Strengthening Oversight: SEC's Regulation of FINRA

The U.S. Securities and Exchange Commission (SEC) recently undertook comprehensive inspections of the Financial Industry Regulatory Authority (FINRA), aiming to evaluate and enhance FINRA’s regulatory performance in areas required by Section 964 of the Dodd-Frank Act. This oversight activity has particular importance, as FINRA, a self-regulatory organization, monitors the compliance of over 3,300 U.S. securities firms. The GAO report, released as a public document from a previously sensitive version, details the SEC’s findings from 2021 to 2023, emphasizing both FINRA's governance and the effectiveness of its oversight mechanisms.

The SEC conducted 21 distinct inspections across a three-year span to assess FINRA’s adherence to critical regulatory priorities such as governance transparency, conflict of interest management, and coordination with state securities regulators. These reviews allowed the SEC to target high-risk areas and apply evolving risk assessments as needed, ensuring that oversight stayed adaptive to emerging threats and regulatory trends. For instance, the SEC continually monitors FINRA through its Tracking and Reporting Examination National Documentation System (TRENDS) and annually re-prioritizes its inspection focuses. During this period, SEC inspections often concentrated on transparency in FINRA’s governance structure, which was a recurring theme in many of these reviews.

In response to a prior GAO recommendation, the SEC in 2022 introduced outcome-based performance measures, an update that has enhanced the accountability and tracking of FINRA's remediation efforts. The SEC’s FINRA and Securities Industry Oversight (FSIO) division, responsible for managing FINRA-related oversight, has introduced significant levels to categorize findings, which in turn direct the urgency and nature of responses. According to the GAO report, FSIO met most of its targeted performance goals, confirming that FINRA agreed to remediate issues at targeted rates. Yet, the SEC aims to refine these measures by adding more detailed corrective review criteria and accumulating additional data over time.

Another critical part of the SEC’s strategy has involved various review types under FSIO’s oversight. Program inspections look at FINRA’s broad operational effectiveness, whereas thematic and broker-dealer oversight examinations assess compliance within specific financial practices. For example, the SEC addresses concerns raised by referrals from other departments, such as the Broker-Dealer and Exchange Examination Program. Such referrals can highlight issues missed in FINRA’s internal examinations, thus prompting targeted corrective action reviews. FSIO further manages tips, complaints, and referrals, ensuring that emerging risks can prompt swift inspection when warranted.

With these initiatives, the SEC ensures FINRA’s internal governance and compliance mechanisms stay aligned with investor protection goals. The agency's commitment to transparent rulemaking and performance-based evaluations is crucial for maintaining market integrity and reinforcing public trust. However, the GAO's report also signals areas where further improvements could bolster oversight effectiveness, such as resource allocation for additional inspection reviews.

The information provided in this article is not guaranteed to be accurate and does not constitute legal advice.