principles of Trade,’ states: “[Firms], in the conduct of [their] business, shall observe high standards of commercial honor and equitable principles of trade.” In addition to FINRA’s extensive specific conduct rules, covering everything from unauthorized trading to outside business activities, this ethically-focused catch-all provision will continue to be important to FINRA in its regulatory and enforcement efforts, even where no other specific rule is necessarily implicated.

In light of the fact that this year will likely be the last at FINRA for long-time chairman and CEO Rick Ketchum (he recently announced that he will be stepping down), who began his lifelong industry-focused career with the SEC in the 1970s, it would not surprise us if FINRA uses its Examinations and Enforcement programs this year to influence fundamental shifts in the way firms do business.

Ms. Novinni is a legal intern with Shustak Reynolds & Partners, P.C. Shustak Reynolds & Partners, P.C. has extensive experience in the area of securities and financial services law and routinely counsels investors, brokers, broker-dealers and registered investment advisors.  For more information  contact Erwin J. Shustak, Esq, Managing Partner, at 619.696.9500 or via email at [email protected] or visit our web site at www.shufirm.com

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