From the perspective of financial services regulation, the concept of company culture seems like a squishy thing that’s hard to measure, gauge, evaluate––and certainly, regulate. But it’s an emphases this year at the Financial Industry Regulatory Authority, which included culture as part of its regulatory and examinations priority letter in early January and made it the focus of a sweep letter sent to more than a dozen unidentified firms in mid-February.

In that letter, the brokerage industry regulator asked recipient firms to address eight points pertaining to their culture, and to submit replies to Finra by March 21.

A Finra spokesperson wouldn’t comment on what Finra’s next step in this process will be, other than to say that in addition to the letter a culture review will be included in some other examinations.

Which leads to the question: How do you define company culture?

“It’s like the Supreme Court case from years ago: can’t define it but I know it when I see it,” says Mitch Kraskin, CEO of Compliance Science, a New York City-based compliance specialist. He is referring to the famous “I know it when I see it” characterization of pornography attributed to U.S. Supreme Court Justice Potter Stewart a half-century ago.

“I think what Finra and the SEC are grappling with is you can have a whole bunch of rules in place that cover how people behave within an organization and with clients, but that’s different from culture,” Kraskin says. “Rules are rules, but culture is this broader topic."

"From a cultural standpoint, ethics and honesty is driven from the top. That’s the tone of the firm, that’s how you encourage your employees to conduct themselves when it comes to the business,” he adds.

Hardy Callcott, a partner at law firm Sidley Austin LLP’s office in San Francisco and whose practice focuses on regulatory issues in the financial services industry, notes that Finra did a report in 2013 on conflicts of interest, and that was after doing some targeted reviews.

“I suspect they’re aiming toward something like that here,” he says. “They need to get some benchmarking information, and eventually it will probably be something they look at across the industry.”

In its letter to broker-dealers, Finra said fines and litigation costs incurred by firms––or their parent companies––stemming from cultural failures were estimated at more than $300 billion since 2010. That fact, the regulator said, emphasizes the need for firms to establish and implement strong cultural values.

Finra noted that one definition of culture is “the set of explicit and implicit norms, practices and expected behaviors that influence how employees make and carry out decisions in the course of conducting the firm's business.”

In that vein, Robert Colby, Finra’s chief legal officer, said in January at a Financial Services Institute conference that culture is the attitude a firm brings in how it conducts its business.

“It’s usually top-down; it’s the leadership and how they communicate,” he said. “We’ll be looking at the frameworks for deciding, disseminating and instilling the firm’s culture through the organization.”

Colby added that Finra will look to see how a firm handles conflicts, how they follow up on violations to see why they occurred and what they should be doing differently.

“We’re going to begin with the large firms first because they typically have a pretty well-developed thought process on this, and we’ll try to understand what they have structured and how they structured it,” he said. “In part, what we’re trying to do is bring the thinking that’s been done already and instill it more broadly to the industry.”

More Than Lip Service

“The way I see the Finra thing is it's as much about the culture of compliance in your firm as it is the culture of your firm,” says Andrew Daniels, managing principal of business development at Commonwealth Financial Network, one of the country’s largest broker-dealers. “I think they’re intertwined.”

Daniels notes that culture is a component of Commonwealth’s human resources process in its Waltham, Mass., home office in terms of who and how they hire, and what they do with those people after they’re hired.

“It’s how we train them, such as a program called Common Knowledge, which is a week-long program at the home office where we share the legacy of the firm and why who we are matters and how that separates us from our industry,” he says. “Culture can’t be lip service; it has to be what you do all of the time.”

Of course, part of the compliance/culture conundrum comes from the very nature of the business.

“Wall Street is the heart of capitalism, and it has a culture of success, wealth and profitability, and a lot of the compliance issues coming up in the broker-dealer community are about the tipping point from being successful and making money to that next level of going over the line ethically to achieve those things,” says Kraskin from Compliance Science.

“We encourage those who we trust our money with to make money for us,” he adds. “Maybe the place to take this to is the concept of good alpha versus bad alpha. Is the firm pushing for alpha at any and all costs? If that’s the culture of the organization, that’s likely to lead to corner-cutting and those unethical situations with brokers selling anything they can to an unknowing, unqualified investor just to earn a commission.”

Regarding Finra’s current scrutiny of company culture, Callcott from Sidley Austin believes the industry has made strides on that front over the years. 

“I think the large firms are much less tolerant of people with disciplinary problems just because they’re a big producer,” he said. “The culture is very different from back in the limited partnership days of the late-80s and early-90s. I think what Finra and other regulators are concerned about is when they dig into specific problems they find particular silos or desks or units within firms that are still problematic.”

Callcott adds that another issue to think about is who within brokerage firms will be responsible for monitoring culture.

“Will this fall to compliance officers, and if so will Finra bring cases against them for failing to establish an appropriate culture at a firm?” he asks. “If that’s the direction Finra goes with this, I think there will be a great deal of concern within the industry about that.”

Whatever comes of this, at the very least Finra’s emphasis on company culture is a positive development for investors.