A new report recommends that the U.S. securities industry self-regulators should be reviewing the efficacy of their rules to make sure they are producing the desired results, and that their oversight could be enhanced, too.
The U.S. Government Accountability Office (GAO) Thursday released a report examining the U.S. Securities and Exchange Commission’s (SEC) oversight of the industry self-regulatory organization (SRO), the Financial Industry Regulatory Authority (FINRA). It concludes that the SEC should encourage FINRA to conduct retrospective reviews of its rules, and that the SEC should establish a process for examining those reviews.
The report notes that neither the SEC, nor FINRA, conduct retrospective reviews of the SRO’s rules. But, the GAO maintains that these sorts of reviews are useful, “as they allow agencies to assess the effectiveness of their rules”; and, it notes that some federal financial regulators, including the SEC, have begun pursuing plans to conduct retrospective reviews.
“By not conducting these reviews, FINRA may be missing an opportunity to systematically assess whether its rules are achieving their intended purpose and take appropriate action, such as maintaining rules that are effective and modifying or repealing rules that are ineffective or burdensome,” the report says.
Additionally, the report finds that the SEC has “conducted limited or no oversight of other aspects of FINRA’s operations, such as governance and executive compensation”. It says that the SEC indicates that the lack of oversight in this area is due to resource constraints, and that it has focused its resources on FINRA’s regulatory departments instead, as they have the greatest impact on investors.
The report indicates that the SEC is in the process of enhancing and expanding its oversight of FINRA using a more risk-based approach. And, it notes that, while the SEC has followed some elements that are important in a risk-management framework, it says the SEC has not documented how it will implement all of the elements, “such as considering alternative oversight approaches and monitoring the effectiveness of its oversight.”
“Incorporating these other elements will better position [the] SEC to prioritize evolving and varying risks, evaluate alternatives, and monitor its oversight efforts. Without such elements, [the] SEC may be missing opportunities to take a more comprehensive, risk-based approach in overseeing FINRA,” it concludes.
The report notes that the SEC generally agreed with the GAO’s recommendations.