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SEC Oversight Questioned as SEC Reviews FINRA

SEC Reviews FINRA’s Pay Practices, Governance Policies as Opponents of SRO-Bill Call SEC Oversight into Question

As the financial industry’s self-regulatory organization continues to seek the power to oversee investment advisors, the federal government continues its increased oversight of the organization itself. Last Wednesday, the Government Accountability Office asked the Securities and Exchange Commission, which oversees the SRO, to look into FINRA’s governance practices and its executive compensation packages. Data collected by the SEC, as required by the GAO and the Dodd-Frank financial law, includes information on FINRA’s retirement plans, salaries, and executive incentives.

The GAO’s request comes just days after the nonpartisan group The Project on Government Oversight called FINRA’s pay packages “excessive.” The group cited as evidence the claim that the self-regulatory organization paid its top 10 executives a total of nearly $13 million in 2010. According to The Project on Government Oversight, FINRA’s “excessive” pay practices pose a potential conflict of interest because they make the organization, which is funded through fees collected from its members, financially indebted to the very firms it is supposed to oversee. FINRA denies the allegations, and insists its pay policies are in line with those of other financial regulators and exchanges.

The supposed “excessive” nature of the pay packages seems to be beside the point, however, particularly because no one is calling into question the method in which the SRO actually gets funded. Instead, certain parties are using the charges levied against FINRA to undermine the SEC’s Jan. 2011 recommendation for an expansion of the organization’s powers.

According to the proposal, an expansion of FINRA’s powers to include oversight of certain investment advisors would improve the regulatory system and streamline the securities arbitration process. The Commission believed, along with many industry experts, that the proposal’s implementation was a logical expansion of the SRO’s powers. It also believed, along with many investor advocates, that the expansion would serve as a step forward for investor protection.

Now, just days before the House Financial Services Committee is scheduled to hold a hearing on a bill that (if approved) would implement the SEC’s proposal, opponents are using the pay controversy as evidence that the proposal is a bad idea. In particular, the opponents maintain that the “excessive” pay packages show that the SEC has failed to adequately oversee the organization and would therefore be unable to adequately oversee an expanded and more powerful version of the organization. Despite these allegations, both FINRA and the SEC maintain that SEC governance of the self-regulatory organization is “robust” – a claim the SEC is likely attempting to affirm with its most recent review. As of today, neither the GAO nor the SEC has released the Commission’s findings.

The information contained in The Firm’s posts on its blog, fraud alerts, investigations or elsewhere on the site is based upon information obtained from other sources including, but not limited to, news outlets and federal, state, and regulatory agency filings. All suspects and subjects of postings herein are presumed innocent until proven guilty in a court of law or administrative action and any and all crimes are alleged until a court or regulatory agency finds otherwise .

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