GAO recommends SEC tighten oversight of Finra

The Government Accountability Office is recommending that the Securities and Exchange Commission tighten its oversight of Finra.

In a report released Wednesday, the GAO examined SEC reviews of the Financial Industry Regulatory Authority Inc. from fiscal 2018 through 2020 in areas such as governance, examinations performed by Finra, executive compensation practices, arbitration services, the agency's use of its funds and the effectiveness of its rules.

The GAO’s analysis of 69 SEC reviews of Finra found that they were not as rigorous as they should be. The GAO said performance measures are “task-oriented,” such conducting meetings, rather than being “outcome oriented” and providing information that Finra could better use to improve its operations.

The “SEC’s program for overseeing Finra also does not have documented policies and procedures for determining which findings and any associated corrective actions to track, or for identifying and communicating the significance of findings from its oversight of FINRA to internal stakeholders and to Finra,” the GAO report states.

In a fact sheet about the report, the GAO used the example of SEC assessments of Finra’s examinations of its member firms to illustrate the lack of SEC follow-through.

“Review Finra’s regulatory work is critical to SEC's mission of protecting investors and maintaining fair, efficient markets,” the fact sheet states. “For example, SEC reviews Finra’s examinations of securities firms and may identify deficiencies. But we found that SEC doesn’t have documented procedures for determining which deficiencies — and Finra responses — to track.”

The SEC established the FINRA and Securities Industry Oversight (FSIO) Program in 2016 to enhance oversight of the broker-dealer self-regulator so that the SEC could devote more resources to examinations of registered investment advisers.

One problem is that there is a lack of performance measures for FSIO monitoring of Finra, the GAO report states.

“GAO is recommending SEC establish performance measures for Finra oversight that reflect leading practices, and policies and procedures for tracking, identifying and communicating the significance of examination findings,” the GAO report states.

An SEC spokesperson did not respond to a request for comment. A Finra spokesperson declined to comment.

A former Finra official said that the SEC should add more rigor to its Finra oversight.

“It seems a little loose in that it lacked formalized, documented processes and communications that one would expect to see in an oversight program,” said Emily Gordy, a partner at McGuireWoods and former Finra senior vice president for enforcement.

But she said the GAO report did not point to weaknesses in Finra’s broker-dealer examination program.

“This is not illustrating a potential regulator gap in terms of Finra’s exams or the SEC’s oversight of those exams,” Gordy said. “What it is showing is missed opportunities to take the program to the next level.”

The GAO periodically reviews SEC oversight of securities industry self-regulators under a provision of the Dodd-Frank financial reform law. The report released Wednesday is a public version of a report delivered to the SEC in July.