The topic of FINRA controls testing requirements often comes up on the context of broker-dealer consulting, particularly because there is an annual testing requirement. FINRA has often provided guidance in this space and last week, I had the pleasure of attending FINRA’s South Region Compliance Seminar in New Orleans. At the Seminar, FINRA Chairman and CEO, Rick Ketchum, gave a talk on ethics, culture and conflicts. During his presentation, he emphasized the importance of developing a culture that, “reduces the risk of good people making bad decisions” and stated that such a culture, “doesn’t happen accidentally.” Such a culture, he said, must be modeled by those at the top of the organization on an ongoing basis. As part of this talk, he asked broker-dealers to consider in this regard. My bet is that FINRA examiners are considering these items, so it would be a great idea to ask these questions sooner rather than later and to take appropriate actions if the answers are not generating a warm fuzzy feeling.
- Are control functions really valued? In discussing this point, Mr. Ketchum discussed the difference between having control procedures and embracing control procedures.
- Is there tolerance for policy and control breaches? For example, what happens when people ignore training requirements? Is there clear accountability?
- Does the firm proactively identify risks? Mr. Ketchum pointed out that risks identified several years ago are not the risks that are present today. That risks change and evolve and that risk management must be part of an ongoing cadence.
- How often do you communicate that each action taken must be in the best interest of the customer?
- How does culture apply throughout various parts of the organization? Culture is not a single point – there must be a focus on geographic disbursement of the firm, the departmental cultures and sub-cultures that are created. And this sub-culture issue must be reviewed over and over.
- What are our conflicts? When mistakes are made, these often come from where the incentives are. FINRA published a Report on Conflicts addressing its findings in this area. FINRA has started its own review on compensation and oversight. If you haven’t seen the request letter for that review, it can be found on the Targeted Exam Letters page of FINRA’s website.
Thoughts on FINRA Controls Testing
At least some of these questions will generate some thought about where you might be able to improve supervisory controls and other areas at your firm. Certification and testing requirements related to FINRA controls are outlined in FINRA Rule 3120 and 3130. Having an expert, outside view of controls and conflicts can make a significant difference in the effectiveness of your overall supervisory controls system.
Mitch Atkins is formerly the Senior Vice President and Regional Director of FINRA’s South Region and is the founder and principal of FirstMark Regulatory Solutions, a broker-dealer compliance consulting firm based in Fort Lauderdale, Florida. Contact Mitch Atkins for assistance with your supervisory controls and conflicts reviews at 561-948-6511.