More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
(ED note: This story originally appeared on our sister site LifeHealthPro.)
Serious questions are being raised about the effectiveness of the Financial Industry Regulatory Authority (FINRA) and whether the Securities and Exchange Commission (SEC) spends enough time overseeing this self-regulatory agency.
In a report issued late Wednesday, the Government Accountability Office (GAO) said FINRA “may be missing an opportunity to systematically assess whether its rules are achieving their intended purpose and take appropriate action, such as maintaining rules that are effective and modifying or repealing rules that are ineffective or burdensome.”
Moreover, the report said, by not reviewing what steps FINRA takes in reassessing its existing rules, the SEC may not capture sufficient information to form an opinion about FINRA’s efforts to review its rules.
The report also says that the GAO found that the SEC has conducted limited or no oversight of other aspects of FINRA’s operations, such as governance and executive compensation.
The SEC defended itself by saying that the operations of concern to the GAO “were not historically considered due to competing priorities and resource constraints.”
SEC officials explained that agency officials are focusing its resources on FINRA’s regulatory departments, “which were perceived as the programs that have the greatest impact on investors.”
But the GAO said that SEC officials “generally agreed with the GAO’s recommendations” which are that the SEC should encourage FINRA to conduct retrospective reviews of its rules and that the SEC should establish a process for examining FINRA’s reviews.
Moreover, the GAO recommended that the SEC should follow all elements of a risk-management framework in developing its future oversight plans.
The issue is important because the House Financial Services Committee is considering legislation that would shift direct oversight of investment advisors to a self-regulatory organization (SRO), presumably FINRA.
The Financial Services (FSC) Committee has scheduled a hearing on the legislation, H.R. 4624, and its chairman, Rep. Spencer Bachus, R-Ala., plans to markup the legislation June 28, according to a number of industry lobbyists.
Bachus, chairman of the FSC, and Rep. Carolyn McCarthy, D-N.Y., are original sponsors of the legislation.
The bill has divided the investment advisor community, with strong support from some groups, including the National Association of Insurance and Financial Advisors and the Financial Services Institute.
But critics include the Project On Government Oversight (POGO), an independent government watchdog.
POGO officials said FINRA's regulatory effectiveness is undermined “by its inherent conflicts of interest, its lack of transparency and accountability, its lobbying expenditures, and its executive compensation packages, among other issues.”