HOUSE COMMITTEE ON FINANCIAL SERVICES
SUBCOMMITTEE ON CAPITAL MARKETS
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On March 5, the House Committee on Financial Services Subcommittee on Capital Markets held a hearing entitled “The Role of Self-Regulatory Organizations (SROs) in U.S. Markets: Examining the Financial Industries Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB).” The witnesses in the hearing were:
- Onnig Dombalagian, Professor of Law, Tulane University School of Law
- Valerie Mirko, Partner & Leader of Securities Regulation and Litigation, Armstrong Teasdale LLP
- Mike Nicholas, Chief Executive Officer, Bond Dealers of America
- Jennifer Shaw, Executive Director, Public Investors Advocate Bar Association
Below is a summary of the hearing prepared by Delta Strategy Group, which includes several high-level takeaways, followed by summaries of opening statements and discussion.
Key Takeaways
- Republican members, led by Chair Wagner (R-MO) and Vice Chairman Garbarino (R-NY), raised concerns that FINRA exercises government-level regulatory authority without being held to the same standards of accountability and transparency that government agencies are required to meet. Wagner raised how targeted reforms could realign the system towards compliance rather than deterrence by enforcement, with Garbarino emphasizing that it is Congress’s responsibility to determine whether the SRO framework remains sound.
- Vice Chairman Garbarino questioned whether FINRA and the MSRB’s current board compositions, where public members outnumber industry professionals, still reflect the industry-led model Congress originally envisioned. Nicholas stated that valuable market expertise is lost when boards are dominated by public members, referencing the positive potential in switching to an industry-controlled board.
- Congressman Stutzman (R-IN) stated that the importance of congressional oversight of SROs is critical because their non-governmental status should not shield them from accountability and transparency. He questioned whether FINRA’s due process standards and governance structure are appropriate for an entity with its level of regulatory power. Dombalagian framed FINRA as a membership-based, technically focused body whose authority is limited and subject to the Securities and Exchange Commission’s (SEC) oversight.
- Congressman Lawler (R-NY) questioned whether the statutory framework created for SROs in 1934 still fits the complexity, speed, and scale of current capital markets. He noted the SRO framework Congress created reflected a different marketplace with slower markets, trading fewer products, and less automation, stating that it raises the fundamental question of whether the statutory framework still fits SROs for the modern environment or if Congress needs to revisit the model.
- Congressman Davidson (R-OH) questioned whether existing surveillance tools are adequate for crypto fraud risks in markets that operate 24/7 across multiple platforms. Mirko noted that while artificial intelligence (AI) has significantly strengthened industry surveillance programs, the sufficiency of FINRA’s tools is ultimately a matter the SEC should oversee. Davidson also raised questions around the adequacy of materiality standards for broker-dealers (BDs) involved in crypto assets. Mirko commended his work with Chairman Hill (R-AR) on the Digital Asset Market Clarity (CLARITY) Act and expressed support for the Senate to pass companion market structure legislation.
- Mirko emphasized that regulatory coordination between FINRA, the SEC, and state regulators is functioning well, and that the key question is how the SEC can strengthen its oversight of FINRA to better manage inherent conflicts of interest. Dombalagian similarly noted the SEC has the authority and tools to improve transparency and accountability of SROs.
SUMMARY
Opening Statements and Testimony
Subcommittee Vice Chairman Andrew Garbarino (R-NY)
SROs were never meant to be a shortcut around accountability. They are meant to be an improvement to it. The idea was simple in that the people closest to the market, who understand its risks and participants, are best positioned to govern it. The government is not nuanced enough to write rules that touch every corner of business practices and professional ethics. Governance of these agencies is a reasonable question for this Subcommittee. When public members outnumber industry professionals on FINRA’s board, it is worth asking if the agency still reflects the industry-led model that Congress envisioned or if it has drifted towards something that carries government authority without government accountability. Self-examination has its limits, and it is Congress’s responsibility, not the SRO’s, to determine whether the framework itself remains sound. This is not an argument against SROs. The model, properly structured and overseen, remains sound.
Subcommittee Ranking Member Brad Sherman (D-CA)
The policy question here is whether the SRO should be folded into the SEC. I do not know. On one hand, government authority and power should be vested in the government and accountable to the American people through the electoral process. The SEC officials, particularly the Chair, are nominated and then confirmed by Congress. The SROs are several steps away from that. No political scientist would think the SRO model is good. On the other hand, if it is not broken, do not fix it. I look forward to having the executives of the SROs come before this Subcommittee.
Onnig Dombalagian
The mandate of national securities exchanges has evolved over the decades. The Exchange Act’s model of securities industry self-regulation is grounded in certain core principles, which continue to resonate today. These include the industry’s familiarity with securities market operations, its reputational interest in upholding principles of trade, and the ability to shift the financial burden of regulation to the industry through membership fees and other revenue sources. The most frequent criticism with respect to FINRA is the shift away from market-driven regulation, which is associated most with SROs, to consolidated business oversight and the perception of the bureaucratization of FINRA. This Subcommittee has entertained broader proposals that would structurally alter the Exchange Act self-regulatory framework. These proposals naturally entail trade-offs between ensuring the accountability of SROs to the public and accommodating the flexibility and adaptability of the securities industry. I believe in the unique synthesis of regulatory and industry expertise that enables our self-regulatory framework to identify and expeditiously respond to market developments. Specifically, the interaction between the SEC, a politically accountable government agency, and FINRA, a self-regulatory body organized as a membership association, is a time-tested way of setting and enforcing norms within the industry.
Valerie Mirko
Part of the reason that U.S. capital markets thrive is because of the thoughtful and smart regulation inherent in the U.S. securities regulatory framework. The importance of the broker-dealer (BD) industry in maintaining the health and vibrancy of the U.S. capital markets relies on the SRO model, which in turn must be subject to government oversight. Through the SRO model, BDs collectively assume responsibility for the regulation of the industry while also maintaining investors’ trust in the markets. The SRO model relies on delegated authority by the government. Therefore, it is important that the SEC adequately supervises SROs and ensures that they operate with fairness, transparency, and neutrality. Congress also has a responsibility to ensure that investor trust remains by overseeing regulators generally and evaluating SRO efficacy specifically. Therefore, reviewing the SEC’s oversight of SROs is important, particularly to review whether these regulators are functioning consistently with their delegated authority and according to basic principles of fairness. I include ten recommendations for Congress to consider implementing to strengthen the oversight of SROs. These recommendations are organized around five broad categories: improving SEC and board oversight of SRO governance, addressing fairness and due process concerns of SROs, eliminating SRO inefficiencies and duplication, increasing fairness and efficiencies in the rulemaking process, and correcting weaknesses in FINRA’s arbitration process. Smart, right-sized regulation is essential to ensure that U.S. markets remain fair, resilient, and efficient.
Mike Nicholas
BDA strongly supports FINRA and the MSRB remaining independent SROs. The SRO model, when functioning properly, brings market expertise and operational flexibility that government agencies alone cannot replicate. Both SROs operate under SEC oversight, and we would urge this Subcommittee to ensure that that oversight is active and rigorous. The question before this Subcommittee is not whether we need SROs, but whether they are performing their roles with appropriate regard for cost, market structure, and the regulatory burden on dealers and the broader industry. We are genuinely encouraged by the launch of FINRA Forward, a comprehensive initiative to modernize rules, reduce unnecessary burdens, and strengthen member firm compliance. This is the kind of rigorous self-examination an effective SRO should undertake. FINRA and the MSRB are worth preserving as independent SROs, but their independence must be matched with accountability.
Jennifer Shaw
FINRA plays a necessary role as a regulator, but they need reform.
DISCUSSION
Chair Wagner (R-MO): What drives the perception from BDs and municipal advisors that enforcement from SROs feels punitive rather than corrective, and what targeted reforms best realign the system towards compliance rather than deterrence by enforcement? Nicholas: There is an extreme regulatory burden placed on the industry. Many small firms do not have the supplies to manage demands made, in this case, by FINRA, and it can feel like a “gotcha” mentality. There is less flexibility from the regulator on minor faults that do not harm a client in any material way. We agree that it can feel punitive and demanding at times. It is felt more by the smaller BDs than the larger. This plays into the role of the SEC’s oversight of FINRA and transparency, ensuring that FINRA meets its mission.
Vice Chairman Garbarino (R-NY): The MSRB Reform Act would revisit the 2010 Dodd-Frank requirement that the majority of the MSRB’s board come from the public sector. Would this legislation represent Congress’s original approach to MSRB governance? Nicholas: It would be a step in the right direction. The original requirement was 5-5-5, five public, five private, and five securities members. This changed under Dodd-Frank in 2010. We think it is important to have public members on the board, but being a publicly controlled board is a misstep. We do not think it serves the markets as well as having experts in the marketplace being in the majority of the MSRB board. Valuable expertise is missing when the board is dominated by public members. The impact of switching to an industry-controlled board would have a positive effect for everyone.
Vice Chairman Garbarino: Where does the current disciplinary and investigative framework fall short of procedural protections Congress should expect from an entity exercising delegated governmental power? Dombalagian: Since 1975, this has been an issue. I think the Securities Act of 1975 amendments were specifically intended to address due process considerations regarding how SROs conducted both rulemaking and disciplinary activities. We have many Administrative Procedure Act (APA) processes of section 19, as well as the SEC review of disciplinary actions. I think today, a lot of what the SEC and FINRA should be focused on is the interplay between the FINRA review process and the SEC review process.
Congressman Davidson (R-OH): Should we have structural concerns about FINRA since the agency has oversight over thousands of firms but is not subject to the APA, the Freedom of Information Act (FOIA), or direct Congressional appropriations? Dombalagian: I think there is a certain measure of forthrightness that would be lost if FINRA were subject to FOIA rules. The SEC has plenary authority under section 15 (a) to think about what the structure of national securities associations should look like. I think it would be worthwhile for the SEC to think about whether there needs to be rules regarding fair governance and governing the transparency of SROs. The SEC has done it in the context of for-profit exchanges, and has the power to do it in the context of FINRA. I think it would be a worthwhile conversation to see how the SEC can use its power to improve transparency and accountability.
Congressman Davidson: Are existing surveillance tools sufficient to handle crypto pump and dump schemes and risks in markets that operate 24/7 across multiple platforms? Mirko: Even though you are speaking about recent technologies, this question is perennial. It is ultimately about monitoring fraud. In terms of surveillance, the traditional tools are still in use and have been supplemented in modern years. AI is revolutionizing what we know as fraud surveillance. Industry firms have very robust surveillance programs that have been supercharged through the use of AI. The sufficiency of the surveillance tools FINRA is using is ultimately something the SEC can and should have oversight over and ask questions about.
Congressman Davidson: The 2026 Annual Regulatory Oversight Report says that BDs involved in crypto-assets must take additional diligence. Why is materiality inadequate? Are there extra criteria that involves crypto, or is it the same standard of materiality, but with different things that would be material? Would passing the CLARITY Act now be good? Mirko: It comes down to the work of this Committee as well as what you have done with Chairman Hill (R-AR) to advance the CLARITY Act. Yes. The Senate is also considering market structure legislation, which we hope to see passed. There is still ultimately a complexity to getting regulation correct for digital assets.
Congressman Stutzman (R-IN): FINRA walks and talks like a government regulator but is not subject to the same rules and regulations as the SEC. Is FINRA more or less accountable to the public than the SEC? Dombalagian: FINRA does not take your life, liberty, and property. All FINRA does is revoke your license to participate in the securities industry. FINRA is a membership agency that interfaces with the SEC, which is a government agency. The SEC has the authority to regulate FINRA. The SEC is politically accountable. FINRA’s job is to come up with technocratic solutions to the problems that face our capital markets.
Congressman Lawler (R-NY): With the complexity, speed, and scale in which markets operate today, do you believe the SRO model framework created in 1934 still fits today’s capital markets? Dombalagian: I agree. Markets have changed, and the SRO framework has evolved along with it. The framework has been developed to let exchanges compete more aggressively not only with one another, but also with alternative trading systems and other proprietary trading systems that are not regulated as stock exchanges.