FINRA Priorities Signal Important Shift in Industry

Jordan Thomas -

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.

 

Strong E&C Programs: New Report Examines Key Characteristics

Jordan Thomas -

Working at the forefront of whistleblower advocacy, we have previously discussed the numerous ways companies hinder or actively retaliate against individuals who choose to bring corporate misconduct to light. In fact, according to the Ethics and Compliance Initiative’s National Business Ethics Survey, more than 1 in 5 respondents said they experienced retaliation after reporting internally. We also continue to witness companies developing new and sophisticated strategies to discourage employees from reporting possible violations.

To be sure, though, the majority of companies want to behave ethically, and are potentially stymied by antiquated internal policies or a lack of guidance regarding appropriate and effective compliance measures.

As part of its continued dedication to improving the current state of corporate ethics, last week the ECI released a new report which examines key characteristics of high-quality compliance and ethics programs. According to the report, common practices of organizations with strong ethics and compliance cultures include:

  • Creating an environment in which employees are encouraged and able to speak up. Management in such organizations not only offers ample opportunity for employees to voice concerns, but also takes retaliation seriously through actively engaged HR, legal and compliance departments.
  • Acting quickly and maintaining accountability when misconduct occurs. These organizations develop a plan of action in which suspicions are thoroughly investigated, and confirmed misconduct leads to consistent consequences, regardless of the employee’s position.

  • Treating compliance programs as central to business strategy. Misconduct poses dire business risks. As a result, an organization that is serious about ethics will ensure that the compliance department is not only responsible for meeting legal requirements, but also works to help management understand and establish integrity to benefit the organization’s overall mission.

It is apparent that companies must demonstrate greater leadership in building ethical cultures, and we applaud the focus and continued work by the ECI to help advance this goal. In our ongoing effort to root out misconduct in the workplace, the ECI’s report provides a solid foundation of principles and practices on which we can continue to build.


Thomson Reuters’ Legal Education Arm and Labaton Sucharow Join Forces: Six-Part Webinar Series Launched

Jordan Thomas -
In August, we launched the first in a six-part series, Whistleblowing in the Corporate World, presented with West LegalEd, part of Thomson Reuters. Our first webinar kicked off with "The Advent of the SEC Whistleblower Program" in which I provide an overview of the origins, mechanics, scope and implications of this important investor protection program. Stay tuned for news and updates on other webinars and feel free to check out our entire digital library in our resource center.