Stop me if you heard this one…
Not a lot of people know this, but FINRA was recently sanctioned by the SEC for altering documents prior to an inspection. Yes, the regulators who govern the financial industry were caught red-handed. I'm sure there are many jokes that come to mind, but there is also a serious side to this.
Every industry professional knows how nerve-wracking a visit by either regulator can be. We prefer to keep them at a higher standard, and believe that they know far greater than we do.
To those of us who have been through an audit, inspection, or maybe even a surprise visit, we understand the importance of having our books and records in order. We all know that there are serious consequences if there is any indication of misrepresentation or fraud. What puzzles many in the industry is why the regulator "gods" felt that they could get away with altering documents.
A Pattern — Not an Isolated Incident
Another question to ponder: how often has this happened in the past and was not caught? What is to say that this is not common practice that has gone unnoticed until now? The SEC has reported that, within the past eight years, FINRA has been fined three times. A shocking revelation to discover for any industry regulator.
Apparently the incident occurred prior to a routine SEC inspection. It was found that, in 2008, a Director of FINRA's Kansas City office altered staff meeting records. FINRA was ordered to hire a consultant and take steps to improve policies and procedures. FINRA was also ordered to undergo training, even though the SEC has reported that past training orders have proved to be ineffective in preventing the misconduct.1 The director's identity was undisclosed and he was allowed to leave his post without public awareness.
A Double Standard in Enforcement?
Compared to actions that have been taken against FINRA members — both industry firms and registered representatives — the action against FINRA was relatively light. In fact, in August, FINRA fined Citigroup for failure to detect fraud, a case in which Citigroup's former registered sales assistant falsified account records, among other things.2
"With growing public scrutiny surrounding the financial industry, we need the regulators to step up to the plate — bear some of the burden and set better examples."
Clearly there's a disconnect if the same regulators who are known to protect against industry misrepresentation and fraud are also caught red-handed.