FINRA’s 2016 Focus: Supervision, Liquidity and Securities Firms’ Culture

The role of ethics & conflict-of-interest also viewed

January 06, 2016 — WASHINGTON–(BUSINESS WIRE)–The Financial Industry Regulatory Authority (FINRA) today released its 2016 Regulatory and Examination Priorities letter highlighting three broad issues – supervision, risk management and controls; and liquidity.

The letter also emphasizes firm culture, conflicts of interest and ethics, and the significant role each of these plays in the way a firm conducts its business.

FINRA cites some overarching themes in the letter:

Supervision, risk management and controls – FINRA examinations will emphasize anti-money laundering, cybersecurity, the management of conflicts of interest and technology management, as well as outsourcing and data quality.

Liquidity – FINRA will review the adequacy of firms’ contingency funding plans both in light of their business model and in connection with testing for marketwide and idiosyncratic stresses. It will also evaluate high-frequency-trading firms’ liquidity planning and controls.

Other areas of priority in 2016 will include:

• firms’ monitoring of excessive concentrations and recommendations, particularly regarding complex, speculative or illiquid products;
• seniors and vulnerable investors;
• private placements and Regulation A+ offerings;
• fixed income securities, including excessive charges;
• market integrity, including the Vendor Display Rule, market access, fixed-income order handling, Regulation SHO, and manipulation across markets and products; and
• financial and operational controls relating to exchange-traded funds and fixed-income prime brokerage.

 

Poor culture of compliance

“Nearly a decade after the financial crisis, some firms continue to experience systemic breakdowns manifested through

significant violations due to poor cultures of compliance,” said FINRA Chairman and CEO Richard Ketchum. “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. Our goal is not to dictate a specific culture, but rather to understand how each firm’s culture affects compliance and risk management practices. 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.”

Culture, compliance & risk management

FINRA will formalize its assessment of firm culture to better understand how it impacts compliance and risk management. It will also complete the review begun in late 2015 regarding incentives and conflicts of interest in connection with firms’ retail brokerage business. In particular, FINRA will assess five indicators of a firm’s culture:

• 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; and
• whether sub-cultures that may not conform to overall corporate culture are identified and addressed.

 

FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, and informing and educating the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.