Congress's investigative arm says Wall Street's self-regulatory organization only has limited oversight from the SEC.
By MICHAEL SMALLBERG and ANDREW WYNER
As the House Financial Services Committee considers legislation to create a private self-regulatory organization (SRO) for investment advisers, a recent Government Accountability Office (GAO) report has raised serious concerns about the inadequate oversight of the Financial Industry Regulatory Authority (FINRA), the largest existing SRO for the securities industry.
The GAO’s report falls in line with POGO’s view that FINRA and other SROs, which operate with significant authority, have not been subject to the same level of oversight that applies to government agencies.
FINRA has argued that it is “subject to comprehensive oversight” by the Securities and Exchange Commission (SEC). But the GAO’s report found that the SEC’s oversight of FINRA is “varied, with some programs and operations receiving regular oversight and others receiving limited or no oversight.”
For instance, the GAO found that the SEC has never reviewed the lucrative compensation packages provided to FINRA’s executives (POGO recently noted that FINRA’s top ten executives received nearly $13 million in pay and benefits in 2010). And the SEC has only been able to provide occasional oversight of FINRA’s finances and governance.
The GAO also found that neither the SEC nor FINRA itself has a formal process in place to evaluate the efficacy of existing FINRA rules.
In its recommendations, the GAO called for retrospective reviews of FINRA’s rules, and urged the SEC to develop a more comprehensive framework for prioritizing its oversight of FINRA’s high-risk areas. But these recommendations raise another question: does the SEC have adequate resources to monitor FINRA and/or a new investment adviser SRO, on top of its current duties to police the financial markets?
Richard Ketchum, FINRA’s Chairman and CEO, argues that SROs can provide enhanced benefits to investors “without significant additional cost to taxpayers, since [SROs] are typically funded by fees assessed on regulated entities.” But the SEC must set aside significant resources to conduct adequate oversight of FINRA and other SROs.
SEC officials told the GAO that the agency has not been able to review issues such as FINRA’s governance and executive compensation due to “competing priorities and resource constraints.” Along these lines, recent reports by the SEC’s Division of Investment Management and the Boston Consulting Group have raised concerns about the significant resources that would be required for the SEC to monitor an investment adviser SRO.
Meanwhile, the House Appropriations Committee has proposed only a modest increase in funding for the SEC, well below the level requested by the Obama Administration. Adding to the SEC’s workload without providing a commensurate increase in funding will make it nearly impossible for the agency to adequately oversee an investment adviser SRO while also carrying out its existing duties.
We’re glad to see that the SEC has committed to expanding its oversight of FINRA. But if Congress is serious about improving the government’s oversight of investment advisers, it should give the SEC the resources it needs to do the job on its own, rather than delegating more of its authority to an inherently conflicted self-regulatory group that is not subject to even basic standards of transparency or accountability.
Michael Smallberg is a POGO investigator. Andrew Wyner is a POGO research associate.
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