FINRA's 2016 Focus on Supervision, Liquidity and Securities Firms' Culture

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 emphasise 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 market wide 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.

“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.”

FINRA will formalise 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 organisation;
  • 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.

Lavanya Rathnam

Lavanya Rathnam is an experienced technology, finance, and compliance writer. She combines her keen understanding of regulatory frameworks and industry best practices with exemplary writing skills to communicate complex concepts of Governance, Risk, and Compliance (GRC) in clear and accessible language. Lavanya specializes in creating informative and engaging content that educates and empowers readers to make informed decisions. She also works with different companies in the Web 3.0, blockchain, fintech, and EV industries to assess their products’ compliance with evolving regulations and standards.

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