While some receive programs and operations are reviewed regularly, others receive limited or no oversight at all, the Government Accountability Office (GAO) said in a report to congressional committees.
Through its inspection process, the SEC conducted routine and special inspections of regulatory programs, including examinations, surveillance and enforcement programs run by FINRA. The regulator’s advertising and arbitration programs also have been routinely inspected but not as frequently as the SEC had planned.
The commission also has reviewed rule changes proposed by FINRA to determine if they are consistent with the Securities Exchange Act of 1934 and related rules and regulations. However, neither SEC nor FINRA conducts retrospective reviews of FINRA’s rules.
The GAO and others have reported on the retrospective reviews since they allow agencies to assess their rules. Some federal financial regulators, including the SEC, have begun plans to conduct retrospective reviews of their rules in light of an executive order that encourages independent regulatory agencies to do so.
In the absence of these reviews, FINRA may be missing an opportunity to assess whether its rules achieve their intended purpose and take action. By not inspecting FINRA’s steps in reviewing its rules, the SEC may not gather enough information to form an opinion about FINRA’s efforts to review.
The SEC has limited or no oversight of other aspects of FINRA’s operations, such as governance and executive compensation. According to the commission, these operations were not considered because of competing priorities and resource constraints. SEC officials said that the commission focused its resources on FINRA’s regulatory departments, which were perceived as having the greatest impact on investors.
The commission is in the process of enhancing and expanding its oversight using a more risk-based approach. To assess the risks facing FINRA, the SEC has collected a substantial amount of information on FINRA’s regulatory programs and operations, including those that it has not reviewed. The commission has analyzed the information and will use it later this year as it implements the enhanced risk-based oversight of FINRA.
Reasons for the GAO Study
The SEC oversees FINRA, which is charged with regulatory oversight of all securities broker/dealers that conduct business with the public in the U.S. Due to recent events in the financial markets, the SEC and FINRA have faced questions about their oversight.
The Dodd-Frank Wall Street Reform and Consumer Protection Act required the GAO to study the SEC’s oversight of national securities associations registered under section 15A of the Securities Exchange Act of 1934, a provision that applies only to FINRA.
“Opportunities Exist to Improve SEC’s Oversight of the Financial Industry Regulatory Authority,” the GAO’s report, examines two issues: how the SEC has conducted oversight of FINRA—including FINRA rule proposals and the effectiveness of its rules—and how the SEC plans to enhance its oversight of FINRA. To address these, the GAO reviewed SEC policies for inspections of FINRA and reviews of FINRA rule proposals; reviewed documentation on SEC’s plans for enhanced FINRA oversight; and interviewed SEC and FINRA officials.
Recommendations from the GAO
The SEC should encourage FINRA to conduct retrospective reviews of its rules and establish a process for examining FINRA’s reviews, and should follow all elements of a risk-management framework in developing its future oversight plans, the GAO said. The commission agreed with these recommendations.
As the commission works to enhance its oversight of FINRA, the SEC chairman should:
- Encourage FINRA to conduct retrospective reviews of its rules and establish a process for examining the regulatory authority’s reviews; and
- Direct the Office of Compliance Inspections and Examinations to follow the elements of a risk-management framework as it develops plans for an enhanced risk-based approach to FINRA oversight, such as developing plans for how it will prioritize risks related to oversight of FINRA and assessing the effectiveness of its risk-based model.
The GAO’s report is available for download here.