With Congress about to take up legislation that would shift oversight of investment advisers from the Securities and Exchange Commission to an industry organization, the agency that wants to fill that role — Finra — has come under fire from a government watchdog.
Last Wednesday, the Government Accountability Office, the investigative arm of Congress, called on the SEC to strengthen its oversight of the
Financial Industry Regulatory Authority Inc., the self-regulatory organization for brokers, including assessing the salary levels of Finra executives.
The GAO also urged the SEC to direct Finra to conduct “retrospective reviews” of its rules to identify ineffective or burdensome regulations that could be repealed.
The GAO study, mandated by the Dodd-Frank financial reform bill, couldn't have come at a better time for opponents of the SRO legislation, which will be the subject of a House Financial Services Committee hearing Wednesday.
“This report is just another prong in the opposition to an SRO bill and underscores why a Finra SRO is not a solution to the problem,” said Marilyn Mohrman-Gillis, managing director of public policy and communications for the Certified Financial Planner Board of Standards Inc.
The SRO bill was introduced by Financial Services Committee Chairman Spencer Bachus, R-Ala., as a way to in-crease investment adviser examinations. Mr. Bachus, comparing the annual 8% of advisers who are reviewed by the SEC with the 58% of brokers who are examined by Finra, said his bill would better protect investors.
Mr. Bachus was re-sponding to an SEC study in January 2011 that recommended three ways to strengthen adviser regulation: allow the SEC to charge user fees for exams, authorize an adviser SRO or enable Finra to expand its reach to advisers who are dually registered as brokers.
Each option requires congressional approval.
Opponents of an SRO now point to the GAO report as further evidence that the SEC has its hands full overseeing Finra's regulation of brokers.
“There might be some points in [the GAO report] that might be used in this debate,” said Skip Schweiss, managing director of investor advocacy and industry affairs at TD Ameritrade Institutional. “We don't believe adding another layer of regulation is the right way to approach it. Let's make those existing regulations and processes better.”
The GAO, while acknowledging that the SEC does review Finra annually, noted that the SEC doesn't monitor Finra's pay levels.
“[The] SEC has conducted limited or no oversight of other aspects of Finra's operations, such as governance and executive compensation,” the GAO report states. “SEC officials said that SEC focused its resources on Finra's regulatory departments, which were perceived as programs that have the greatest impact on investors.”
Within the GAO report, the SEC indicates that its Office of Compliance Inspections and Examinations is reviewing “Finra executive compensation, including retirement plans and incentive compensation.” The SEC also is assessing Finra's governance practices.
In a May 22 response to the GAO, SEC staff said that the agency has a “robust” program for overseeing Finra, and that it already has planned to implement the GAO's recommendations for enhanced risk-based reviews of Finra.
"ADDITIONAL METHODS'
In addition, SEC Chairman Mary Schapiro has requested the SEC staff to encourage Finra to “consider additional methods to conduct retrospective reviews of its rules to assess whether Finra's rules are achieving their intended purpose,” the SEC response said.
Finra maintains that current SEC oversight is strong, but agrees with the GAO that it should review its rules.
“Finra believes the report demonstrates the broad and robust oversight the SEC provides to our operations, with annual or continuous review of our core regulatory programs,” Finra said in a statement. “We agree with GAO's recommendation that a retrospective review of Finra rules could be valuable, and we'll work with the SEC to implement such a process.”
Finra needs to be more transparent, according to Peter Chepucavage, general counsel at Plexus Consulting Group LLC and a former SEC lawyer.
He asserts that the self-regulator could disclose more about its pay level like government agencies do.
“If you're going to have real oversight, then you have to look at the pay scales” of self-regulators, Mr. Chepucavage said. “And you need to say, "How did you arrive at this [pay level]?'” he added.
“The SEC has always been reluctant to pursue this issue — they were reluctant with [former NYSE chairman Richard] Grasso — and I've always wondered why.”
UNDER PRESSURE
In 2003, Mr. Grasso was forced out of the
New York Stock Exchange due to a furor over a $139.5 million pay package approved by directors from firms the Big Board regulated.
Finra's costs are especially important now that its revenue is under pressure and member fees are about to be raised, Mr. Chepucavage said.
Finra discloses pay for its top executives in an annual report and tax returns, but the data are at least six months old and limited to the top 10 executives.
“We need to see [compensation] at all executive levels, above the district director,” said Carrie Wisniewski, president of B/D Compliance Associates Inc., a compliance consultant, and Bridge Capital Associates Inc., a broker-dealer.
She also likes the idea of eliminating outdated rules, such as one that limits business entertainment expenses to $100 per year per individual recipient.
“Lots of things don't create big risk for public investors, but we spend an inordinate amount of time complying with [related rules]” Ms. Wisniewski said.
“We could be spending time on [customer] account reviews instead of looking at business receipts,” she said.
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