FINRA released its 2016 Exam Priorities yesterday, and its top priority ventures into a very grey area. FINRA has announced that beginning this year, it will formalize a process of assessing “firm culture”. In doing so, FINRA appears to be focused primarily on ethics and conflicts of interest and insists that it “does not seek to dictate firm culture”.
FINRA has defined “firm culture” as “set of explicit and implicit norms, practices, and expected behaviors that influence how firm executives, supervisors and employees make and implement decisions in the course of conducting a firm’s business.” In its assessments, FINRA plans to focus on five indicators of acceptable firm culture:
- 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 (e.g., at a branch office, a trading desk or an investment banking department) that may not conform to overall corporate culture are identified and addressed.
While FINRA’s intentions are well-placed, this level of micromanagement is unprecedented. Assessment of company values and culture is inherently subjective, which makes it difficult for a government regulator to assess and enforce. Thus, it will be interesting to see how FINRA actually develops its formal evaluation of firm culture.