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It's the Culture, Stupid, Part II

By Dennis Stubblefield of Shustak Reynolds & Partners, P.C. posted on Friday, May 27, 2016.

Dennis A. Stubblefield

Dennis A. Stubblefield


FINRA CEO Rick Ketchum just delivered what will undoubtedly be his swan song to the industry (he will likely step down later this year). His remarks last week at the SRO’s Annual Conference were all about “culture.” But, unlike so much feel-good blather about ethics these days, Ketchum’s remarks put a lot of meat on the backbone structure of how FINRA expects its member firms to conduct themselves. Drawing from FINRA’s now well-established units focusing on behavioral economics and big data/analytics, Ketchum explored three key areas: “group-think versus individual standards of right or wrong, our winner-takes-all culture, and the importance of tone from the top.”

Ketchum set the stage by reminding the audience of what has come before---most recently, FINRA’s January 2016 guidance to firms, which was also focused on firm culture. As we blogged then, FINRA takes its “Management 101” responsibilities seriously, and thus made clear to BDs in its January piece that it would be measuring firms’ commitment to culture along five specific metrics. Ketchum recapped those metrics in his annual remarks, and suggested that FINRA was seeing mixed results by firms so far in measuring up. 

Ketchum also flagged hiring and compensation practices for special evaluation: “[FINRA is] using … data and advanced analytics to identify [reps] with potentially problematic regulatory histories,” stating that “[they] could be ‘negative culture carriers.’” He explained that such persons could potentially seed a negative sub-culture at firms.

Ketchum invoked movies and music to make an equally important point: that FINRA is accountable too. Graham Nash’s “Teach Your Children” was key to Ketchum: “…those of us on the road ‘…need a code we can live by.’” He went on to suggest the outlines of such a code for FINRA itself to live by, emphasizing that the overarching goal is all about the customers: “Without [FINRA] asking the question ‘how is each action we take justified because it will increase our ability to protect investors’ we risk fundamentally losing our compass.”

Ketchum clearly intended that this admonition be taken to heart by firms. As we observed recently, one of the best ways to execute smart and effective compliance is called “management by walking around.” So, while the experts in social science, economics and data analytics have a lot to bring to the table, there is no substitute for good old-fashioned, one-on-one interaction by firm leaders and managers with their troops, and with their retail customers. Ideally such engagement should involve at least speaking in complete sentences, ideally live and in-person, eyeball-to-eyeball, and ideally with the verve and vigor and humor attendant to good communication.

Mr. Stubblefield served with the SEC’s Enforcement Division from 1977 through 1984. He heads the Securities Enforcement Defense practice at Shustak Reynolds & Partners, P.C., whose attorneys represent investment advisers, stockbrokers, brokerage firms and investors in claims involving employment and promissory note disputes, investment disputes, and FINRA and SEC regulatory matters. Contact us today for a confidential analysis of your situation.

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