More On Legal & Compliancefrom The Advisor's Professional Library
- U.S. Securities and Exchange Commission Information This information sheet contains general information about certain provisions of the Investment Advisers Act of 1940 and selected rules under the Advisers Act. It also provides information about the resources available from the SEC to help advisors understand and comply with these laws and rules.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
Fed up with receiving altered documents, the Securities and Exchange Commission on Thursday ordered the Financial Industry Regulatory Authority (FINRA) to hire an independent consultant and undertake other remedial measures to improve its policies, procedures and training for producing documents during SEC inspections.
The SEC’s order found that on Aug. 7, 2008, the Director of FINRA’s Kansas City District 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.”
The SEC order requires FINRA to “cease and desist from committing or causing future violations of Section 17(a) of the Securities Exchange Act of 1934 and Exchange Act Rule 17a-1.”
According to the SEC, FINRA provided altered documents requested by the SEC during an inspection at the Kansas City office, and not for the first time, despite the fact that it had previously worked on improving compliance after two other events in which document integrity had been questioned.
That spurred the disciplinary action ordering compliance.
Gerald Hodgkins, associate director of the SEC’s Division of Enforcement, said in a statement, “The law requires FINRA to produce the documents the SEC seeks in its examinations in complete and accurate form. 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. This order will help ensure that FINRA effectively addresses the weaknesses in its training as well as its policies and procedures.”
Hours before furnishing SEC inspection staff with FINRA’s response to a requested item, the director allegedly caused the minutes for meetings that took place on Aug. 28, 2006, Sept. 22, 2006, and Jan. 31, 2007 to be altered. Certain information was deleted or edited, apparently, while in other instances, entire passages were removed or changed.
“With respect to all three altered documents, the original author’s signature was changed to the director’s,” the SEC charged.
The SEC said that the production of the altered documents by the Kansas City District Office was the third instance during an eight-year period in which an employee of FINRA or its predecessor (National Association of Securities Dealers) provided altered or misleading documents to the SEC.
FINRA has consented to engage an independent consultant within 30 days that will review and evaluate its policies and procedures and training regarding document integrity, and make recommendations for enhancement. FINRA neither admitted nor denied the findings, but consented to the SEC’s order.
Attorney Brian Rubin of the securities law firm Sutherland, Asbill & Brennan expressed surprise over the incident, but pointed out that "it was limited conduct so it doesn't say much about FINRA as a whole."
From a broader perspective, FINRA and the SEC have been at odds over whether there should be a self-regulatory organization for investment advisors or the SEC should continue to regulate RIAs. Rubin suggested that despite the limited nature of this case, he expected that it will be "exploited by FINRA's critics and those who think FINRA should not become the SRO" for advisors.