Securities Regulation: SEC Could Take Further Actions to Help Achieve Its FINRA Oversight Goals
Fast Facts
FINRA is a securities industry organization that regulates over 3,400 U.S. securities firms. The Securities and Exchange Commission (SEC) also regulates the industry.
Reviewing FINRA's regulatory work is critical to SEC's mission of protecting investors and maintaining fair, efficient markets. For example, SEC reviews FINRA's examinations of securities firms and may identify deficiencies. But we found that SEC doesn't have documented procedures for determining which deficiencies—and FINRA responses—to track.
Our recommendations include establishing such procedures.
Highlights
What GAO Found
In fiscal years 2018–2020, Securities and Exchange Commission (SEC) reviews (such as examinations and inspections) of the Financial Industry Regulatory Authority, Inc. (FINRA) included areas specified in Section 964 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, such as governance, funding, and transparency. GAO analysis of documentation from these 69 reviews showed they typically focused on FINRA's policies and procedures, including execution of such procedures. They also evaluated areas such as the timeliness of FINRA's operations, staffing levels, and sufficiency of training and program risk management. SEC reviews frequently identified deficiencies and FINRA typically proposed corrective actions to address these findings.
SEC has several opportunities to leverage information obtained from its reviews of FINRA to inform its FINRA oversight goals. Currently, SEC's performance measures (see table) for FINRA oversight are task-oriented (such as conducting meetings) and do not reflect leading practices (such as being outcome-oriented and providing useful information for decision-making). SEC's program for overseeing FINRA also does not have documented policies and procedures for determining which findings and any associated corrective actions to track, or for identifying and communicating the significance of findings from its oversight of FINRA to internal stakeholders and to FINRA. By establishing such measures, policies, and procedures, SEC would gain information that would allow it to better monitor and assess the impact of its reviews of FINRA, better evaluate FINRA responses, and more clearly communicate concerns to FINRA.
SEC's Performance Measures for Its FINRA and Securities Industry Oversight (FSIO) Program
|
Create annual inspection and examination oversight plan |
|
Monitor progress and complete inspection and examination plan |
|
Process tips, complaints, and referrals |
|
Conduct periodic meetings with FINRA |
|
Document examination plan update meetings |
|
Review recurring information from FINRA |
|
Conduct internal meetings with FSIO staff and provide training |
|
Meet with other SEC departments periodically to identify risks and priorities |
|
Inform Division of Examinations leadership weekly about oversight of FINRA |
|
Conduct meetings of FSIO senior staff to discuss FSIO risk-mitigation efforts |
Legend: FINRA = Financial Industry Regulatory Authority, Inc.; SEC = Securities and Exchange Commission
Source: SEC. | GAO22-105367
This is a public version of a sensitive report GAO issued in July 2021. GAO omitted from this report information on the number and type of findings and associated corrective actions that SEC determined to be confidential supervisory information.
Why GAO Did This Study
The securities industry is generally regulated by a combination of industry and federal oversight. FINRA, a self-regulatory organization, regulates more than 3,400 securities firms doing business with the public in the United States. SEC oversees FINRA's operations and programs.
Section 964 of the Dodd-Frank Wall Street Reform and Consumer Protection Act includes a provision for GAO to triennially report on aspects of SEC's oversight of FINRA. GAO issued its first report in May 2012 (GAO-12-625), its second in April 2015 (GAO-15-376), and its third in July 2018 (GAO-18-522).
This report (1) determines the extent to which SEC oversight of FINRA since fiscal year 2018 included areas specified in Section 964, and (2) assesses how SEC used inspection and examination findings to help achieve its FINRA oversight goals. GAO examined case files for all SEC reviews of FINRA in fiscal years 2018–2020, reviewed certain SEC policies and procedures, and interviewed SEC and FINRA staff.
Recommendations
GAO is recommending SEC establish performance measures for FINRA oversight that reflect leading practices, and policies and procedures for tracking, identifying, and communicating the significance of examination findings. SEC generally agreed with these recommendations.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| United States Securities and Exchange Commission |
Priority Rec.
The Director of the Division of Examinations should develop FSIO performance measures that reflect leading practices, including measuring progress in achieving FSIO's mission, setting targets against which actual performance can be measured, incorporating key elements of FSIO's oversight activities, and providing information on the outcomes of FSIO program activities related to its stated mission goals and objectives. (Recommendation 1) |
In June 2022, FSIO adopted three new performance measures to help assess the effectiveness of its FINRA oversight. FSIO also set numeric targets to measure its performance on each of the metrics. The first new metric tracks the percentage of observations for which FINRA agreed to take corrective action in response to significant deficiencies and control weakness identified by FSIO. The second metric measures the percentage of the most significant deficiencies and control weakness for which FINRA implemented corrective actions within 24 months of agreeing to do so. To help assess whether FSIO is effectively identifying areas of risk within FINRA's regulatory programs, the third metric measures the share of inspections or oversight examinations initiated in response to FSIO's risk assessment process that resulted in significant findings.
|
| United States Securities and Exchange Commission |
Priority Rec.
The Director of the Division of Examinations should develop and implement FSIO policies and procedures for tracking identified deficiencies and associated FINRA corrective actions, including establishing when and how to monitor findings and FINRA's implementation of corrective measures. (Recommendation 2) |
In June 2022, FSIO adopted policies and procedures to identify, communicate, and monitor significant findings from its inspections and oversight examinations of FINRA. The procedures include the timing and method for tracking findings and FINRA's implementation of corrective measures. The Division of Examinations amended its exam manual in July 2022 to reference the new policies and procedures.
|
| United States Securities and Exchange Commission |
Priority Rec.
The Director of the Division of Examinations should develop and implement FSIO procedures to identify and communicate the significance of its inspection and examination findings. (Recommendation 3) |
In June 2022, FSIO adopted policies and procedures to identify, communicate, and monitor significant findings from its inspections and oversight examinations of FINRA. The procedures include a process for categorizing inspection and examination findings based on significance and for communicating the significance of the most important findings internally and to FINRA. The Division of Examinations amended its exam manual in July 2022 to reference the new policies and procedures.
|