New Year, New Priorities

FINRA sets the tone for 2016 with a focus on firm culture


It’s that time of year again. The decorations are put away, resolutions are in full swing and the U.S. Financial Industry Regulatory Association (FINRA) has released the 2016 Regulatory and Examination Priorities Letter. While the regulatory body continues the theme from 2015 with a continued focus on cybersecurity and senior investors, the letter emphasizes firm culture, conflicts of interest and ethics.

In the letter released on January 5, FINRA cites a few overarching themes – supervision, risk management and controls, and liquidity. Exams will focus on anti-money laundering, cybersecurity and technology management. Liquidity planning and controls as they relate to business model will also come into focus.

Other priority areas return to some of the items from the 2015 letter, such as firm monitoring of excessive concentrations and recommendations, especially in the realm of complex products (FINRA considers a variable annuity a complex product), seniors and vulnerable investors, private placements, fixed-income securities and operational controls.

The 2016 letter paints a much broader picture, however. Policies and procedures are still at the forefront, but a firm’s attitude toward compliance seems to be the centerpiece of the regulatory body’s emphasis. The focus on firm culture delves into what FINRA Chairman and CEO Richard Ketchum calls “systemic breakdowns through significant violations due to poor cultures of compliance.”

Concentrating further on how a firm’s culture impacts compliance and risk management practices, “FINRA will be looking for firms to focus on their culture and whether it is putting customers first and promoting risk management adaptable to a changing business environment,” says Ketchum. “Firms with a strong ethical culture and senior leaders who set the right tone, lead by example and impose consequences on anyone who violates the firm’s cultural norms are essential to restoring investor confidence and trust in the securities industry.”

In the letter, FINRA defines firm culture as “the 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.” The formalized assessment will encompass five indicators:

  • Whether control functions are valued within the organization;
  • Whether policy or control breaches are tolerated;
  • Whether the organization seeks to identify risk and compliance events;
  • Whether immediate managers are effective role models of firm culture; and
  • Whether sub-cultures that may not conform to the overall corporate culture are identified and addressed.

FINRA believes that a firm’s culture both impacts and is derived from it’s supervisory system, and states that “firms should take visible actions that help mitigate conflicts of interest, and promote the fair and ethical treatment of customers.” Supervision is at the heart of this, and carries over from the 2015 areas of focus.

In 2016, FINRA will continue the sweep begun the previous year with regard to conflicts of interest, including sales based on incentives, aggressively cross-selling products. They will also look at firm disciplinary actions as they relate to “high” and “low” producing representatives. According to Ketchum, an appropriate culture means “ensuring an environment where there isn’t a separate standard for high-producing” individuals.

Suitability and concentration also take center stage yet again, with a recurring focus on complex products (including variable annuities). FINRA draws attention to shortcomings in training, product review committees, and due diligence responsibilities on the part of the registered representative. One of the major focuses for 2016 will be in excessive concentration, and the regulator will focus more heavily on firm policies surrounding concentration and suitability determinations. As an example, FINRA “will assess whether registered representatives adequately consider, for example, such factors as credit risk, duration and leverage as relevant to specific fixed-income, complex and alternative products.”

Seniors and vulnerable investors also return to the spotlight in 2016, as FINRA reiterates the need for diligence in protecting these investors from abusive sales practices, exploitation and fraud. FINRA’s senior investor helpline, which launched in April of 2015 has received more than 2,500 calls, and has worked with firms to voluntarily reimburse nearly $750,000. In 2016, FINRA compels firms to aggressively monitor investor accounts for potential red flags and urges registered representatives to maintain a vigilance concerning their elderly clients.

Outside activities still has a priority place in the new year, as well. Firms are encouraged to monitor outside activities with an eye toward conflicts of interest, including influence and financial gain. FINRA’s focus will be on firms’ review and assessment of outside activities and whether customers have been harmed due to failures to follow Rules 3270 or 3280.

Altogether, FINRA’s priority letter for 2016 looks quite a bit like the one for 2015, but the differences take the spotlight. Firm culture – how it impacts the functioning of the firm’s business units, and how it translates to the field – will be paramount this year, and probably for years to come. The best way to prepare is to know the rules, follow them and ask questions when necessary. Here’s to a happy, prosperous and uneventful 2016!









Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s