SEC denies FOIA appeal of FINRA surveillance documents

The SEC conceals every problem it has discovered and solved at FINRA in recent years from the public, financial advisors, wealth managers and their clients.

The Wall Street regulator, which oversees registered investment advisers and US capital markets, is the sole supervisor of FINRA, which regulates broker-dealers. The Government Accountability Office, an oversight agency that reports to Congress, found in an audit last year that frequent reviews and inspections of FINRA by the SEC have shown a need for clearer metrics, accountability and communication between the two regulators. But the report left out “confidential oversight information” about the details of any findings or actions taken by the SEC in 69 different reviews it conducted of FINRA between 2018 and 2020.

This is the first time the SEC has restricted part of the watchdog’s triennial reports on its oversight of FINRA as “controlled unclassified information” that is too sensitive to be made public. After having taken six months to refuse Financial planningit is Freedom of Information Act’s initial request for details, the SEC dismissed FP’s appeal in a heartbeat. The denial omits any clue to what, if anything, the SEC ordered FINRA to change in its operations to better protect investors and enable market integrity. Although FINRA has reformed significantly, its critics say it could perform much better on its main tasks.

Describing FINRA as a “financial institution” for the purposes of the SEC’s exemptions from the law, Assistant General Counsel for Litigation and Administrative Practice Melinda Hardy said in an Aug. 22 letter to FP that the law does not apply. applies to any “examination, operating or condition reports” used by any body that regulates financial institutions.

A “broad interpretation” from several court cases on regulatory exemptions helps to “protect the safety of financial institutions by withholding public documents containing candid assessments of these entities, and to promote cooperation and communication between regulated entities and their reviewers,” Hardy wrote. Disclosure of the SEC’s findings in its reviews, she added, “could compromise the Commission’s oversight of regulated entities, including FINRA.”

Hardy said she determined that partial record sharing would also not be consistent with the purposes of the exemption. FP may seek judicial review of agency decisions by filing a lawsuit against the agency in federal court.

SEC officials did not respond to requests for additional information about its oversight of FINRA or its reasons for not publicly sharing the results of the reviews.

GAO officials also rejected FP’s filing requests, citing the SEC’s ruling that the information is too sensitive to be made public. Half a dozen congressmen on committees that oversee the SEC did not respond to inquiries asking for the records.

The Financial Industry Regulatory Authority is not a government agency per se and is technically a self-regulatory organization overseen by the SEC, a status that does not appear to fit Hardy’s classification. It is not a financial institution, by widely accepted definitions, nor its own. On its website, FINRA is called “a non-profit organization authorized by the government.”

According to the Code of Federal regulationsa list of general and permanent regulations issued by executive departments and agencies of the federal government, a financial institution means “any U.S. entity that is in the business of accepting deposits, making, granting, transferring, holding, or dealing loans or credits, or purchase or sell currencies, securities, commodity futures or options, or procure buyers and sellers thereof, as principal or agent”.

Either way, the SEC has shut down access to its FINRA review results. GAO’s SEC audit is one of 32 in the past fiscal year designated as “restricted” based on the executive agency’s determinations that they had “classified information or controlled unclassified information”. While the federal government watchdog completed its full report in July 2021, five months before releasing a public version, the first is only available to Congress. In addition to covering predictable classified topics such as military vessels, aircraft, and weapons, other restricted reports include those on IRS operations, digital currencies, and information technology.

In 2010, the Dodd-Frank Act sought to restore confidence in the financial system during the Great Recession and after the Bernie Madoff scam revelations, in part through a provision ordering the GAO to probe oversight of FINRA by the SEC every three years. While it’s unclear what findings or initiatives are missing from the public version of the GAO report, the deletion should concern advisers and the public as it helps regulators avoid potential liability, the fraud expert said. and in regulation Douglas Schulz of Invest Securities Consulting.

“Every scam, every fraud perpetrated against the American investor has been committed under the noses of FINRA and the SEC,” Schulz said. “It may not be so much that we can see what the SEC has found wrong with FINRA. We could see that they have done next to nothing.”

In June, the GAO Posted a progress report noting that the SEC is working to implement the watchdog’s three recommendations stemming from its earlier review of the SEC’s oversight of FINRA. The SEC ‘generally agrees’ with the watchdog’s proposals calling for more reliable performance measures, better tracking of shortcomings and corrective actions, and new procedures to explain the significance of the results of its reviews FINRA. In its report last year, the GAO took the SEC to task for what it called a lack of “results-oriented” data and “useful information for decision makingaccording to his opinions on FINRA.