Let's hope that Finra has learned a lesson from the public flogging it received after it was reported that a regional official allegedly doctored the minutes of internal staff meetings that were then turned over to SEC examiners.
The Securities and Exchange Commission took the
Financial Industry Regulatory Authority Inc. to task Oct. 27 for inadequate internal policies and procedures stemming from its inspection of Finra's Kansas City district office in August 2008. Specifically, the SEC charged the former director of that office, Thomas Clough, with document tampering.
Finra, which neither admitted nor denied the allegations, settled with the SEC by, among other things, agreeing to hire an outside consultant to examine its internal policies and procedures with regard to record keeping.
The incident marks the third time in eight years that an official from Finra, or its predecessor NASD, delivered altered or misleading documents to the SEC.
It also marks a low for SEC Chairman Mary Schapiro, who became NASD's chief executive in 2006 and led it through its
consolidation with the
New York Stock Exchange's member regulation functions to form Finra in 2007. She served as Finra's chief executive until 2009.
Although Ms. Schapiro rightly recused herself from participating in the SEC's action, she has the dubious distinction of being the first commission chairman to preside over the sanctioning of a self-regulatory organization for conduct committed on her own watch.
Besides being more than a little embarrassing for her, this latest incident undermines Finra's credibility as Wall Street's self-policing organization. To make matters worse, it does so at a time when Finra is lobbying the SEC and Congress for more authority to oversee thousands of investment advisers.
Finra already monitors 4,500 broker-dealers and 634,000 stockbrokers.
CRITICS QUESTIONS
Finra's critics — and there are many — are justified in asking how an organization that purports to hold its members to high ethical standards could fall prey to such ethical lapses within its own ranks.
They also are right to take exception to the fact that the SEC's sanctions against Finra were far gentler than what the SRO likely would have imposed against a broker-dealer accused of doctoring records.
That said, the allegations against Finra don't appear serious or far-reaching and shouldn't derail the organization's bid to become the SRO for investment advisers.
For starters, the incident was confined to the Kansas City office and it didn't involve the organization's top executives. Also, the matter was reported to Finra by a whistle-blower and Finra, in turn, reported it to the SEC, all of which point to policies and procedures that worked successfully to bring internal ethics violations to light.
Hopefully, a chastened and perhaps more suitably humble Finra will continue to look for ways to improve its policies and procedures with regard to internal record keeping. As Wall Street's main watchdog, Finra must handle its own record keeping with the same level of competence and integrity that it demands of its broker-dealer members.
But what happened in Kansas City also should serve as a wake-up call to Finra to make sure that its house is in order before it takes on additional oversight responsibilities.
In July, the U.S. Chamber of Commerce issued a report calling for more transparency with regard to Finra's budgeting, compensation and governance practices.
It is time that Finra addressed these issues and took steps to become more transparent to its members and the individual investors it is charged with protecting.
