GAO Calls On SEC to Strengthen Oversight of FINRA As Congress Weighs Investment Adviser SRO Legislation

On May 30, 2012, the federal Government Accountability Office (GAO) released a report, mandated by Dodd-Frank, on its study of the SEC’s oversight of FINRA. The report is critical of the agency’s oversight of FINRA, calling on the agency to direct FINRA to conduct “retrospective reviews” of its rules and to identify ineffective rules that should be abandoned. The report notes the “SEC has conducted limited or no oversight of [certain] aspects of FINRA’s operations, such as governance and executive compensation.” In its response to a draft of the report, the agency maintained it operates “a robust program for the oversight of FINRA” but indicated that SEC Chairman Mary Schapiro had already requested staff to “encourage FINRA to consider additional methods to conduct retrospective reviews of its rules to assess whether [those] rules are achieving their intended purpose.” The SEC’s response also agreed with the report’s recommendations that the Office of Compliance Inspections and Examinations (OCIE), the department with primary responsibility for FINRA oversight, implement a more comprehensive, risk-based approach to its oversight of the SRO. The report comes just one week before the House Financial Services Committee is set to hold a hearing on legislation that would move direct oversight of investment advisers, which currently rests with the SEC, to a new self-regulatory organization that FINRA is vying to become. The proposed law, H.R. 4624, would amend the Investment Advisers Act of 1940 to create “National Investment Adviser Associations” that, like FINRA’s oversight of Broker-Dealers, would be supervised by the SEC. Proponents of the bill argue that an SRO will increase oversight of advisers. Opponents of the legislation, however, are pointing to the GAO study as further evidence that adding a new layer of oversight will not address the bill’s purported concerns about investor protection. For additional information about these issues or any other securities law concern please contact us at (619) 298-2880.

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