FINRA Escapes SEC Scrutiny

Representing Investors Nationwide

The Financial Industry Regulatory Authority (FINRA) enjoys what is know as the Securities & Exchange Commissions (SEC) “black box” status. That means the SEC has provided FINRA a means by which the self-regulatory organization’s (SRO) records are kept private.

This is because SRO’s like FINRA are considered to be “financial institutions” under the federal Freedom of Information Act (FOIA). As a result, SEC oversight reports and other records relating to FINRA don’t have to be made public. The FOIA exempts from disclosure any “examination, operating or condition reports” of financial institutions.

When enacted, the FOIA was intended to protect banks in questionable financial shape from depositor runs by keeping oversight reports private, in addition to fostering cooperation with regulators, according to the Department of Justice, which interprets the FOIA statute for government agencies. A 1997 decision by a federal court found that Exemption 8 also applied to FINRA, then known as the National Association of Securities Dealers.

FINRA enjoys a status that, in the view of critics, is contrary to it’s mission, that of regulating the financial services industry. They feel as a regulator, not a financial institution, FINRA records should be available for review. The more cynical observers have to wonder why documents are being kept from public scrutiny particularly in light of the rampant fraud that took place on Wall Street during 2007 and 2008.

Individual investors are contractually bound to take their claims for brokerage firm losses to FINRA arbitration. Given, this is most individual investors’ only avenue of redress, one would think there should be more transparency, not less.

If you believe you have experienced investment losses due to stockbroker negligence or fraud, please contact our offices for a free case evaluation. Thank you.