Compliance officers and management teams are advised to prepare for sharper attention to ethics and conduct in light of the Financial Industry Regulatory Authority's (FINRA) 2016 Regulatory and Examination Priorities Letter. FINRA has made it clear that it will be looking into messages from management, compensation programs, and an overall culture that encourages employees across the firm to "do the right thing" for their clients and the institution itself.
While "culture" and "ethics" are broad terms that may be difficult to examine, it is important that firms can demonstrate appropriate "tone from the top" and support for various control and compliance programs. In addition, firms should assess incentive programs to confirm that they encourage ethical behavior. This document can serve as a guideline for management in setting the right tone and for compliance officers in reviewing governance, compensation, and training programs to better meet regulatory expectations in these areas.
Ethics and Conduct Framework
FINRA defines ethics and conduct as the set of explicit and implicit norms, practices, and expected behaviors that influence how firm executives, supervisors, and employees make and implement decisions in the course of conducting the firm's business. The areas of scrutiny are frameworks firms use to develop, communicate, and evaluate conformance with their culture.
Five key indicators are:
Ethics and Conduct Risk
Firms should be aware of key areas of risk associated with ethics and conduct - performing a risk assessment in these areas can reduce overall risk and better prepare the institution for regulatory examination. Some areas of risk include:
Increased Regulatory Implications
Firms may pay a high price for ethics violations. In May 2015, FINRA's National Adjunctory Council (NAC) released updated Sanctions Guidelines for use in disciplinary proceedings involving FINRA member firms and associated brokers. The Guidelines follow the NAC's decision to review existing disciplinary guidelines and generally provide for tougher sanctions for violations of FINRA rules. FINRA explained that the Guidelines "harmonize the Sanction Guidelines with the current state of the cases in this area," but are not meant to prescribe fixed sanctions for particular violations.1
Actions to Consider
Firms can consider taking specific steps to demonstrate that they have made ethics and culture a high priority for the institution. Among these steps are:
Firms may consider an ethics and culture risk assessment process, including an incentive risk heat mapping program in order to review the current environment and benchmark against best practices and reporting recommendations. This process will enable the institution to demonstrate a systematic approach to ethics and culture across business units, geographies, and overtime. The goal is to maintain efficient regulatory compliance and stave off unwanted FINRA sanctions.
FINRA has placed a high priority on examining firms' behavior regarding ethics, conduct, and overall culture. The issues described in this Alert should be considered priorities by management and specifically by compliance functions within your organization.
Questions? Contact your Berdon advisor or Alexander Moshinsky
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