The Securities and Exchange Commission has completed three steps a congressional watchdog called on the regulator to carry out in order to bulk up the agency's reviews of FINRA.
As the only entity directly supervising FINRA, the SEC "has adopted performance measures to help assess the effectiveness of its oversight of FINRA as well as policies and procedures to identify, communicate and monitor significant findings from its inspections and examinations of FINRA," the U.S. Government Accountability Office
In response to the findings, the SEC developed "new performance measures and numerical targets," standards "to identify, communicate and monitor significant findings" from its exams of FINRA and guidelines "for identifying and communicating the significance of SEC's inspection and examination findings to FINRA," U.S. Comptroller General Gene Dodaro, the head of the GAO, said in an
"By taking these steps, SEC will receive the information it needs to better monitor and assess the effectiveness of its reviews of FINRA, better evaluate FINRA's responses and more clearly communicate SEC's concerns to FINRA," Dodaro wrote. "Consequently, SEC will be better positioned to protect investors and maintain efficient markets, and the agency will have greater assurance that FINRA will carry out its regulatory responsibilities."
Certain parts of the report two years ago about "the number and type of findings and associated corrective actions that SEC determined to be confidential supervisory information" remain under wraps as part of a "sensitive" version of the probe that hasn't been released to the public. The GAO — an independent oversight agency reporting to Congress — and the SEC each
Regardless, enacting the GAO's recommendations represents "a great sign" for the regulator that "undercuts the narrative we've seen advanced by some in Congress recently" suggesting that Gensler's team isn't "able to get the little things done," according to Michael Canning, former director of policy and government affairs for the North American Securities Administrators Association and founder of consulting firm
"GAO is a serious nonpartisan agency and getting them to sign off on something — much less three things — can mean a rigorous process that can take years," Canning said in an email. "A big question is, with improved procedures, measures, assessments, etc., how do these reforms impact actual broker conduct? That remains to be seen."
Representatives for the SEC, which had "generally agreed" with the GAO's suggestions in 2021, referred questions to the updated status about the policy adjustments on
The SEC has three new performance metrics and numeric targets for each of them: the percentage of exam observations in which FINRA "agreed to take corrective action in response to significant deficiencies and control weakness"; the share of "the most significant deficiencies and control weakness for which FINRA implemented corrective actions" within two years; and the portion of inspections started in response to the SEC's "risk assessment process that resulted in significant findings."
In addition, the SEC unit overseeing FINRA created policies and procedures for discussing and tracking the results of its exams, such as "the timing and method for tracking findings and FINRA's implementation of corrective measures" and "for categorizing inspection and examination findings based on significance and for communicating the significance of the most important findings internally and to FINRA."
With about 3,900 employees and
Among other items, FP had requested access to "inspection and examination case file materials for the 69 reviews of FINRA (13 program inspections, 11 thematic oversight examinations, and 45 single oversight examinations) that the SEC completed from fiscal year 2018 through 2020." The GAO report from two years ago cited those files as part of its research and interviews in its review of the SEC's oversight of FINRA.
In a response to FP, SEC Assistant General Counsel for Litigation and Administrative Practice Melinda Hardy said that FINRA qualifies as "a financial institution" since it's an industry self-regulatory organization under the supervision of the SEC. Therefore, an exemption to the Freedom of Information law from the Securities and Exchange Act applies to the exam materials and findings, Hardy wrote.
"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," she continued. "I further find that it is reasonably foreseeable that disclosure of the withheld examination records would harm interests protected by Exemption 8 because such a disclosure could compromise the Commission's oversight of regulated entities, including FINRA. I have also considered whether partial disclosure of the withheld records is possible, but have determined that it is not because such a disclosure would not be consistent with the purposes of Exemption 8."
