From the U.S. Government Accountability Office, www.gao.gov

Transcript for: SEC’s Oversight of the Financial Industry Regulatory
Authority

Description: Audio interview by GAO staff with Nikki Clowers, Director,
Financial Markets and Community Investment

Related GAO Work: GAO-12-625: Securities Regulation: Opportunities Exist
to Improve SEC's Oversight of the Financial Industry Regulatory
Authority

Released: May 2012

[Background Music]

[Narrator:] Welcome to GAO's Watchdog Report, your source for news and
information from the U.S. Government Accountability Office. It's May
2012. The Financial Industry Regulatory Authority, or FINRA, is charged
with overseeing all security broker dealers conducting business with the
public in the United States. The Securities and Exchange Commission, or
SEC, oversees FINRA. A group led by Nikki Clowers, a director in GAO's
Financial Markets and Community Investment team, recently reviewed SEC's
oversight of FINRA. GAO's Jeremy Cluchey sat down with Nikki to learn
about what they found.

[ Jeremy Cluchey: ] Can you start out by explaining the relative roles
and responsibilities of the SEC and FINRA?

[ Nikki Clowers: ] The securities industry is regulated by a combination
of direct SEC oversight as well as self-regulation by the industry. SEC
is the primary federal regulator. FINRA, the Financial Industry
Regulatory Authority, helps provide self-regulation for the industry,
and in providing that regulation it oversees broker dealers, which are
the firms that makes, that make security trades on behalf of its firm as
well as individuals. Congress created this bifurcated system to help
promote the efficient oversight and hopefully less costly oversight also
in a way to reduce government involvement in the markets. But in order
for this system of regulation to work, it's important for SEC to ensure
that FINRA's carrying out its regulatory responsibilities, and this is
what our report examines.

[ Jeremy Cluchey: ] And what kind of oversight has the SEC been
conducting of FINRA to date?

[ Nikki Clowers: ] Historically, SEC's oversight of FINRA has varied,
with some aspects of FINRA receiving a good deal of attention on a
routine basis, while other areas have received limited to no oversight.
SEC has routinely examined FINRA's regulatory programs to include its
enforcement and examination programs as well as its proposed rules. But
it has provided little to no oversight of other aspects of FINRA such as
governance and executive compensation issues. According to SEC, this is
because they've been dealing with other competing demands.

[ Jeremy Cluchey: ] And your team identified some areas for potential
improvement in SEC's oversight. One has to do with retrospective
reviews. Can you talk about what this term means and why GAO is
recommending it here?

[ Nikki Clowers: ] Retrospective reviews are essentially studies that
look back on a program or project or regulatory action after it's been
implemented to determine whether that action achieved its intended
purposes. We've been on record in the past recommending retrospective
reviews in a variety of settings, and others have recognized the
importance of retrospective reviews. And more recently federal financial
regulators such as SEC have begin, have begun moving towards conducting
retrospective reviews of its rules in light of a recent executive order
that encouraged them to do so. Currently, FINRA does not conduct
retrospective reviews of its rules, and we believe it's missing an
opportunity to determine whether those rules are effective and make
adjustments accordingly such as modifying or repealing rules, and thus
we make a recommendation that SEC should encourage FINRA to conduct
those type of reviews.

[ Jeremy Cluchey: ] Your team also looked at how SEC plans to enhance
its oversight of FINRA moving forward. What did you find there?

[ Nikki Clowers: ] SEC has been working to expand and enhance its
oversight of FINRA. Starting back in 2010, SEC started to transition to
a risk-based approach to its oversight, and to do this they've been
collecting a lot of information from FINRA about its various programs
and activities. SEC has also adopted a risk management approach or
framework to guide these efforts. But what we've found is that they have
not incorporated all the elements of a risk management framework such as
evaluating different alternatives and establishing a system to monitor
the effectiveness. And we make a recommendation in this area that they
should be more closely following all the elements of a risk management
approach to ensure that they're taking a comprehensive view in this
area.

[ Jeremy Cluchey: ] And finally for taxpayers who are interested in the
issues around oversight at agencies responsible for regulating the
financial sector, what's the bottom line here?
[ Nikki Clowers: ] SEC's working to enhance its oversight of FINRA. To
do this it's going to be very important that SEC identify and mitigate
the risk facing FINRA and also be nimble in their ability to adjust to
the evolving risk. And we'll continue to monitor SEC's progress on this
front.

[ Background Music ]

[ Narrator: ] To learn more, visit gao.gov and be sure to tune in to the
next episode of GAO's Watchdog Report for more from the congressional
watchdog, the U.S. Government Accountability Office.