SEC Makes Changes to GAO FINRA Oversight

The SEC is heeding calls from a government watchdog to step up its oversight of FINRA, but it is doing so behind closed doors.

The Wall Street regulator, which is FINRA’s sole oversight agency, “generally agreed” with recommendations from the Government Accountability Office last December to improve its formal review of FINRA, which oversees broker-dealers. According According to a GAO report in June, the SEC is making changes to its FINRA reviews. The GAO had called on the SEC to flesh out review performance metrics and records of deficiencies and corrective actions, as well as to better communicate the results of its audits.

The SEC leads triennial FINRA reviews as required by Dodd-Frank, the 2010 law that sought to restore stability and oversight to Wall Street after the financial crisis and mortgage meltdown. FINRA has drawn criticism for being too close to the securities industry and not doing enough to root out schemers like Bernie Madoff. He also came under surveillance for its arbitration forum. Although FINRA is supervised by the SEC, it is generally a self-regulatory organization. This generated $1.3 billion in operating revenue in 2021.

The SEC cleared the GAO’s previous reports of its oversight of FINRA under Dodd-Frank, in 2012, 2015 and 2018, to be fully public. But with its current report, the SEC “has determined that some of this information is confidential surveillance information.” The SEC ordered the GAO to omit certain details from the public version of the report it Posted in December, five months after thelimit” edition that is immune from public scrutiny.

last January, Financial planning submitted a request to the SEC and GAO for the “restricted” version under the Freedom of Information Act. The GAO declined the request a few weeks later.

In its denial, the GAO said the report was “designated as containing ‘unclassified controlled information’ by [the SEC].” The GAO has defined such information as relating to facts “obtained from various agencies or private enterprises in such a manner as to increase the visibility of particularly sensitive information or to reveal weaknesses or internal control methodology.”

In a July 6 letter to FP, the SEC also classified the report as restricted and containing “confidential oversight information.” The Wall Street regulator added that making the study public “could reasonably be expected to disclose techniques, guidelines and criteria used in the review of records by staff and thereby undermine law enforcement.” Federal Securities Laws.

SEC officials did not respond to requests for comment.

Asked about the GAO’s recommendations, FINRA spokesperson Ray Pellecchia said in an email that FINRA “has taken a number of important steps to strengthen investor protections and adapt to the evolution of markets and industry practices” since the events of the stock sale even in early 2021.

Pellecchia added that FINRA has “implemented a new rule that improves our ability to monitor the liquidity risk of members most exposed to clients and counterparties.” The body “also sought comment on member firms’ practices involving complex products, options and short selling.”

The SEC placed “modernizing the American financial regulatory system” on its “High risk listin 2009, and five other key areas for the watchdog “also have direct implications” for SEC operations, according to the GAO’s rolling update on recommendations.

What is common knowledge is that the SEC conducted 69 reviews of FINRA between fiscal years 2018 and 2020. The public version of the GAO report in December faulted the SEC for a lack of “results-oriented” data. ” and “useful information for decision makingamong other areas covered in the review.

For some regulatory experts, secrecy over the details of the report doesn’t seem right.

“As is always the case, when you authorize a government agency to classify information or designate confidential information, which may be used more widely than necessary to obscure and prevent the public from accessing information that the public or the industry should have the right to examine, understand and make judgments,” said Michael Canning, former director of policy and government affairs for the North American Securities Administrators Association and founder of consulting firm The LXR Group.

The June 17 Watchdog Update cited the latest status on FINRA’s “priority” SEC review adjustments. First, performance metrics with improved tracking of review results “would provide greater assurance that FINRA is fulfilling its regulatory responsibilities and that the SEC is fulfilling its mission, including protecting investors and maintaining efficient markets.” “, did he declare.

Second, strengthened procedures for monitoring deficiencies and corrective actions would “provide [the] SEC with reasonable assurance that it obtains key information on the state of risks as part of its monitoring of FINRA and the extent to which identified risks have been appropriately mitigated,” he said. declared.

Third, he said, specifically identifying the most significant review findings and coordinating between the two regulators about them would help the SEC “obtain reasonable assurance that it has correctly and consistently identified and communicated its most important findings internally and at FINRA”.

The report did not provide an expected timeline for the SEC to implement the recommendations.

The watchdog follows up with government agencies, including the SEC “at least once a year, sometimes more frequently,” to check on progress, said Michael Clements, GAO’s director of capital markets and community investment. . He added that the SEC “has actions pending; they simply need to complete these actions to satisfy the recommendations.