October 27, 2011
The Hunter Becomes the Prey: SEC Sanctions FINRA
The SEC announced today that it has sanctioned FINRA (the Financial Industry Regulatory Authority) by ordering it to hire an independent consultant and to take other measures to improve its polices and procedures relating to producing documents during SEC inspections. The SEC action found that FINRA failed to furnish complete and accurate records to the SEC in violation of Section 17(a)(1) of the Exchange Act and Exchange Act Rule 17a-1. The SEC's Order can be found here.
According to the Order, FINRA employees "[h]ave produced altered or misleading documents to Commission inspection staff on three separate occasions over the past eight years." The tipping point that resulted in this action seems to be an August 2008 SEC request to FINRA's Kansas City office that resulted in the then director of the office "(causing) the alteration of three records of staff meeting minutes just hours before producing them to the Commission inspection staff, making them inaccurate and incomplete." Although the SEC found improvement in the SRO's internal controls, it found that FINRA failed to ensure the integrity of documents provided to the Commission, and found that it therefore violated the Exchange Act. The SEC did not fine FINRA, nor did it pursue action against any responsible individual (at least nothing has been noted yet). (The then-director of that office resigned from FINRA last year during the SRO's internal review of the matter). Rather, the action will require FINRA to provide additional training to current and new employees and to engage an independent consultant to review its policies and procedures and training that are related to document integrity, and to recommend improvements, if any, in that area, with consultant reports provided to FINRA's Board and to the SEC.
I think that the sanctions imposed on FINRA are much more lenient than sanctions that would be imposed on an individual registered representative or a broker-dealer if they had been found to have provided misleading and inaccurate documents to FINRA - and especially if they had done it repeatedly.
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