SEC Orders FINRA to Hire Independent Compliance Consultant

The U.S. Securities and Exchange Commission (SEC) issued a news release (2011-227) on October 27, 2011 saying that it had ordered the Financial Industry Regulatory Authority (FINRA) to hire an independent consultant to aid and assist in the implementation of new policies, procedures and training for the production of documents for SEC inspections.

The SEC order is the direct result of an SEC inspection on August 7, 2008 of FINRA’s Kansas City District Office. Just prior to that examination, FINRA documents about three staff meetings were doctored prior to producing them for inspection. The minutes of the meetings that were included occurred in 2006 and 2007, when the SEC’s existing Chairman Mary Shapiro was FINRA’s Chief Executive. In 2004 and 2005, there were occasions where documents were altered or information completely removed from documents. According to the SEC news release, this was the third time that employees of FINRA, or its predecessor NASD (National Association of Securities Dealers), had altered documents given to the SEC within the last eight years. It is general practice for the FINRA offices to undergo SEC inspections every two or three years.

According to SEC charges, the author’s signature on the document was changed to the FINRA District Office Director. The Director resigned on September 20, 2010, after FINRA advised the SEC of the situation following notification of the problem from a whistleblower in June 2010.

Many have remarked that this is a huge black eye for FINRA, which will not bode well for FINRA’s movement to become the regulatory authority over registered investment advisers. It already oversees some 4,600 brokerage firms and is seeking approval from lawmakers to oversee over 10,000 investment advisory firms. Comparisons show that a broker or a brokerage firm who did the same thing, altering or falsifying documents would have been sanctioned, fined, suspended or even barred from the industry, depending on the severity of the act.

Gerald Hodgkins, Associate Director of the SEC’s Enforcement Division, said that while it is unusual for the SEC to bring an enforcement action against an SRO, “the SEC is committed to protecting the integrity of our inspection program.”

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