If, during a FINRA investigation, you or your firm altered original documents before providing them to FINRA you would be subject to sanction pursuant to FINRA guidelines. These sanctions could include a monetary fine, as well as a bar for falsification of documents, depending upon how serious the violation. What happens when FINRA alters documents that it is required to provide to the SEC. FINRA recently learned that it would not be punished as harshly as it would punish one of its regulated entities.
The director of FINRA’s Kansas City, Missouri office apparently caused the alteration of three sets of SEC requested staff meeting minutes before providing them to the SEC inspectors as part of the examination process. The alterations made the documents incomplete and inaccurate. Separately, an employee of FINRA predecessor NASD provided the SEC with altered or misleading documents two times; these alterations included the deletion or editing of certain information. In some cases, the FINRA employee removed entire passages.
These alterations have resulted in the SEC bringing a case against FINRA, the result of which was FINRA agreeing to hire an independent consultant and pledging to increase its internal compliance procedures. In that regard, FINRA has instituted changes that include additional online and live ethics training, as well as heightened focus on document integrity. Putting aside the utter embarrassment at the upper echelons of FINRA, what does this all mean.
The timing is awful for FINRA. As a result of the Dodd-Frank Act mandate, the SEC has been considering having FINRA act as the SRO over investment advisers. Investment advisers have historically avoided the level of oversight from the SEC as compared to the oversight over FINRA member firms. This misconduct will surely lead to the SEC asking for additional resources so that it, instead of FINRA, can serve as the investment advisers SRO, which many in Congress oppose due to the SEC well-documented failures and its own document retention issues. In the end, there may be a heightened call for the creation of a totally new SRO, one free of taint. Heightened oversight of investment advisers is coming, but, in all likelihood, will be further delayed until this latest embarrassment vanishes, like the documents FINRA was supposed to maintain.