FINRA & the Culture of Compliance

FINRA & the Culture of Compliance

FINRA examiners are looking for "Culture of Compliance"

The Financial Industry Regulatory Authority (FINRA) recently published its 2016 Regulatory and Examination Priorities Letter. For firms under FINRA’s purview, the document provides useful insight into where the organization plans to devote its resources.

FINRA focuses on "Culture of Compliance" in 2016

Of particular note for 2016, FINRA will specifically focus on firm culture, which it notes has “a profound influence on how a firm conducts its business and manages its conflicts of interest.”

In assessing whether a firm has a “culture of compliance,” FINRA’s letter explains that it will look at five key indicators:

  • 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.

Other key areas in the Culture of Compliance

Supervision, risk management and controls remain top priorities for FINRA. In 2016, FINRA plans to specifically address four compliance areas where it has “observed repeated concerns that affect firms’ business conduct and the integrity of the markets.” They are:

  • Conflicts of interest: FINRA will continue its targeted examination regarding incentive structures and conflicts of interest in connection with firms’ retail brokerage business. Another area of focus is whether firms’ research analysts are inappropriately involved in their investment banking activities and whether investment banking personnel exercise undue influence on analysts.
  • Technology: FINRA will focus on firms’ supervision and risk management related to cybersecurity, technology management, and data quality and governance.
  • Outsourcing: FINRA will review firms’ due diligence and risk assessment of providers of outsourced services and their supervision of those services.
  • Anti-Money Laundering: FINRA advises that firms should routinely test their systems for monitoring for suspicious activity to verify the accuracy of data sources and to ensure that all types of customer accounts and customer activity, particularly those that are higher-risk, are properly identified and reviewed.

Lastly, liquidity will remain a top area of focus in 2016. According to FINRA, it plans to review the adequacy of firms’ contingency funding plans in light of their business models. In its letter, FINRA points to Regulatory Notice 15-33, in which it advised that firms should “rigorously evaluate their liquidity needs related to both marketwide and idiosyncratic stresses, develop contingency plans so that they have sufficient liquidity to weather those stresses, and conduct stress tests and other reviews to evaluate the effectiveness of their contingency plans.”


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AboutDan Brecher

Dan Brecher's experience ranges from general counsel of New York Stock Exchange and NASD/FINRA member brokerage firms to representation of companies in hundreds of public and private securities offerings and advising institutional and high net worth investors.Full Biography

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