May 31 The U.S. Securities and Exchange
Commission can do a better job of overseeing the Financial
Industry Regulatory Authority, a government report found.
While the SEC routinely inspects many regulatory programs
run by Wall Street's industry-funded regulator FINRA, it doesn't
review whether FINRA's rules for the securities industry are
effective, according to a Government Accountability Office
report released late Wednesday. It also doesn't have a process
for such a review, said GAO, an investigative arm of Congress.
Congress required the GAO's study in the Dodd Frank
financial reform law of 2010. It specifically directed the GAO
to review oversight of various FINRA practices, including
executive compensation practices, securities arbitration
programs and governance issues.
While a federal law authorizes FINRA to regulate the
brokerage industry, the SEC must oversee FINRA and approve its
FINRA agreed with GAO's recommendation that a "retrospective
review of FINRA rules could be valuable," a spokeswoman told
Reuters by email on Thursday.
"We'll work with the SEC to implement such a process," she
The report, which analyzes the SEC's oversight of FINRA
between 2005 and 2010, comes less than a week before a hearing
by federal lawmakers about legislation that would establish a
self-regulatory organization for registered investment advisers.
Those advisers are subject to SEC oversight. FINRA has been
promoting itself as an appropriate choice to serve as regulator
for those advisers.
While GAO found that the SEC regularly reviews FINRA
activities, such as its examination and advertising programs,
other aspects of FINRA's operations receive little to no
oversight. These included the adequacy of FINRA's funding,
certain corporate governance issues and potential conflicts of
The SEC has also not historically reviewed executive
compensation programs at FINRA, the report said.
Richard Ketchum, FINRA's chairman and chief executive
received $2.6 million in compensation for 2010, according to
FINRA's annual report. Its top ten executives received nearly
$13 million in pay and benefits in 2010, according to a letter
by the Project on Government Oversight, a Washington-based
government watchdog group, to federal lawmakers on Tuesday.
The SEC is in the process of collecting information from
FINRA that could highlight potential risks worthy of review,
according the report. Those details include everything from
executive compensation issues to policies covering former FINRA
employees who later work at companies it regulates.
A letter from SEC officials, included in the report,
acknowledges the agency is putting new risk-based procedures in
place for FINRA oversight.
The SEC has "enhanced and expanded its oversight of FINRA"
since 2010, wrote Carlo di Florio, director of the SEC's Office
of Compliance Inspections and Examinations, and Robert Cook,
director of the Division of Trading and Markets.
Indeed, the report demonstrates "the broad and robust
oversight the SEC provides to our operations," the FINRA
(Reporting By Suzanne Barlyn. Editing by Bernadette Baum)