The role of self-regulatory organizations in U.S. markets was scrutinized recently at a hearing held by a House of Representatives panel, according to WealthManagement.com.
The session, conducted by the House Subcommittee on Capital Markets of the Committee on Financial Services, evaluated the accountability, efficiency and transparency of the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB).
Lawyers and other industry stakeholders testified at the hearing, generally agreeing that FINRA should maintain its independence but should also have more robust oversight by the Securities and Exchange Commission. A bill introduced last year, the Restoring Accountability in Market Supervision Act, would transfer rulemaking, examination and enforcement authority from FINRA to the SEC. It will be considered by the House Committee on Financial Services.
Among the topics discussed at the hearing was the FINRA Forward initiative, a series of initiatives that includes a broad review aimed at modernizing FINRA rules and eliminating unnecessary burdens. One top investor advocate argued the initiative has resulted in “unwieldy” rulemaking and is a “path towards securities industry appeasement.”
Jennifer Shaw, executive director of the Public Investors Advocate Bar Association, a group of lawyers representing investors in disputes with the industry, said that “over the last year PIABA members have grown increasingly concerned with recent changes by FINRA.”
Shaw testified that FINRA Forward “has chosen the path towards securities industry appeasement and against the best interests of investors, seemingly to weather attacks against it by Project 2025 and as a reaction to litigation filed against it in the federal court system.”
FINRA “is entering the second year of its FINRA Forward initiative with a stated goal of modernizing its rulebook and enhancing compliance tools and strengthening fraud protections,” Valerie Mirko, partner and leader of the securities regulation and litigation practice at Armstrong Teasdale in Washington, told the lawmakers. “This initiative has already resulted in greater transparency of long-standing FINRA operations.”
However, Mirko added, “there is a role for Congress to play to make legislative changes to the overall framework.” Mirko recommended that every bar or expulsion decision made by FINRA be reviewed and approved by SEC.
Mike Nicholas, CEO of the Bond Dealers of America, said the group is “genuinely encouraged” by the launch of FINRA Forward, but he urged the subcommittee “to monitor whether it produces genuine rule changes, not just consultation documents.”
FINRA Forward “is the kind of rigorous self-examination an effective SRO should undertake, and BDA participated in the comment process,” Nicholas said. “But encouragement must be paired with candor. FINRA Forward is a commitment, not yet a result.”
Members of the subcommittee expressed their concerns about the transparency and accountability of self-regulatory organizations.
“A recurring concern from smaller broker dealers and municipal advisors is that enforcement by Self-Regulatory Organizations, or SROs, can feel punitive rather than corrective,” said committee chairwoman Rep. Ann Wagner (MO-02). “If the S in SRO reflects industry stewardship, incentives within the system should encourage compliance outcomes, not simply deterrence through enforcement.”
Subcommittee on National Security, Illicit Finance, and International Financial Institutions Chairman Warren Davidson (OH-08) said, “FINRA exercises regulatory authority over thousands of firms, yet it is not subject to the Administrative Procedures Act, FOIA, or direct congressional appropriations. So members of this committee have had similar concerns about the structure of the Federal Reserve, for example.”
“Today, FINRA staff, not industry members, writes binding rules, investigates people, brings enforcement cases, holds hearings, issues large fines and can permanently end someone’s career, said Republican Conference Chairwoman Lisa McClain (MI-09. “Yet, FINRA is not subject to the same transparency laws as federal agencies. Its meetings are not fully open. Its records are not fully public. Now, if an organization exercises government level power, it should have government level accountability.”
Onnig Dombalagian, a professor of law at Tulane University School of Law, responded, “When we say the FINRA is a quasi-governmental agency, are we saying that they have the power, again, to be able to put people in jail? No.”
McClain responded FINRA does have the power to collect and levy fines. Dombalagian agreed with but argued that it is only for individuals in the securities industry.
“If it looks like a duck and it acts like a duck and it quacks like a duck, it’s probably a duck,” McClain said.
U.S. Rep. Brad Sherman (D-Calif.) suggested that if FINRA remains independent, the board members could be selected by the SEC.
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