On Thursday, October 27, 2011, the SEC entered a Cease-and-Desist Order against FINRA, which, according to the SEC’s Press Release, included a finding that "certain documents requested by the SEC’s Chicago Regional Office during an inspection were altered just hours before FINRA’s Kansas City District Office provided them." FINRA consented to hire an independent consultant and undertake other remedial measures.

According to the Order, the Commission’s inspection staff sent a document request to FINRA’s Kansas City District Office, which was received on July 28, 2008 and included a request for "Minutes of District staff meetings conducted between November 1, 2005 and the present." FINRA responded on August 7, 2008. However, hours before providing the documents to the Commission, a Director in FINRA’s Kansas City District Office "caused the minutes for meetings that took place on August 28, 2006, September 22, 2006 and January 31, 2007 to be altered. Specifically, certain information was deleted or edited, 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."

FINRA learned of these actions in June 2010, self-reported to the Commission and commenced an internal investigation. Based on the investigation, the Director who altered the documents resigned from FINRA in September 2010.

The SEC also found that this marked the third time in eight years that an employee of FINRA or its predecessor provided altered or misleading documents to the Commission. Associate Director Gerald Hodgkins of the SEC stated: "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."

The SEC charged FINRA with violating Section 17(a)(1) of the Exchange Act. Without admitting or denying the violation, FINRA consented to the entry of the Order requiring it to cease and desist from committing or causing future violations and agreed hire an independent consultant to: (1) conduct a one-time comprehensive review of FINRA’s policies and procedures and training relating to document integrity; (2) assess whether those policies and procedures and training are reasonably designed and implemented to ensure the integrity of documents provided to the SEC; and (3) make recommendations for the enhancement of FINRA’s policies and procedures and training.

In a statement, FINRA CEO Richard Ketchum acknowledged that "As a regulator, FINRA must always hold itself to the highest standards. … We self-reported the Kansas City matter to the SEC and have fully cooperated with the agency’s review. … I am personally committed to taking all possible steps to ensure that this type of conduct does not reoccur. … Under no circumstances will such conduct be tolerated at FINRA."

The SEC has faced questions about its own document retention policies recently. As discussed here, in a inquiry dated August 17, 2011, Senator Chuck Grassley (R. Iowa) of the Senate’s Committee on the Judiciary asked SEC Chairman Mary Schapiro whether the Commission had destroyed files relating to some of its more high-profile and controversial matters, such as its investigations of Bernie Madoff, Goldman Sachs, Bank of America, Lehman Brothers and others. The SEC responded to the inquiry by suspending its record-destruction procedures for closed cases until further notice, as described here.


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