GAO Report Finds SEC Oversight of FIRA Lacking & Critics Use Report Against FINRA as Potential Investment Adviser SRO

June 05, 2012

The U.S. Government Accountability Office (“GAO”) recently released a report on the U.S. Securities and Exchange Commission’s (“SEC”) oversight of the Financial Industry Regulatory Authority (“FINRA”). The report examined “how the SEC conducted oversight of FINRA and how it plans to enhance oversight in the future.”

The SEC is responsible for oversight of financial self-regulatory organizations (“SRO”). The SEC supervises FINRA by conducting inspections and reviewing proposed SRO rules. Section 964 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) required GAO to review SEC oversight of FINRA. Specifically, Section 964 identified the need to review “examinations, effectiveness of FINRA rules, arbitration services, advertising regulation, governance, executive compensation, cooperation with state securities regulators, funding, and policies regarding former FINRA employees.” To conduct the review, GAO “reviewed and assessed the SEC’s documentation, procedures and guidance for inspections of FINRA.”

After its review GAO found SEC oversight of FINRA deficient in several areas. The investigation indicated the SEC failed to maintain oversight at the same level for all FINRA programs. Areas with strong SEC oversight include FINRA regulatory programs such as examinations, surveillance, and advertising. GAO’s report found oversight of FINRA executive compensation, cooperation with state securities regulators, and transparency of governance to be nonexistent. According to the report, the lack of SEC oversight in these areas was a result of “competing priorities” and a lack of sufficient resources.  The report also criticized FINRA’s lack of retrospective reviews of its rules.  “By not conducting these reviews, FINRA may be missing on an opportunity to assess whether its rules are achieving their intended purpose and take appropriate action when necessary.” Information found in the report fueled the fires for those in opposition to FINRA becoming the SRO for investment advisers.

The Project On Government Oversight (“POGO”) recently wrote a letter to leaders of the Committee on Financial Services of the U.S. House of Representatives (“Financial Services Committee”) regarding the Investment Adviser Oversight Act of 2012 (“Investment Adviser Oversight Act”) citing this GAO report. The letter raised concerns over the creation of a new SRO for investment advisers and concerns that FINRA may be selected as that SRO. POGO believes there is a conflict of interest with SROs and that FINRA lacks transparency and accountability. Furthermore, the group believes government oversight is the best way to regulate investment advisers. The letter recommends that the Financial Services Committee reject the Investment Adviser Oversight Act and instead provide additional funding for the SEC to “carry out its important regulatory duties on its own without reliance on SROs.”

Posted by Bryan Hill
Labels: FINRA, SEC, SRO