What kind of regulator would alter documents requested by its regulator? The Financial Industry Regulatory Authority (FINRA) does, according to the Securities and Exchange Commission. In 2008, employees at FINRA’s Kansas City office altered three documents just hours before producing them to the SEC pursuant to a document request. The documents were records of staff meeting minutes.
It was the third instance in which FINRA or its predecessor, the NASD, produced altered or misleading documents to the SEC. In 2004 and 2005, FINRA reportedly edited and deleted entire passages from documents sent to the SEC.
The SEC ordered FINRA to stop violating applicable federal securities laws. The SEC further ordered FINRA to hire an independent consultant within 30 days that will review FINRA policies, procedures and training regarding document integrity, determine whether they are reasonable designed and implemented to ensure the integrity of documents produced to the SEC, and recommend any changes that may be necessary. FINRA consented to the order without admitting or denying the findings.
“The law requires FINRA to produce the documents the SEC seeks in its examinations in complete and accurate form,” Gerald Hodgkins, associate director of the SEC’s enforcement division, was quoted as saying, adding: “Although FINRA has previously taken steps to improve compliance, those enhancements did not go far enough to prevent the document production failure that occurred in its Kansas City district office.”
FINRA did not learn about the document alterations until June of 2010 when a whistleblower complaint was filed, according to the SEC. The head of FINRA’s Kansas City office immediately resigned.
The SEC’s announcement did not provide any information as to what it is looking for in its investigation of FINRA or what the altered documents revealed. The documents were apparently minutes of meetings that took place in 2006 and 2007. At that time, Mary Shapiro, the current SEC chairman, was FINRA’s chief executive.
The SEC has long kept the details of its oversight of FINRA secret. The SEC typically denies Freedom of Information Act Requests concerning its oversight of FINRA, citing an exemption that purportedly allows it to conceal information about financial institutions.
Ironically, FINRA, which is funded by the securities industry, is the securities industry’s “self-regulatory” organization that is supposed to oversee securities firms’ compliance with the securities laws, as well as FINRA’s own rules, which require, among other things, that “[a] member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.”
This latest scandal comes at a time when FINRA is jockeying to expand its oversight to include investment advisors. FINRA has been criticized for not doing a good job policing the sales practices of its member broker-dealers and their associated persons. In addition, the U.S. Chamber of Commerce reportedly issued a report criticizing the lack of transparency of its governance, compensation and budgeting practices.
It seems fair to ask, what is being investigated at FINRA and what are FINRA employees trying to hide?
Page Perry is an Atlanta-based law firm with over 150 years collective experience protecting investor rights and fighting Wall Street corruption.