Earlier this year, FINRA issued a sweep letter, requesting information regarding member firms’ compliance culture. In the letter, FINRA explained that it launched a targeted examination in which it will be reviewing how firms establish, communicate and implement cultural values, and whether those values are guiding business conduct. FINRA has determined that firm culture has a profound influence on how a broker-dealer conducts its business, including how it manages conflicts of interest. A firm’s failures to consistently place ethical considerations and client interests at the center of business decisions can impose significant harm on investors and the markets as well as firms themselves. As a result, FINRA is planning to meet with executive business, compliance, legal and risk management staff to discuss cultural values.
Firm culture can be defined as “‘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 business.’” Firms are allowed to have their own definition of firm culture that can be used to prepare for their meeting with FINRA and in drafting a response to the sweep letter. FINRA Chairman and CEO Richard G. Ketchum stated in a speech at FINRA’s annual conference, that “brokers with checkered backgrounds can undermine a firm’s culture and turn it into a place that harms investors.”
Some jurisdictions have already begun following FINRA’s lead by electing to send out their own sweep letter. For example, the Massachusetts Securities Division recently sent a sweep letter to firms asking broker-dealers to report information about their hiring policies and procedures. Firms with more than 15% of representatives with at least one current misconduct report on their records received a letter from the Secretary of the Commonwealth William Galvin. Galvin stated that the purpose of the sweep was to determine how the industry is meeting its responsibility to protect investors by keeping rogue brokers out of the industry.
In light of FINRA’s increased scrutiny of firms with rogue brokers, firms should carefully consider their hiring policies and practices related to brokers who have engaged in misconduct.
About Red Oak Compliance Solutions
Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes.