Targeted Examination Letter on Establishing, Communicating and Implementing Cultural Values

February 2016

Firm culture has a profound influence on how a broker-dealer conducts its business, including how it manages conflicts of interest. 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. Conversely, failures in these areas can impose significant harm on investors and the markets as well as firms themselves. One estimate places fines and litigation costs to firms, or their parent companies, related to cultural failures at over $300 billion since 20101. This underscores the critical importance of firms establishing and implementing strong cultural values

FINRA is reviewing how firms establish, communicate and implement cultural values, and whether cultural values are guiding business conduct. As part of this review, we plan to meet with executive business, compliance, legal and risk management staff of your firm to discuss cultural values. We would also like to discuss how your firm communicates and reinforces those values directly, implicitly and through its reward system. We are particularly interested in how your firm measures compliance with its cultural values, what metrics, if any, are used and how you monitor for implementation and consistent application of those values throughout your organization.

One definition of "firm culture" is the set of explicit and implicit norms, practices and expected behaviors that influence how employees make and carry out decisions in the course of conducting the firm's business2. Your firm may have its own definition of "firm culture" that it can use to prepare for our meeting and respond to this letter.

This inquiry is not an indication that FINRA has concerns about your firm's culture or has determined that your firm violated any rules or regulations. Rather, our goal is to better understand industry practices and determine whether firms are taking reasonable steps to properly establish and implement their own cultural values within the firm. 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.

In preparation for our meeting, we request that your firm submit the following information (or indicate instances where the requested information is not available) to FINRA by March 21, 2016:

  1. A summary of the key policies and processes by which the firm establishes cultural values. In the summary, include whether this is a board-level function at your broker-dealer or at the corporate parent of the firm. If it is a board-level function, describe the board's involvement. Also, provide a description of any steps you have initiated or completed in the past 24 months to promote, strengthen or change your firm's culture.
  2. A description of the processes employed by executive management, business unit leaders and control functions in establishing, communicating and implementing your firm's cultural values. Include a description of how executive management communicates, promotes and establishes a "tone from the top" as it relates to cultural values (to the extent not covered by the previous question). Include a description of the firm's approach to ensure that its cultural values are adopted and applied by middle management.
  3. A description of how your firm assesses and measures the impact of cultural values (to the extent assessments and measures exist) and whether they have made a difference at your firm in achieving desired behaviors. Provide a summary of the policy statements, procedures, mission statements or other related documents that reflect your firm's assessments and measures.
  4. A summary of the processes your firm uses to identify policy breaches, including the types of reports or other documents your firm relies on, in determining whether a breach of its cultural values has occurred. Please focus your summary on those activities your firm considers to be directly related to reinforcing its culture.
  5. A description of how your firm addresses cultural value policy or process breaches once discovered. What efforts are used to promptly address these policy or process breaches? What is the escalation process to surface and resolve such breaches?
  6. A description of your firm's policies and processes, if any, to identify and address subcultures within the firm that may depart from or undermine the cultural values articulated by your board and senior management?.
  7. A description of your firm's compensation practices and how they reinforce your firm's cultural values.
  8. A description of the cultural value criteria used to determine promotions, compensation or other rewards. Describe opportunities for promotion to the managing director or equivalent level available to personnel of your compliance, legal, risk and internal audit functions.

1. McLannahan, Ben, "Banks' Post Crisis Legal Costs Hit $300bn." The Financial Times, June 8, 2015

2. See, FINRA's 2016 Regulatory and Examination Priorities Letter dated January 5, 2016