Last week, the Financial Industry Regulatory Authority (FINRA) released its regulatory and examination priorities for 2016. FINRA’s letter highlights five areas for examination at brokerage houses and financial advisory firms, including standards of ethical behavior, alignment of firm and customer interests, and the management of conflicts of interest. FINRA’s chairman also stated intentions to specifically examine the conflicts of interest that can arise in the sale of proprietary investment products to clients. These conflicts have garnered increased regulatory scrutiny, including in a recent landmark action where our whistleblower client tipped the SEC to inappropriate client "steering" at JPMorgan. One of the largest actions against an investment adviser, the matter resulted in a $267 million settlement with the SEC and an additional $40 million to the CFTC in a parallel proceeding.
FINRA’s concentration on ethical culture marks an important first step in identifying the nature of corruption within the industry at large. As our recent survey of financial services professionals revealed, the industry has a disregard for ethics and a deep-rooted culture of secrecy. While regulatory oversight has played and will continue to play a critical role in dismantling the status quo, true and sustainable change requires organizations to prioritize and demand integrity—from within and top down.
In developing a new paradigm for corporate ethics, companies need to begin by understanding that traditional reporting methods alone do not work. In a New York Law Journal article, we previously discussed how too many compliance programs are designed to respond to problems after they have surfaced, and focus on the latest reporting trends, rather than proactive, consistent, organization-wide change that puts a premium on transparency and ethical agency.
To be sure, creating such a culture is a substantial undertaking. But in an era of whistleblowers and empowered law enforcement, no organization can bear the cost of noncompliance. As we reported earlier, the Ethics and Compliance Initiative recently examined certain key characteristics that are common to high-quality compliance and ethics programs. These characteristics must be the admission standard for all commercial entities, but particularly those in the financial markets.
In order to truly eradicate corruption, firms must embrace and develop comprehensive and clear ethical visions. We applaud FINRA’s decision to examine
corporate culture, and believe it signals an important shift in the financial services industry in recognizing the critical role of ethics in deterring
wrongdoing, protecting investors, and building stronger companies.