"Any regulatory organization can be noted as missing things," Ketchum said. "The question is not whether we're going to miss things, the question is what we effectively find and how we can continue to make steps to try to make us continuously better."
Lack Of Jurisdiction
One of the reasons Finra may have missed the Madoff Ponzi scheme was because of a lack of jurisdiction over the investment advisory side of dually registered firms, the 2009 report said. "We at Finra are limited in our ability to look fully at what is an equally integrated business," Ketchum said in prepared remarks for a March 22 speech.
Although Finra examines more than half of its broker-dealer firm members, it doesn't mean that the quality of those examinations is good, said Smallberg of the Project on Government Oversight. There also aren't enough mechanisms in place to review their regulatory operations, he said.
"Giving more authority to Finra should come with additional transparency and accountability," Smallberg said. "I worry sometimes about the façade of a really robust examination or investigation process providing a false sense of confidence for investors."
Outraged Regulators
State securities regulators say the issue for them with Finra is a lack of cooperation on sharing examination information. About two years ago, Finra stopped routinely sending examination reports on brokers to state securities regulators, said Bob Webster, a spokesman for the North American Securities Administrators Association.
"State securities regulators were outraged," said Crawford, a former NASAA president. Regulators relied on the reports to help spot potential fraud committed by brokers in their own states, she said.
Finra told the regulators it couldn't routinely share investigative information with them because active collaboration could make Finra a "government actor," Webster said. That would mean Finra would have to give certain rights to brokers during investigations that it doesn't currently.
Finra received more than 100 access requests from state regulators in the past year and fulfilled all of them, Finra's Luparello said. "I know of no example where we didn't provide information when we would have before," he said.
State regulators won't know to request examination results if they don't know that there's something they should be on the lookout for, said Borg of the Alabama Securities Commission. "Just like the Morgan Keegan case, I'm hoping that all of our cases working with Finra in the future will work out just as cooperatively," Borg said.