Thursday, October 27, 2011

SEC Orders FINRA to Improve Internal Compliance Policies and Procedures

Citing weaknesses in the Financial Industry Regulatory Authority’s training, policies and procedures, the SEC ordered FINRA to hire an independent consultant and undertake other remedial measures to improve its document production during SEC inspections.

As charged, the director of FINRA’s Kansas City office caused the alteration of three records of staff meeting minutes just hours before producing them to the SEC inspection staff, making the documents inaccurate and incomplete.

According to the Commission, this matter was the third instance during an eight-year period in which a FINRA employee, or an employee of its predecessor, the National Association of Securities Dealers, Inc., provided altered or misleading documents to the Commission. Although FINRA has endeavored to improve its procedures and training since document integrity issues came to light in May 2006 and December 2007, stated the SEC order, "those efforts were not effective in preventing the Director’s misconduct."

In July 28, 2008, FINRA’s Kansas City District Office received a document request from the Commission inspection staff. As alleged, the district director caused the minutes for three staff meetings to be altered by deleting or editing information, or removing or changing entire passages. With respect to all three altered documents, according to the SEC, the original author’s signature was changed to that of the director.

As a result of this conduct, the SEC found that FINRA violated Section 17(a)(1) of the Exchange Act and Exchange Act Rule 17a-1. Section 17(a)(1) of the Exchange Act requires a national securities association such as FINRA to make and keep for prescribed periods such records, and to furnish copies as required by rule. Exchange Act Rule 17a-1(a) requires a national securities association to keep and preserve at least one copy of all correspondence, records, and other documents made or received by it in the course of its business as such and in the conduct of its self-regulatory activity. Rule 17a-1(c) requires a national securities association promptly to furnish the Commission with a copy of any such document that the Commission requests. The requirement that a national securities association keep and furnish records to the Commission includes the requirement that those records be complete and accurate.

In determining to accept FINRA's settlement offer, the Commission considered remedial acts promptly undertaken by the SRO and the cooperation afforded the Commission staff.

FINRA agreed to several training undertakings, and will engage an independent consultant to review and make recommendations concerning FINRA’s policies and procedures and training relating to document integrity.

The SEC's order may be found