* 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 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.
FODDER FOR CRITICS
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
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.