May 31, 2012 / 2:30 PM / 6 years ago

SEC can boost oversight of FINRA -GAO report

May 31 (Reuters) - 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 industry rules.

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 said.

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 interest.

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 spokeswoman said. (Reporting By Suzanne Barlyn. Editing by Bernadette Baum)

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