Article by Arthur B. Laby
Organizational culture--a system of shared assumptions that define an organization--is deeply embedded in most firms. Culture affects everything, or nearly everything, that happens in an organization, including important decisions--such as who is promoted, hired, and fired--how people act around one another, and even what people wear. Not surprisingly, culture also can determine a firm's flexibility and its ability to undergo change.
Financial services regulators are moving along a path toward regulatory convergence or regulatory harmonization, which will require certain financial services firms to transform. Yet regulators often do not address whether culture might present a barrier to their harmonization goals. In this Article, I maintain that culture is an underappreciated challenge to regulatory harmonization and that regulators are more likely to succeed if they recognize culture as a barrier to change and consider how they can overcome cultural differences.
Regulatory convergence can be approached from a number of perspectives. The government, for example, may wish to standardize certain requirements, such as privacy or anti-money-laundering rules, across a variety of service providers. Or regulators may wish to standardize consumer credit laws across a variety of lenders. I shall discuss convergence in the area of investment advice within the larger context of the debate over whether to harmonize the duties and obligations imposed on broker-dealers and investment advisers. Brokers and advisers both provide advice to retail investors about securities, but they are regulated differently. The question for regulators is whether to harmonize the duties imposed on brokers and advisers when giving advice to retail investors.
Brokers and advisers have a different history and a different culture. These differences emerge in the divergent regulations governing brokers and advisers. Cultural differences help explain resistance to harmonization and help inform how one might craft more effective regulation. However, cultural differences cannot be erased by legislative or regulatory fiat in an attempt to harmonize standards. Thus, any attempt to harmonize the duties and obligations imposed on brokers and advisers is more likely to succeed if culture is taken into account. I shall focus on the attempt to harmonize the regulation of broker-dealers and investment advisers in particular, but the tensions that present themselves in this context likely exist in other areas where harmonization is desired.
In addition, apart from the context of regulatory harmonization, firm culture is garnering attention among financial regulators. In February 2016, the Financial Industry Regulatory Authority (FINRA) identified firm culture as a new area of focus. According to FINRA, it will now review “how firms establish, communicate and implement cultural values” and the effect of culture on business conduct. FINRA stated that it will formalize its assessment of culture to understand how culture affects compliance and risk management. FINRA will assess five aspects of a firm's culture, focusing on control functions, toleration of breaches, identification of compliance events, whether supervisors serve as cultural role models, and development of subcultures that are inconsistent with overall culture. The topic of organizational culture, therefore, is more timely than ever.
I shall proceed in eight short Parts. Part II briefly reviews the debate over broker-dealer and investment adviser regulatory harmonization. Part III discusses the functions of brokers and advisers as a prelude to an examination of culture. Part IV addresses the importance of organizational culture. Part V discusses key differences in the culture of brokerage and advisory firms. Part VI addresses the effect these differences can have on harmonization--whether culture is a barrier to harmonization. Part VII discusses the effect that harmonization can have on culture--whether changes in the law can result in changes in culture. Part VIII provides a short conclusion.
About the Author
Professor, Rutgers Law School
Citation
90 Tul. L. Rev. 1181 (2016)