FINRA brokerage oversight group misled regulators, SEC charges

October 27, 2011

The main self-policing organization for brokers and stock markets misled the government by altering documents sought by federal regulators, the Securities and Exchange Commission charged Thursday.

FINRA, a private organization responsible for overseeing much of the U.S. financial industry, altered minutes of staff meetings before turning them over to SEC inspectors in 2008, the agency alleged.

“Specifically, certain information was deleted or edited, while in other instances, entire passages were removed or changed,” the SEC said in an administrative order.

It was the third time in eight years that FINRA employees have given SEC inspectors altered or misleading documents, the agency said. Similar episodes occurred in 2004 and 2005, the SEC said.

Despite the fact that FINRA took steps to address those “document integrity problems,” it “has not ensured the integrity of documents provided to the Commission,” the SEC said.

Without admitting or denying wrongdoing in the latest case, FINRA agreed to take further remedial steps and to “cease and desist” from similar violations, the SEC said.

FINRA, the Financial Industry Regulatory Authority, was headed by Mary L. Schapiro before she took the helm of the SEC in early 2009. Schapiro first joined one of
FINRA’s predecessor organizations in 1996 as president of its regulatory arm and was vice chairman at the time of the earlier episodes.

The SEC would not say whether Schapiro was aware of the earlier incidents or whether the SEC was notified of the events at the time.

Because the SEC oversees matters as diverse as insider trading, the workings of the financial markets and the treatment of investors by their stockbrokers, the government agency relies to a great extent on FINRA.

The SEC and members of Congress have recently been considering outsourcing some of the agency’s functions to FINRA, and FINRA has welcomed the chance.

The SEC is responsible for conducting routine inspections of private money-management firms known as investment advisers, but with limited resources, it has been examining them an average of once every 11 years.

FINRA told Congress last month that it is “uniquely positioned to serve as at least part of the solution to this pressing problem.”

In testimony to a House panel explaining why the government should have confidence in industry self-regulation, FINRA Chairman and chief executive Richard Ketchum noted that the SEC oversees and inspects FINRA.

But the SEC now says its oversight of FINRA was repeatedly subverted.

An outside consultant’s report on the SEC that was released in March called for “much deeper and broader” SEC supervision of FINRA.

The document the SEC issued Thursday charging FINRA with securities violations provided no detail on the passages that were deleted from FINRA records.

It said the director of FINRA’s Kansas City office “caused the alteration of three records of staff meetings just hours before producing them to the Commission staff.” The original author’s signature was changed to that of the director, the SEC said. The minutes covered meetings that took place in 2006 and 2007, the agency said.

The SEC did not name the director, but it said he resigned in 2010.

The SEC inspection of FINRA’s Kansas City office apparently was not designed to catch the organization by surprise. The SEC said it requested the documents as part of “a previously announced inspection.”

FINRA learned about the Kansas City matter through a whistleblower complaint in June 2010 and opened an internal investigation, the SEC said.

The organization reported the matter to the SEC and has “fully cooperated with the agency’s review,” Ketchum said in a statement Thursday.

“Following our own internal review we took decisive action, including appointing new leadership in our Kansas City office and instituting a number of changes that strengthened document-handling procedures across the organization,” Ketchum added.

In settling the SEC charges, FINRA agreed to such measures as training employees, developing a podcast on “document integrity” and hiring a consultant to review its policies.

For its part, the SEC has been accused of illegally destroying internal records. The agency’s inspector general recently completed an investigation of the allegations, which were raised by a member of the SEC’s enforcement division, and the agency is preparing to release the inspector general’s findings within days.

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