6 Min Read
* SEC takes enforcement action against FINRA
* SEC charges FINRA altered documents during exam
* FINRA says it has already worked to make fixes
* Incident occurred at FINRA while Schapiro was CEO
By Sarah N. Lynch and Suzanne Barlyn
Oct 27 (Reuters) - The U.S. Securities and Exchange Commission scolded the self-policing brokerage industry group FINRA on Thursday for allegedly doctoring internal documents before handing them over to examiners.
The SEC said a regional office of the Financial Industry Regulatory Authority in 2008 altered staff meeting documents just hours before handing them over to SEC inspection staff.
This is the third instance in eight years that FINRA or its predecessor has given the SEC altered or misleading documents, the agency said.
The embarrassing incident comes as FINRA, which has been criticized for having opaque governance, is trying to convince the SEC and Congress to expand its oversight authority to include investment advisers.
FINRA is an industry-funded group that supports the SEC by overseeing roughly 4,500 brokerage firms and monitoring market activity. The SEC supervises FINRA.
The SEC settled with FINRA, which did not admit or deny the allegations, and ordered it to hire an independent consultant and take other steps to improve its policies.
At the time the alleged document alteration occurred in 2008, SEC Chairman Mary Schapiro was serving as CEO of FINRA.
FINRA did not learn about the document integrity issues, however, until June 11, 2010, when a whistleblower complained.
The main sanction against FINRA is far more benign than what the Wall Street self-watchdog would assess against one of its own members for the same conduct, said Alan Wolper, a former director of FINRA's Atlanta office who is now a securities lawyer in Chicago.
"I would expect there to be fines (and) suspensions," he wrote in an email.
FINRA Chief Executive Richard Ketchum said in a statement that the organization has taken prompt action to report, investigate and discipline the behavior at issue.
"Under no circumstances will such conduct be tolerated at FINRA," he said.
In its action against FINRA, the SEC said that the director of FINRA's Kansas City District Office in 2008 caused three records of staff meeting minutes to be altered.
The changes made to the documents included deleting or editing certain information. In some cases, entire passages were removed or changed, the SEC said.
Also, the author's signature on the documents was changed to the director, the agency said.
The SEC did not detail the content of the alterations. Wolper, who is familiar with staff minutes from his tenure at FINRA, said the minutes are usually "dull and perfunctory."
The SEC has long been secretive about details involving its oversight of FINRA.
For example, it typically denies Freedom of Information Act requests about the watchdog. The SEC cites an exemption that allows regulators to not reveal information they collect about "financial institutions," a category that the SEC and a court ruling say includes FINRA.
That lack of transparency can "hinder effective oversight," said Michael Smallberg, an investigator for the Project on Government Oversight, a Washington-based watchdog group.
Enforcement actions by the SEC involving self-regulatory organizations are "unusual but not unheard of," said Deborah Meshulam, chair of the securities-enforcement practice at DLA Piper who formerly served as an assistant chief litigation counsel in the SEC's enforcement division.
For instance, a price-fixing scandal at Nasdaq in 1994 led to a settlement between the SEC and the National Association of Securities Dealers, which then owned the exchange.
NASD was later renamed FINRA in July 2007 after it merged with some of the New York Stock Exchange's regulatory operations.
The most recent allegations against FINRA are not widespread enough to have a major impact on FINRA's bid to become the SRO for registered investment advisers, said John Coffee, a professor at Columbia Law School.
"It's certainly an embarrassing incident, but it occurred in Kansas City, and it didn't involve the senior most management," he said.
However, he said critics of FINRA becoming the SRO for advisers will likely try to use the incident against Schapiro and the Wall Street watchdog.
The U.S. Chamber of Commerce is among FINRA's critics and in July came out with a report criticizing the transparency of its governance, compensation and budgeting practices.
The SEC said that problems with document integrity date back to 2004 at FINRA's predecessor NASD.
In that case, the SEC says an NASD director misled SEC examiners with misdated documents. Then again in 2005, misleading documents were also produced to an SEC inspection team. The SEC said NASD did take some corrective action to try and fix the errors.
During those time periods, Schapiro served in various leadership roles at NASD.
She joined NASD in 1996 as president of NASD Regulation, and was named vice chairman in 2002. She became the organization's CEO in 2006, and led it through its consolidation with NYSE's member regulation functions.
SEC spokesman John Nester declined to comment beyond the information in the SEC's order against FINRA.