FINRA Focused On Firms’ Culture

FINRA culture

(TradersMagazine) BrokersDealers, get ready for your culture check close-up.

As FINRA examiners make their rounds this year, they will put firms’ culture under the microscope. Wall Street’s chief regulator is turning its attention to the tone set by senior leaders and supervisors, asking whether the culture they create supports compliance, risk management and ethical conduct throughout the  brokerdealer organization.

The industry regulator last week published its annual letter outlining its examination priorities for the new year, putting the industry on notice that, along with firm culture, FINRA examiners will be looking broadly at issues around supervision and liquidity, as well as a host of other areas ranging from cybersecurity to how brokers work with elderly clients.

In a statement accompanying the exam-priorities letter, FINRA CEO Richard Ketchum explains that the focus on culture comes in response to the failure of too many firms to establish a compliance-driven ethos that rejects self-dealing and where brokers and advisors consistently place clients’ interests ahead of their own.

“Nearly a decade after the financial crisis, some firms continue to experience systemic breakdowns manifested through significant violations due to poor cultures of compliance,” Ketchum says. “In 2016, 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.”

Not One-Size-Fits-All

While FINRA says that it plans to “formalize” its method for assessing a firm’s culture in 2016, the industry regulator insists that it is not going to be overly prescriptive and hold brokers to a one-size-fits-all standard for what an appropriate culture should look like.

“Our goal is not to dictate a specific culture, but rather to understand how each firm’s culture affects compliance and risk management practices,” Ketchum says.

At the same time, FINRA is working toward a more objective set of criteria to evaluate the culture of a firm, and says that it will complete the review of incentives and conflicts of interest in the retail brokerage sector that it began late last year. Through those sweep exams, FINRA has been collecting information on how firms navigate conflicts of interest in areas like proprietary products and the compensation structure for registered reps.

The mechanism for evaluating a firm’s culture that FINRA expects to finalize in 2016 will draw on five criteria:

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 immediate managers are effective role models of firm culture

Whether sub-cultures (such as at a branch office or trading desk) that may not conform to overall corporate culture are identified and addressed
FINRA explains that it expects firms to take “visible actions” to mitigate conflicts of interest and promote the clients’ interests, and to adopt a zero-tolerance policy for violations of the organization’s protocols.

Additionally, FINRA intends to focus on the four areas where it has observed firms falling down in their supervisory procedures: Conflicts of interest, Technology, Outsourcing, and Anti-money laundering programs.

Cybersecurity will be a chief focus as examiners review firms’ technology operations. Officials at FINRA and the SEC have been warning the industry to sharpen its focus on protecting information systems and client data in the face of constantly evolving and widely varied cyber threats.

“While many firms have improved their cybersecurity defenses, others have not — or their enhancements have been inadequate,” FINRA cautions in its letter.

This article originally appeared on the website of Traders’ sibling publication Financial Planning.

Regulators Call For More Disclosure When It Comes to BrokerDealers’ Fees update courtesy of JD Supra Business Advisor from 9 January.

In September, state securities regulators formed a working group aiming to make brokerdealers’ disclosures about their fees more clear, accessible, and useful to investors in comparing different firms’ charges. The group plans to finish its work by next fall, and will consider, for example, developing

  • a model fee disclosure form;
  • guidelines on accessibility, transparency, and uniform use of terminology; and
  • recommendations on how to notify customers of fee changes.

In addition to representatives of the North American Securities Administrators Association (NASAA), the working group includes representatives of FINRA, the Securities Industry and Financial Markets Association, the Financial Services Institute, and several brokerdealer firms. NASAA President Andrea Seidt said “the working group will take into consideration … wirehouse firms, independent brokerdealers, clearing firms, and introducing firms, among others.

Earlier this year, a NASAA report on its survey of 34 brokerdealer firms recommended the working group’s formation. The survey found a wide disparity of brokerdealer fee disclosure practices. However, that survey, and certain enforcement actions that preceded and partially motivated it, focused particularly on certain problematic fee disclosure practices. For example, some firms allegedly hid the true amount of their compensation for securities transactions by charging unreasonable markups for what they disclosed as “handling,” “postage,” “delivery of securities in certificated form,” or “miscellaneous.” The survey also focused particularly on fees firms charge for closing accounts or transferring account securities to another firm.

Against this background, the working group may focus primarily on disclosure issues regarding a limited number of specific fee types. Alternatively, the working group may seek a more comprehensive approach.

In any case, some of the practices addressed by NASAA’s survey and the working group may involve legal violations. Brokerdealers would be well advised to review their own practices with that in mind.


BrokerDealers Beware: Watch Your Step Before You Skip (To a New Firm) blog post courtesy of extract from 11 August column by Mason Braswell

investmentnewslogoBrokerage firms may be monitoring their brokers’ investment accounts for signs that a broker is about to jump ship.

Firms have long monitored brokers’ personal trading accounts for signs of suspicious trading activity. But certain behaviors — such as large withdrawals, moving assets into the accounts owned by family members or suddenly liquidating shares in proprietary products — may also suggest that a broker is planning to switch to another firm.

Indeed, brokers who make big changes to their accounts in anticipation of a job change run the risk of being fired or even facing legal consequences, said Sharron Ash, chief litigation counsel at the Hamburger Law firm, which specializes in representing brokers in transition.

“It’s certainly something that brokers who are planning a transition have to be cognizant of,” she said. “If it falls into the broader basket of anything out of the ordinary it could throw up a red flag.”

Brokers are required to custody their personal investment accounts, and those of their immediate family, at the firms they work for.

Those who are planning to quit often withdraw large sums ahead of the move to cover transition costs, such as paying for property when starting their own office. Also, brokers that owe money on large upfront recruiting loans may also withdraw funds in an attempt to thwart their firms from freezing their assets after they quit.

Liquidating positions in funds held by their firm is frequently done in advance of a move because those products may not transfer easily.

Firms do not take such moves lightly. Continue reading