SEC blocks details of FINRA exams, again

The Securities and Exchange Commission drove changes at FINRA over the last three years, but the agency is refusing to share publicly exactly what it did and why, a watchdog report said.

As part of the safeguards that the Dodd-Frank Act put in place in the wake of the 2008 financial crisis, the U.S. Government Accountability Office conducts triennial reviews of the SEC's oversight of FINRA in 10 areas, adding up to what may be the only regular and independent glimpse into a key aspect of the regulation of Wall Street firms. The SEC is "meeting its performance goals" in FINRA supervision and getting the self-regulatory organization to agree "to take corrective action," the GAO said in its latest report on the topic last month. 

But the SEC is shielding those metrics, problems and solutions from the public.

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The Wall Street regulator asked the GAO to remove what it deemed "sensitive" details about "the specific topics covered" in the SEC's examinations of FINRA, the findings of those 21 inspections between 2021 and 2023, the main factors involved in its performance goals and an appendix that dove into one particular inspection last year, the watchdog said. The resulting Nov. 12 public report is a sanitized version of the "sensitive" edition from July, in which the GAO included many facts elided in the recent publication. The new report marked the second consecutive time that the SEC has blotted out the relevant details of the watchdog's review.

"I read it, and I had to reread it again just to try to get a handle of what they're actually doing," said Adam Gana, a managing partner of law firm Gana Weinstein and the president of the Public Investors Advocate Bar Association. The organization for the lawyers of clients harmed by wealth management firms is pushing for the SEC to require registered investment advisory firms to use the same FINRA arbitration forum where brokerages resolve customer disputes. Gana said that he hopes the next GAO report on the SEC's administration of FINRA probes that issue, as well as unpaid arbitration awards and errors and omissions insurance at RIAs.

Representatives for the SEC declined to comment beyond what is available in the report on why the agency objected to disclosing more information on its FINRA and Securities Industry Oversight program.

"This report is a public version of a sensitive report we issued on July 19, 2024," Michael Clements, the GAO's director of financial markets and community involvement, wrote in the report. "The sensitive report's first objective included information on specific examination and inspection topics. SEC deemed some of this information to be sensitive. Thus, this public report omits certain information related to SEC's inspections and examinations of FINRA and the specific topics covered in those reviews. The sensitive report also included an objective describing specific findings from SEC inspections and examinations of FINRA, as well as information on the significance of those findings. SEC determined that such information is sensitive, and this report therefore omits it."

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In keeping with the GAO's recommendations the last time it reviewed the SEC's oversight of FINRA, the regulator followed the watchdog's instructions to implement "outcome-based performance measures and goals" and "develop policies and procedures for tracking, identifying and communicating the significance of examination findings," according to the report. For example, the SEC unit concluded that it had met a goal seeking to ensure that "FINRA agrees to take corrective action on a targeted percent of findings at or above a specified significance level." However, the report didn't state anything about the areas where the SEC found deficiencies at FINRA or the percentage of them that led FINRA to agree to make changes.

Dodd-Frank ordered the GAO to study 10 aspects of the SEC's oversight of FINRA. They are: FINRA's governance, "including the identification and management of conflicts of interest"; the nature of the SEC's examinations of FINRA; executive compensation at FINRA; arbitrations administered by FINRA; regulatory reviews of FINRA members' advertising; how FINRA cooperates with state securities regulators; how FINRA manages its budget; FINRA policies about the employment of ex-officials by firms it regulates; the effectiveness of FINRA's rules; and the transparency of its activities. The 21 SEC inspections between 2021 and 2023 involved eight of those 10 areas, but earlier and later exams reached the other two, the GAO said.   

The GAO's previous review of the SEC's oversight of FINRA represented the first time that the agency restricted any of the materials from public view, although the watchdog had earlier found shortcomings with the Wall Street regulator's supervision of FINRA. In 2022, the GAO and the SEC each denied Financial Planning's request under the Freedom of Information Law to obtain the nonpublic version of its last report. The SEC rejected an appeal later that year. At the time, SEC Assistant General Counsel for Litigation and Administrative Practice Melinda Hardy told FP that FINRA is "a financial institution" that qualifies for an exemption from FOIA rules.

"Exemption 8 has been broadly construed 'to provide absolute protection regardless of the circumstances underlying the regulatory agency's receipt or preparation of examination, operating or condition reports,'" Hardy wrote. "That broad interpretation has been found to advance Exemption 8's two principal purposes: (1) to protect the security of financial institutions by withholding from the public materials containing frank evaluations of these entities, and (2) to promote cooperation and communication between regulated entities and their examiners."

In all, FINRA is the primary regulator for roughly 3,300 brokerage firms across the financial industry. The agency has about 4,200 employees across 17 offices with a 2024 budget of $1.48 billion, according to its latest annual financial report. In 2023, it issued $88.4 million in fines and referred 623 possible cases of fraud and insider trading to the SEC and other agencies.

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FINRA has its critics on the left and the right. The conservative blueprint for President Donald Trump's second term, Project 2025, called for major transparency reforms at FINRA, if not outright elimination of the agency. As a "self-regulatory organization," FINRA gets its budget through those enforcement cases and membership fees paid by the companies it regulates. 

"FINRA writes rules to govern these firms and their representatives and examines for and enforces broker-dealer compliance with FINRA rules and federal securities laws," Clements wrote in the GAO report. "In addition, it conducts market surveillance on U.S.-listed equities and U.S.-listed options. Given the scope of FINRA's regulatory responsibilities, ensuring that it carries out these responsibilities is critical to SEC's mission to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation."