SEC should step up scrutiny of Finra: Report

A study of the SEC's internal operations suggests that the agency needs to pay closer attention to the SRO

Mar 11, 2011 @ 3:58 pm

By Dan Jamieson

The SEC needs to beef up its oversight of Finra, according to an analysis of the former's internal operations released yesterday.

The Boston Consulting Group Inc. completed the six-month review, which was required under the Dodd-Frank law, this month.

The Securities and Exchange Commission 's relationship with self-regulatory organizations was just one aspect studied.

Because the Financial Industry Regulatory Authority Inc. now provides market surveillance services for approximately 80% of U.S. equity trading, the SEC's oversight of Finra is particularly important, the report stated.

In addition to focusing on Finra's market regulation function, BCG said the SEC should pay more attention to Finra's member regulation and enforcement units by assigning dedicated inspectors to oversee these departments and work with other SEC staff members who handle Finra rule filings and conduct exams of the SRO.

The SEC's Office of Compliance Inspections and Examinations has the equivalent of about 50 full-time employees dedicated to inspecting 12 SROs.

But the SEC has limited information about these private regulators.

SROS "are not currently required to regularly disclose information to the SEC regarding their regulatory operations," the report said.

The study recommended that the disclosure of data by SROs to the SEC be formalized.

The SEC's Division of Trading and Markets has more than 100 staff attorneys reviewing SRO rule filings, the report said.

But that unit's staff "could benefit from a deeper understanding of how the markets and market participants operate," the consulting group found.

The number of SRO rule proposals jumped 40% from 2005 to 2010, straining the SEC's ability to review the filings.

Finra spokesman Nancy Condon declined to comment on the report.

The analysis "confirms the concerns I have been expressing — that the SEC does not have the resources to perform all the activities expected of us," SEC Chairman Mary Schapiro said in a statement.

She said the SEC will be forming a series of working groups to address each of the report's recommendations.

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