GAO Claims SEC Oversight of FINRA is Insufficient; SRO Hearing is This Week

As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Government Accountability Office (GAO), a non-partisan investigative agency of Congress, conducted a study which criticized the Securities and Exchange Commission’s (SEC) oversight of the Financial Industry Regulatory Authority (FINRA). The purpose of the study was to determine how the SEC has conducted its oversight of FINRA, including the effectiveness of FINRA rules, and how the SEC plans to enhance its oversight.

The GAO found that both the SEC and FINRA do not conduct retrospective reviews of the impact of FINRA’s rules. As a result, the GAO believes that “FINRA may be missing an opportunity to systematically assess whether its rules are achieving their intended purpose and take appropriate action, such as maintaining rules that are effective and modifying or repealing rules that are ineffective or burdensome.” The GAO also noted that the SEC does not conduct sufficient oversight over FINRA’s governance and executive compensation. The SEC has responded to the survey by saying that it is focused primarily on oversight of FINRA’s regulatory departments, which the SEC claims has the biggest impact on investors.

The GAO has recommended that the SEC enhance and expand its oversight of FINRA through a more risk-based approach, and that the SEC conduct retrospective reviews of its rules. The SEC has stated that it generally agrees with the GAO’s recommendations. FINRA also said in a statement, “We agree with GAO’s recommendation that a retrospective review of FINRA rules could be valuable, and we’ll work with the SEC to implement such a process.”

This study comes at an inopportune time for FINRA since it is in the process of lobbying to become the self regulatory organization (SRO) for investment advisers. Currently, FINRA is the SRO for broker-dealers. The House Financial Services Committee is conducting a hearing this week to discuss Rep. Spencer Bachus’s (R-AL) SRO bill, which could transfer oversight of investment advisers to FINRA or create a new SRO. There are numerous groups opposing the bill, including the Investment Advisers Association, the Financial Planning Coalition, the American Institute of CPAs, and the Project on Government Oversight. Some of the opponents of the bill see the GAO study as proof that the SEC is already having trouble overseeing FINRA’s regulation of broker-dealers, and that the SEC would not be able to handle oversight if FINRA also became the SRO for investment advisers.

FINRA officials will have an opportunity at the House Financial Services Committee hearing to answer concerns about its possible future role. Other officials slated to testify at the hearing include the executive director of the Investment Adviser Association, David Tittsworth, and officials from the Financial Services Institute, the Securities Industry and Financial Markets Association, the North American Securities Administrators Associations, and the National Association of Insurance and Financial Advisors.

Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.

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