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SEC and FINRA “Accountability Is Impossible Without Transparency”

Posted by Larry Doyle on June 17, 2011 6:46 AM |

“Good corporate governance is a system in which those who manage a company — that is, officers and directors — are effectively held accountable for their decisions and performance. But accountability is impossible without transparency.”

Truer words were never spoken. The above statement very succinctly highlights a cornerstone principle of Sense on Cents. Whomever issued this proclamation would certainly seem to be a strong candidate for the Sense on Cents Hall of Fame. Regrettably not.

Our current SEC chair Mary Schapiro offered those pearls of wisdom in December 2009 and the Washington Post concluded its commentary SEC Tightens Rules On Investment Advisers, Corporate Transparency with that quote from Ms. Schapiro. If only Mary would practice what she preached. 

In my strong opinion, transparency and freedom of information are all too often foreign concepts when it comes to those who are charged with protecting investors and overseeing our markets. Can we ever forget the fact that the Dodd-Frank Financial Regulatory Reform initially included a FOIA (Freedom of Information Act) exemption for the SEC?

For those with real passion on this topic, you may care to review the Sense on Cents library of articles encompassing the SEC and FOIA. I humbly submit Sense on Cents/SEC-FOIA.

I raise this topic once again because here in mid-2011, a full two and a half years from her confirmation hearing, SEC chair Mary Schapiro once again displays a shocking lack of appreciation for even the most basic calls for transparency for those overseeing our markets.

I thank the regular reader of Sense on Cents for bringing to my attention a Morningstar release which highlights, SEC Keeps Its Secrets on FINRA Oversight,

Chairman Mary Schapiro’s commitment to more transparency at the Securities and Exchange Commission doesn’t appear to extend to its supervision of Wall Street’s self-regulator, the Financial Industry Regulatory Authority.

For a year and a half, a lawyers’ group has been trying to get the agency to disclose documents on how it oversees the Financial Industry Regulatory Authority’s process for selecting arbitrators for securities disputes. The SEC has refused to provide anything.

The group, the Public Investors Arbitration Bar Association, or Piaba, first made its request under the Freedom of Information Act in February 2010. When the SEC denied it, Piaba appealed. The SEC’s general counsel turned down the appeal in April. Piaba now plans to go to the courts, according to its president, Peter Mougey.

The SEC cites an exemption to FOIA that allows it and other regulatory agencies to keep secret their dealings with “financial institutions,” a term that would seem to naturally apply to the banks, brokerages and the like. Some degree of confidentiality in those relationships might seem reasonable.

But according to the SEC, Finra also falls into that category despite its role as a watchdog, not a broker dealer or bank.

So FINRA, the Wall Street self-regulatory organization is for these purposes considered a financial institution? Really? And I am a professional baseball player. What a joke!! Regrettably, the joke is on those of us who would care to really understand what goes on within the walls of the SEC and FINRA. Let’s continue to navigate.

A California federal court ruling supports that view, and so does Schapiro herself. She told Congress in September that the agency believes that all “entities it regulates, supervises or examines” should be included under the definition.

Her remarks came during sharp cricitism of a provision in the Dodd-Frank financial reform law that would have allowed the SEC to keep secret all details of its examinations of entities it oversees. That provision was repealed but an amendment to the Securities and Exchange Act was quietly approved, ratifying her broad definition of financial institution. (LD’s highlight…the smell of the incest is truly pungent!!)

Extending the definition to Finra places a regulator with considerable power in the same category as the brokerages it oversees. It means information the SEC has about Finra, and about its relationship to Finra, is not subject to any public scrutiny.

But Mary, what about the fact that “accountability is impossible without transparency”? Cheap political pandering, perhaps? You think!! What about the following statement as well?

Schapiro’s position on the exemption is in contrast to remarks she made when sworn in as the agency’s head in 2009. “We will work to deepen the SEC’s commitment to transparency, accountability, and disclosure while always keeping in mind the needs and concerns of investors front and center,” she said, according to a news release at the time.

“The juxtaposition between what they are saying and the reality is so stark,” says Mougey, who is a securities arbitration lawyer in Pensacola, Fla. “I think investors are entitled to know what the SEC is doing, especially because you have a monopoly on the justice system for broker-dealers.” Arbitration is typically mandatory in securities disputes, including claims by investors who feel they were cheated.

Asked for comment, an SEC spokesman said that the exemption is designed to preserve the integrity of examinations, and that the agency is following legal precedent. It declined to comment on the Piaba request.

Finra, which operates under an SEC charter that gives it broad authority, declined comment. Its own marketing, including television advertising after the financial crisis, emphasizes its role as a protector of investors and in no way equates itself with the brokers it regulates.

Piaba’s FOIA letter was very limited in scope, asking for documents related only to the SEC’s oversight of how Finra selected arbitrators. The lawyers weren’t asking for the types of sensitive financial details related to brokerage firms that you’d think the exemption was aimed at covering, such as investors’ personal financial statements or brokerage firms’ trading records.

“There’s clearly a public interest in sharing information about a fair process for selecting arbitrators,” says Michael Smallberg, an investigator for the Project on Government Oversight, a Washington, D.C.-based watchdog group. The FOIA exemption, known as Exemption 8, has “allowed agencies to go too far,” he says.

A much broader request for information about how the SEC oversees Finra and the Financial Accounting Standards Board was filed in June 2010 by the Citizens for Ethics and Responsibility in Washington. It also was denied, and an appeal is being pursued.

SEC and FINRA transparency? Please. The Wall Street-Washington incest would seem to remain firmly entrenched and our nation suffers in the process.

Navigate accordingly.

Larry Doyle

Isn’t it time to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook?

Please get your friends and colleagues to do the same. Thanks!!

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Rob P.

    Lip service from Ms. Schapiro. Shameless…

    The Corporatocracy marches on.

  • Pat

    Mary is looking a little weathered in the picture. Maybe she is getting a little tired of the beatings and calls for transparency.

    Tough luck.

  • http://www.zethics.com zEthics

    Thanks Larry.

    This explains why the SEC has denied our FOIA requests.

    “…accountability is impossible without transparency.” The SEC must be willing to voluntarily disclose the fundamental data required to substantiate the fitness of its internal compliance system, with relevant, reliable, and sufficient information such as:

    1) ETHICS CODE CERTIFICATIONS – A searchable index of records granting public access to the signed, acknowledged, and certified Code of Ethics for each Director, Officer, and Employee.

    2) ETHICS ACTION REPORTING – A searchable index of records granting public access to the Code of Ethics incident reports and opinions, including concurring and dissenting opinions, as well as orders, made in connection with the adjudication of matters relating to the Code of Ethics. Such records include, but not be limited to, the following:
    - Official incident report number (unique identifier)
    - Date incident first reported
    - Description of incident
    - Official title(s) of person(s) involved.
    - Supporting documents/summary findings
    - Official opinion(s) rendered and its reasoning
    - Date incident closed and made available to the public
    - Person (and department) responsible to ensure proper handling of the incident report

    This fundamental data is essential to form valid opinions regarding the adequacy of design and effectiveness of operations within a “robust” internal compliance system. In addition, this fundamental data serves as a significant basis to judge the duties of care and loyalty.

  • B-D

    What does the President of a registered broker-dealer think of FINRA?

    From a recent poll

    With its numerous dictates over the last several years, FINRA has become as popular as ObamaCare, with the efficiency of the postal service and the compassion of the IRS. This has been evident on the broker-dealer level, and I also noticed it at the TD Ameritrade conference—FINRA potentially regulating RIAs brought a feeling of doom to those attending.






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