The Role of Self-Regulatory Organizations in U.S. Markets: Examining FINRA and the MSRB

Subcommittee on Capital Markets will come to order. Without objection, the chair is authorized to declare recess the committee at any time. Today's hearing is titled The Role of Self-Regulatory Organizations in U.S. Markets: Examining FINRA and the MSRB. Without objection, all members will have five legislative days within which to submit extraneous materials to the chair for inclusion on the record. I now recognize myself for four minutes for an opening statement. Good afternoon. I want to thank our witnesses and all those in attendance for joining us today. This hearing continues the subcommittee's work in examining the infrastructure of our regulatory system, not just as the agencies Congress directly created, but the private bodies Congress empowered to act alongside them. Self-regulatory organizations or SROs were never meant to be a shortcut around accountability. They are meant to be improvement to it. The idea was straightforward, the people closest to the market who understand its risks and its participants are best positioned to set the standards that govern it. Government alone cannot write rules nuanced enough to reach into every corner of business practice and professional ethics. Industry, given the right structure and oversight, can. That is the bargain Congress struck when it created the framework for SROs in 1938. But a bargain requires both sides to uphold up their end. FINRA today regulates approximately 3,500 firms and 620,000 brokers. The MSRB writes the rules for $4 trillion municipal securities market. These are not minor organizations, they sit at the center of how American capital markets function. The decisions they make about what rules apply, how they are enforced, and who bears the cost have real consequences for businesses of every size and the investors they serve. With such broad authority, Congress has a duty to periodically ensure these organizations are still serving their original purpose. FINRA's budget has grown to $1.5 billion, funded by the firms it regulates without congressional or SEC oversight. While regulatory fees drive its operations, FINRA also collects fines to fund strategic initiatives subject to its own board's approval. That funding model and what it incentivizes is a legitimate question for this subcommittee. So is governance. When public members outnumber industry practitioners on FINRA's board, it is worth asking whether the organization still reflects the industry-led model Congress envisioned, or if it has drifted towards something that carries government authority without government accountability. The MSRB presents its own concerns. Since Congress expanded its mandate in 2010, the number of registered municipal advisors has fallen by nearly 40 percent. These are not large institutions with compliance departments and legal teams, the majority have five or fewer employees. Whether the regulatory framework is proportionate to what Congress envisioned is a question worth asking. To their credit, both organizations have recently undertaken efforts to modernize their own practices, and that is constructive sign. But self-examination has limits. It is Congress's responsibility, not the SROs, to determine whether the framework itself remains sound. I want to be clear, this hearing is not an argument against self-regulation. The model, properly structured and properly overseen, remains sound. The question is whether FINRA and the MSRB still resemble what Congress authorized, or whether they have become something Congress never intended. Today's witnesses bring precisely the range of expertise this question demands, and I look forward to a substantive discussion about what reforms, if any, are needed to ensure these organizations remain true to their statutory purpose. I now recognize the ranking member of the subcommittee, Mr. Sherman, for four minutes for an opening statement.

Thank the policy issue before us is whether the SROs should be folded into the SEC. I am an very faithful agnostic on that issue. I do not know. On the one hand, any political scientist would tell you that government authority and power should be vested in the government and ultimately accountable to the American people through the electoral process. Now, I realize the SEC is not an office for which you run, but you are the those on the SEC, particularly its chair, are appointed by the president and confirmed by Congress. The SROs are several steps away from that and no political scientist would embrace that as a good model. On the other hand, if it's don't broke, don't fix it. We got plenty to do in this committee, and if it's working well, let's go on to look at something that's working not so well. I would say that in looking at the SROs and folding things in, we should not just look at the FINRA and the MSRB, we should look at the PCAOB and FASB. Now, there are technical distinctions, but in all cases, you have a non-governmental entity that does the work of government, that is to and that work is to set what the standards are, what the regulations are, what the laws are you have to follow and enforcing them. And all of those organizations are engaged in that process. Now, it's wonderful to have these witnesses, but I look forward to having the executives of the SROs and perhaps PCAOB and FASB come before this subcommittee. I always prefer the witnesses that are actually doing the job. One thing I'm not an agnostic on, and that is if the SEC absorbs any of these organizations, it has to absorb the revenue source of the organization. You can't transfer a lot of responsibility to the SEC and say do it out of your existing budget, especially when we see the SEC has cut its staff by almost 15 percent, its enforcement staff by 20 percent. There has not been a decline in the number of people trying to fleece investors. It is a shame that the SEC's enforcement budget has been cut, and it should not be cut further by assigning new responsibilities under the existing budget. I know that one of the areas that is important is the effect on short selling and making sure that short selling is not naked and that those who shall short have arranged to borrow the relevant securities. And I think short selling does play an important role in our capital markets, but the there are clearly some problems with it, particularly when it's it's done naked. We see that investors have a searchable have a well, there's a list in BrokerCheck where you can check an individual firm to see whether it has been restricted, but there's no published list of those. So you have to go hit and miss one after the other, and there is a strong argument that the entire list should be published. Any enterprising journalist could do it by just putting in the name of each organization saying is is Adams on the list, is is is Arthur on the list, and go through the alphabet. So this list ought I believe to be published and I will yield back.

Gentlemen yields back. Today we welcome the testimony of Professor Onnig Dombalagian, I do well on that one? All right, right. A professor of law, Tulane University School of Law. Ms. Valerie Mirko, partner and leader of securities regulation and litigation practice at Armstrong Teasdale. Mr. Mike Nicholas, the CEO of Bond Dealers of America. And Ms. Jennifer Shaw, the executive director of Public Investors Advocate Bar Association. We thank each of you for taking the time to be here. Each of you will be recognized for five minutes to give an oral presentation of your testimony. Without objection, your written statements will be made part of the record. Professor Dombalagian, you are now recognized for five minutes for your oral remarks.

Thank you, Chair Garbarino, Ranking Member Sherman, and members of the subcommittee. Thank you for the opportunity to testify today on the role of self-regulatory organizations in U.S. capital markets and specifically the efficiency and accountability of FINRA. My name is Onnig Dombalagian, and I'm a professor of law at Tulane University School of Law. Since leaving the SEC to join the academy, I have studied and written about the legal and regulatory structure of securities markets with particular attention to the role of SROs. I have also had the privilege of serving two terms as a non-industry member of FINRA's National Adjudicatory Council and over two decades as an arbitrator for FINRA's dispute resolution services. I'm honored to appear before you and I would like to commend the subcommittee for its continued oversight of FINRA's significant role in regulating the securities industry. I am of course speaking in my personal capacity and not on behalf of Tulane University or the law school. In the Maloney Act of 1938, Congress established a regulatory regime for the registration of national securities associations for brokers that were not members of a national securities exchange. The NASD, the National Association of Securities Dealers, FINRA's forerunner, is the only association to have registered under Section 15A of the Exchange Act. The mandate of national securities exchanges has evolved over the decades as the NASD has amassed greater responsibility for business conduct regulation in the brokerage industry. The Securities Acts Amendments of 1975 consolidated that authority among SROs, the transition to automated trading and the wave of exchange demutualization in the late 90s and 2000s exacerbated conflicts of interest, which required NASD and the New York Stock Exchange to spin off their regulatory arms, and today the member regulation functions of the New York Stock Exchange and the NASD have been merged into FINRA, which serves as the principal authority for upholding just and equitable principles of trade in the securities industry. 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 of course the ability to shift the financial burden of regulation to the industry through membership fees and other revenue sources. In recent years, both industry and academic commentators have questioned FINRA's effectiveness and accountability, and in some cases the constitutionality of its rulemaking and disciplinary activities. Others conversely criticize unmanaged conflicts of interest in FINRA's governance and sometimes excessive lenity in its rulemaking and disciplinary activity. But perhaps the most frequent criticism in vein in respect of FINRA is the structural shift away from market-driven regulation, which we associate with SROs, to consolidated business conduct oversight and the perception of the bureaucratization of FINRA. FINRA has undertaken initiatives to modernize its rules in response to these and other criticisms from its members and the public, and this subcommittee has entertained broader proposals that would structurally alter the Exchange Act's self-regulatory framework. These proposals naturally entail tradeoffs between ensuring the accountability of SROs to the public and accommodating the operational flexibility and adaptability of the securities industry. While I share many of the reservations and appreciate many of the proposals that have been brought before Congress and other bodies, I strongly believe in the unique synthesis of regulatory and industry expertise that enables our self-regulatory framework to identify and expeditiously respond to market developments. More 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. I also acknowledge there is a compelling interest in ensuring that FINRA is transparent and accountable to both the industry and the public with respect to its regulatory program, its senior management, the collection and use of fee revenues and other monies, and its corporate governance practices. In my testimony, I outline concrete steps Congress could take in the short term to reinforce FINRA's effectiveness within the current self-regulatory paradigm, such as addressing the asymmetry between the display of disciplinary history of broker-dealers and other financial services providers, in reforming the dispute resolution framework, particularly in the context of pre-dispute arbitration agreements, and also thinking about strategies for enhancing the robustness of the SEC's rule review process, for example, by revisiting the timetables for the approval or disapproval of FINRA rules. Mr. Chair and Mr. Ranking Member, I commend the subcommittee's efforts to examine the efficiency of the self-regulatory framework. In this spirit, I believe that our system of self-regulation in the securities industry can continue to serve investors, market participants and the public interest. I appreciate your attention and look forward to your questions. Thank you.

Thank you very much. Ms. Mirko, you are now recognized for five minutes for your oral remarks.

Thank you. Distinguished members of the subcommittee, thank you for the opportunity to testify before you today and contribute to the important work of this subcommittee. I am pleased to be here to discuss the role of SROs in the U.S. markets, with a focus on FINRA and the MSRB. The U.S. capital markets are the best in the world. Part of the reason that they thrive is because of the thoughtful and smart regulation inherent to the U.S. securities regulatory framework. My point of view is informed by 20 plus years in the legal industry, including over a dozen years as a securities defense attorney in private practice, as well as several years working with regulators and on regulatory coordination. I am a partner at Armstrong Teasdale and leader of the firm's securities regulation and litigation practice. In my day-to-day, I represent broker-dealers, investment advisers, and public companies subject to SEC investigations and other regulatory initiatives. I also represent broker-dealers subject to FINRA investigations. In addition to representing public companies and industry firms, at times I also represent their executives when subject to regulatory scrutiny. Prior to Armstrong Teasdale, I also spent several years as a partner at the global law firm of Baker McKenzie and before that as general counsel of NASAA. And earlier in my career, I worked at two broker-dealers. The importance of the broker-dealer industry in maintaining the health and vibrance of the U.S. capital markets relies on the SRO model, which in turn must be subject to government oversight. Through the SRO model, broker-dealers collectively assume responsibility for regulation of the industry while also maintaining investor trust in the markets. The SRO model, however, also relies on delegated authority by the government. Therefore, it is important that the SEC adequately supervise SROs and ensure that they operate with fairness, transparency, and neutrality. My written testimony includes several recommendations to address fairness and fundamental due process concerns with respect to FINRA's enforcement program, its rulemaking process, dispute resolution forum, and overall governance. Congress also has a responsibility to ensure that investor trust remains by overseeing regulators generally and evaluating the efficacy of SROs specifically. Therefore, reviewing the SEC's oversight of SROs, and here FINRA and the MSRB, is important, particularly to review whether these regulators are functioning consistent with their delegated authority and according to basic principles of fairness. It is important to note that in the context of FINRA oversight, the organization is entering the second year of its FINRA Forward initiative with a stated goal of modernizing its rulebook and enhancing compliance tools while also strengthening fraud protections. This initiative has already resulted in greater transparency of long-standing FINRA operations. In this context, however, there is a role for Congress to play to make legislative changes to the overall framework. In my written testimony, I include 10 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, correcting the weaknesses in FINRA's arbitration process. Smart, right-sized regulation is essential to ensure that U.S. markets remain fair, resilient, and efficient. My goal with these recommendations is to preserve the strengths and robustness of our capital markets so they continue to serve as a source of financial stability and opportunity for all Americans. I welcome and look forward to your questions.

Thank you very much. Mr. Nicholas, you are now recognized for five minutes for your oral remarks.

Thank you, Chair Garbarino, Ranking Member Sherman, and other members of the subcommittee. I'm Mike Nicholas, CEO of the Bond Dealers of America. BDA is the only industry organization in the country that solely focuses on the U.S. bond markets. Member firms underwrite and trade across all bond market segments and with an office presence in almost every state in the country. Our $50 trillion U.S. bond market is a national asset, financing the Treasury, federal agencies, corporations, state and local governments, and homebuyers while providing safe, liquid investments for institutions and individuals. BDA's mission is to promote better, more efficient bond markets for investors and issuers alike. We take that mission seriously, and we appreciate the opportunity to testify. First let me say that BDA strongly supports FINRA and the MSRB remaining independent self-regulatory organizations. 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, transparency, and efficiency. Turning to FINRA, we're 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. We also commend FINRA and the MSRB for reversing their one-minute bond trade reporting proposals, even after SEC approval, a demonstration of exactly the independent judgment the SRO model requires. But encouragement must be paired with candor. FINRA Forward is a commitment, not yet a result, and we urge the subcommittee to monitor whether it produces genuine rule changes. One example, FINRA's ongoing review of its modern workplace framework, including remote supervision under Rule 3110, presents an important opportunity to modernize oversight. Supervision has changed drastically since Rule 3110 was established. Work habits have evolved since the pandemic. Bond dealers use technology much more than proximity to supervise their traders and others. Supervision rules should reflect this reality. We also continue to raise concerns about the depth of fixed income expertise among FINRA examiners, a gap that can waste dealer resources and produce inconsistent examination outcomes. And we again flag the structural inequity of Dodd-Frank's requirement that FINRA collect fees from municipal securities dealers to fund GASB, whose work benefits issuers and investors far more than it does dealers. Congress should revisit that provision. On the MSRB, we acknowledge the new rate card fee structure as a constructive step towards transparency, but we have concerns about governance and resource management that have persisted for years and demand attention from this subcommittee. Regarding the MSRB's annual budget, nearly 60 percent of the MSRB spending goes not to market regulation, but to technology and infrastructure. Broker-dealers fund the majority of the MSRB's budget, almost 80 percent in 2025, through underwriting transaction and technology fees. On governance, the MSRB board includes seats, including this year's vice chair, for non-dealer municipal advisors, firms that advise issuers but do not underwrite or trade. We do not object to municipal advisors having representation, in fact we encourage it, but as a group, municipal advisors contribute only a small fraction of total MSRB fee revenue, 6 percent in 2025, while broker-dealers pay the vast majority. That imbalance between fee contribution and board influence is a structural problem that has persisted and been unaddressed for years. Congress should revisit the Dodd-Frank provision governing MSRB board composition with this imbalance squarely in view. More broadly, both MSRB and FINRA have majority public boards, which can dilute the market expertise embedded in their governance. We urge Congress and this subcommittee to reconsider whether that balance is serving the markets well. To conclude, let me re-emphasize that both FINRA and the MSRB are worth preserving as independent SROs, but their independence must be matched with accountability. This subcommittee, working with the SEC, has an important role to play in ensuring both organizations meet the standard the markets require. We appreciate the opportunity to assist in that work, and we welcome any questions.

Thank you very much, Mr. Nicholas. Ms. Shaw, you are now recognized for five minutes for your oral remarks.

Thank you for inviting me to be here on behalf of the Public Investors Advocate Bar Association, where I serve as the executive director. Previously, I spent the majority of my legal practice as an enforcement attorney for the people of Oklahoma. PIABA's members represent Main Street investors and retirees who have been the victim of fraud, bad advice, or other investment misconduct. Our members know firsthand the devastation that results when a retiree or other investor loses their nest egg. We also meet with FINRA, the SEC, and state regulators to try to help put in place rules to protect investors from unscrupulous advisors. Today I want to talk about FINRA. FINRA's slogan is protecting investors, ensuring market integrity. While PIABA believes that FINRA plays a necessary role as a regulator, we also believe they are in need of reform. Recently FINRA started their FINRA Forward initiative, which PIABA believes moves investor protection backwards to a time long before the 2008 financial crisis. These are some of the initiatives that we feel will harm investors: allowing brokerage firms to supervise by Zoom, as opposed to an office visit where they can touch and see the broker files; rolling back supervision of investment advisors, which would leave investors holding the bag if the advisor sells them a Ponzi scheme. From PIABA's perspective, not only does it appear that FINRA is weakening the protection for investors on the front end, it is now attempting to stack the deck against investors and retirees who attempt to hold their brokers accountable for their bad or fraudulent advice. When investors sign up to invest their retirement savings with a financial advisor, they are forced into FINRA's industry-run private justice system. Since the financial crisis, FINRA has taken some small steps to make this industry-run forum more fair for investors who have been defrauded. However, with its recent action just Monday of this week, FINRA announced its intention to consider a rollback of investor protections to the 1980s, to a time before the financial crisis, the dot-com bust, or even Black Monday. FINRA's 70-page notice of potential rule changes would trample investor rights in the mandatory FINRA arbitration forum. These changes would impact real people, your neighbors, your siblings, your friends. I want to discuss the real people impacted by FINRA and the potential changes to investor protection. We'll start with Marilyn. She's a blind widow from Alabama in her 80s who lost 80 percent of her life savings due to her financial advisor selling her a complex and risky product. Despite the long odds of recovery in FINRA's private justice system, Marilyn was awarded her losses and $60,000 in damages to punish her advisor and his firm. Under FINRA's new rules, this advisor would go unpunished. Indeed, FINRA's proposal would remove the ability to punish brokers and their firms for outrageous behavior, even when state law would allow for these damages. Kathy from Florida lost her life savings due to a broker's mismanagement. She has been forced back to work as a cashier in a grocery store. As of yesterday, she had a bank balance of $212.75 and is terrified she is going to lose her home. She is waiting on the justice of FINRA's arbitration forum. But at least she had a ability to hear, have her case heard from a panel of arbitrators. FINRA Forward's new rule would make it easier to throw out cases like Kathy before the hearing. And FINRA Forward would change who decides these cases, eliminating arbitrators that can relate to investors and be fair. While FINRA's forced arbitration forum does do a few things well, like requiring disclosure of awards against bad brokers and providing a private justice system that is less expensive than others, it still needs reform. Only three out of 10 investors win their financial arbitration hearings. This the award process is not easy. The investor must realize they've been scammed, find an attorney to handle their case, hire the attorney, pay the expert and arbitration fees, and then prevail in the forum that's stacked against them. And then after all of these steps, a shocking 37 cents on every dollar awarded in 2024 remains unpaid because the firms are engaging in financial trickery. This has a real impact to Main Street investors. Take the Crows, an elderly couple in their 70s from rural Illinois, who worked as a farmer and a librarian and lost most of their retirement as a result of securities fraud. The Crows went through three years of FINRA arbitration and were fortunate to win an award. However, they have not been paid a penny. FINRA is aware of solutions to the unpaid award issue, such as insurance and investor recovery pools, but instead of protecting investors, FINRA gave $50 million back to Wall Street firms. PIABA wants FINRA to do its job, return to its important and necessary role of investor protection and protecting the integrity of the markets. Thank you for this opportunity and I look forward to your questions.

Thank you very much. Thank you very much, Ms. Shaw. We'll now turn to member questions. I now recognize myself for five minutes for questioning. Again, thank you all for being here today. For the first 35 years after Congress created the Municipal Securities Rulemaking Board, there was no statutory requirement that a majority of the board be made up of public members. That changed in 2010 when Dodd-Frank required that a majority of the MSRB's board come from the public sector. Legislation before us today, the MSRB Reform Act, would revisit that requirement and change the board's composition. Mr. Nicholas, would would this legislation represent a return to Congress's original approach to MSRB governance?

Well, Chair Garbarino, we think it'd be a step in the right direction. It's the original, as you may know, MSRB board until 2010 was five, five, and five, five public, five bank, five securities firms. That changed under Dodd-Frank in 2010. We think the it's important to have public members on the board, no doubt about it. Being a public member controlled board, we think is is a misstep. We don't think it serves the markets as well as having experts in the marketplace, and that includes municipal advisors, but experts in the marketplace being in the majority of the MSRB board. It's there's invaluable expertise that it's missing when it's when the board is dominated by public members. And we think it'd be a step in the right direction.

So so you agree it would be a positive the impact would be positive.

The impact switching to an industry-controlled board, we think would be positive for everyone, including individual investors.

Thank you very much. Professor Dombalagian, in a paper from last year, you said, I quote, "While FINRA policies violations of federal securities laws by its members, much of its enforcement activity entails promoting compliance with standards of trade. Requiring the SEC to take over enforcement of such business conduct rules may be unnecessarily costly." Could you provide examples of standards of trade and elaborate on the unnecessary costs the SEC would face through enforcing such standards?

Thank you for your question. Certainly, the SEC has tried this before. There used to be a program called the SEC program, the SEC-only program, where the SEC would regulate broker-dealers who were not members of an SRO. One of the difficulties that the SEC ran into is articulating ethical principles through the kind of rulemaking process and public adjudication that we associate with SEC enforcement. For example, the canonical Rule 2010, members must observe just and equitable principles of trade, picks up pretty much every FINRA violation, including violations that aren't or ethical conduct that isn't necessarily picked up by a specific rule, things like cheating on exams or forgery of documents. For the SEC to have to articulate through a rulemaking process and then enforce either before an ALJ, to the extent that process continues, or in federal court, what it means to act in an unethical manner, would probably consume enforcement resources, generate case law that limits the flexibility of the SEC to tailor ethical principles to the industry, and so forth. I think you can look at other examples, for example, excessive markups. The SEC has tried to police markups under 10b-5 under its anti-fraud authority. That again is limited by the fact that you have to show scienter, whereas FINRA is able through its markup rule to regulate the size of the markup without necessarily inquiring into the mental state of the firm that's charging the markup. So I think these are some examples of rules that are better adjudicated through an industry forum rather than by the SEC.

Thank you very much. FINRA and the MSRB exercise significant enforcement authority that can end careers and reshape firms, yet they are not Article II agencies subject to the same procedural safeguards as other regulators. When Congress delegates coercive authority, legitimacy depends on a fair and transparent process. Professor, where does the current disciplinary and investigative framework fall short of the procedural protections Congress should expect from an entity exercising delegated governmental power?

Thank you. Since 1975, this has been an issue. I think the Securities Act Amendments of 1975 were specifically intended to address due process considerations regarding how SROs conducted both rulemaking and disciplinary activities. And so we have the mini-APA processes of Section 19 as well as the SEC review of disciplinary actions. I think today a lot of what I think the SEC and FINRA should be focused on is the interplay between the FINRA appellate process or the FINRA review process and then the SEC process. There are brokers, for example, who may be subject to FINRA sanctions who either require...

Professor, I'm I'm sorry, I'm out of I'm out of time and I know the chairwoman would want me to keep a keep a tight ship going today and I'll ask you for that response in writing. I now recognize the ranking member of the subcommittee, Mr. Sherman, for five minutes.

Even if FINRA remains independent of the SEC, we could adopt an approach that we've already done for PCAOB where FINRA, though all the board members are selected by the SEC. This would be consistent with principles of democracy that governmental power should be vested in those appointed by governmental officials. Why would we not want the SEC to appoint all the members of the FINRA board? Does anybody have a reason not to?

Ranking Member Sherman, I'll weigh in. The BDA's largest concern about whether you roll FINRA or the MSRB into the SEC is you immediately politicize regulation. FINRA's not a political body. MSRB's not a political body. The SEC is.

Look, everybody, most of the members of this board go of this committee go back to their districts and say I'm not a politician. Nobody's a political body. Everybody's a political body. But again, the question was not whether to roll FINRA into the SEC, but rather to have it structured like the PCAOB. Does anybody have a comment on that? Ms. Shaw?

Yes. I think that's the only way that we will get fairness within FINRA. It is shown that even its public members are not truly public. They have interest with the industry, and I think that this should be something that's considered by this committee.

Okay. Next question. Robert Cook made $3.8 million back in 2003. Does anybody know what he made subsequent to that? Or is that secret? You guys are knowledgeable of what... Okay. Ms. Shaw, is there is it a good idea for Robert Cook to make some undisclosed amount, presumably more than $3.8 million?

PIABA would not be able to truly comment on the salaries of any of the FINRA employees. However, we would just emphasize that the money should go to help investors on their unpaid awards and for investor protection, that should be the priority.

Now you mentioned these unpaid awards. Are that is that because the defendant in the matter is bankrupt or that for some other reason they're able to escape enforcement?

There are many other reasons that they're able to escape enforcement or they just change entities, open another entity, still are in the business.

So the entity that you have the claim against is allegedly bankrupt, but the same people are somewhere else and FINRA then allows those people to continue?

Yes, they do.

And no one posts a bond in order to work under FINRA's jurisdiction so that if you're unable to, you know, if you disappear, the bond company has to pay?

No, sir.

Hmm. And is FINRA suggested or the FINRA members, you got 21 of them over there, any of them pushing for a system that it would make sure that anybody that people get paid? Do you have any supporters over there?

We have some supporters. We have had frequent conversations with FINRA on getting an investor recovery pool or insurance. However, that has not gone any further than our conversations.

Okay. We've got FINRA with this broker check where if you put in the name, you can check, but you can't just browse all the names. Ms. Shaw, should FINRA go further and put on its website an up-to-date list of the names of high-risk firms as well as the names of those newly formed firms that employ 20 percent or more brokers from previously twice-designated high-risk firms?

I think that would be a good step to go further. Disclosure is always further for the investing public. However, I think you should take it a step further and make sure to educate investors. Most investors probably couldn't find FINRA, couldn't find FINRA broker check online to check their financial professional. We need to do more on the front end to get to those.

ChatGPT will get them there fairly soon. Ask ChatGPT, how do I know my broker's on the up and up? And they may learn about a FINRA that they previously had never heard of. Okay, I do want to emphasize how important it is that if the SEC swallows FINRA, it or MSRB, it's got to swallow the revenue sources. The last is there anybody here who thinks that the amount of money that we spend carrying out the functions of these two organizations is excessive and that we could do it with less staff? Raise your hand if we should cut the staff doing the jobs of FINRA. No hands went up and my time's up. Thank you.

Gentleman yields back. Gentleman from Texas, Mr. Sessions, is now recognized for five minutes.

Chairman, thank you very much and welcome each of you to the hearing today. It's pretty easy to show up in front of members of Congress and hear us perhaps act like we know what's going on at FINRA or the SEC. You're professionals that see a lot more viewpoint than we do. But I would offer some feedback that I'm interested in yours, and that is that I find that there is too cozy of a relationship in decision-making between the two bodies. That they kind of wink at each other or hit shoulders with each other, hey, you do this, I'll do that, I'll cover your base, you cover my base. Oh, I don't want to make a decision, let's take it to a state regulatory agency. Let's get out of this, it may have been too hard. But oh, but let's tell the state regulatory agency what we expect them to do, even though we had it for two or three years and couldn't forthrightly move forward. Now, that sounds like it's something that happens on a regular basis. I don't mean to imply that. I mean to imply it does happen, and perhaps only a few times. What would be your take off my conversation that I had, any of you?

...recognized for five minutes.

I mean, certainly FINRA is obligated by statute to be accountable to the SEC. It is a self-regulatory body. It is responsible to its membership, but it also has to follow federal securities law. So there has to be a relationship between the SEC and FINRA that is productive, that takes the form of a dialogue over what the regulatory scheme is for our markets.

Yes, sir, but I'm talking about really unprofessional. I'm talking about buddy-buddy to where we'll play off each other and the person, you know, the SEC is there for shareholder value. And yet over time, all of this tends to go away if there is an unprofessional relationship between these two bodies, that is what I am trying to get at, not the regular relationship.

The SEC is a politically accountable body, the chair is appointed by the president, confirmed by the Senate, and we will find out, you know, with the Supreme Court's evolving jurisprudence whether there will be additional strictures on how the SEC is governed. I think it is partly the responsibility of the SEC...

Okay, thank you. Does somebody have some insight about whether my conversation with you is correct or not or maybe it is just a byproduct of one or two or five people saying this, it is not indicative? I get this top-level thing. I am talking about the conversation that I had with you, I am asking, talk me out of or into what I made as a statement, if I could please have someone address it from that perspective.

My perception of the relationship between regulators is that regulatory coordination is inordinately important in order to not have duplication, in order to have efficient enforcement. I think your point about a federal regulator telling a state regulator what to do does not resonate with me at all. Every regulator is ultimately, every state regulator is ultimately a sovereign. I do think there is a lot of good regulatory coordination between the SEC, FINRA, and the states, and I experienced it firsthand in my eight years at NASAA. I am now in private practice and have been for several years and I continue to see a high level of professionalism from the staff, particularly when they do need to interact with each other and with other regulators.

Thank you, thank you for addressing the question the way I asked it. Anyone else?

I would like to agree with Ms. Mirko as far as regulation. I was a state regulator for almost 20 years. FINRA, the SEC, and states do work well together and that is essential to keep all three of those bodies. However, I would say that FINRA should at least be subject to FOIA requirements in their correspondence between the SEC. I think it would just make it clearer and the market safer for investors.

Good, good. All I can do is point up the facts of the case that things were held for five years, threats were provided back and forth, the regulator failed to respond back for years and then passed it to a state and that state was very demeaning in their ability to effectively wish to know more about it and simply became punitive. Mr. Chairman, I appreciate it and thank you for your feedback. I appreciate it. I yield back my time.

The gentleman yields back. The gentleman from Illinois, Mr. Casten, is now recognized for five minutes.

Thank you, thank you all for being here. Mr. Nicholas, I want to pick your brain a little bit and get a little bit into the weeds of municipal bond markets given where you sit and the MSRB's role. We have got about $4 trillion in municipal bonds, maybe 40 percent of that is owned by institutional investors. American Society of Civil Engineers says we need to invest about $7.5 trillion in infrastructure over the next decade, so presumably that is filtering into those markets as well, not the only source of need that is coming into those markets. And as I look at, and I want to warn you, I do not want to make you politically uncomfortable, but we might end up there. I do not know if you are familiar with Jack Handey, one of our nation's greatest philosophers, wrote Deep Thoughts on Saturday Night Live. One of my favorite of his lines is I would rather be rich than stupid. Because we have so politicized climate risk, I really worry that we now have our head in the sand in these municipal bond markets. So with a $4 trillion market, the Paradise, California fires in 2018 caused $8.4 billion of property loss. Hurricane Sandy, $3.1 billion of property loss. The Los Angeles wildfires last year, $250 billion in property loss. All of these things lead to sell-offs. Tell me if you disagree, but falling tax base and loss of property value is really bad for municipal bond markets. Do you agree?

I do agree and it sounds to me, Congressman, that the point is the value of the municipal bond markets and the potential of the municipal bond markets to rebuild much of the infrastructure in the country.

Well, but even before that and I guess what I struggle with is that bond markets and the pricing agencies and all the robustness that goes into their works to the extent that we can quantify risks and identify those risks. We have seen a surge of state agencies and indeed a lot of my colleagues across the aisle who have said we should not even ask those questions because to ask about climate financial risk, to ask investors who would like to insulate themselves from climate financial risk is somehow woke and therefore we cannot ask the questions. And so I guess my first question is, do you feel like the bond rating agencies, the MSRB, are able to get that data in this political environment so that we can appropriately price those bonds and appropriately sell them to people who would like to be exposed or not exposed to those risks?

Yes, Congressman, I think a lot of progress has been made in that respect. You see that over the past few years, more focus on climate risk and the impact ultimately to markets and to investors. And I think we work very closely with state and local groups as one example who I know are focused on climate risk and the impact to the municipal bond market at large. We work with a number of academics that are also focused on this.

But I guess I am not asking about you as an individual because you look at the macro data, Breckinridge Capital Advisors had this report that only 30 percent of their bond offerings mention climate change. BlackRock said that municipal issuers in Miami could lose up to 4.5 percent of GDP, which got me crunching math. The total property value in Florida is about three times Florida GDP. Six of the seven most uninsured counties in the country are in Florida, Miami being number one. How do we get that data? I mean, I do not think any of us want to be in a place where the state of Florida goes bankrupt, but again, because I would rather be rich than stupid, right? But how does the industry get that data when these big players like Breckinridge, like BlackRock, and indeed like our own financial regulators are saying, well, I am not even going to ask those questions anymore?

Well, this is a problem. I go back to one of your points that if it is not broken, do not fix it, right? So I think to the extent that the MSRB, for instance, is not broken, but more work can be done, right? And I think that your questions go to the oversight of the MSRB, right? And the SEC's oversight of the MSRB, and maybe more should be done there.

Okay, I mean, for what it is worth, I think S&P Global agrees with you, they said that we need more transparency into issuers' climate exposures given the illiquidity and long duration of those bonds. Investors of all, and I would remind everybody, 40 percent of these investors are retail. This is all the people we represent, particularly people who depend on fixed income who are exposed. So I hope we can do that and I hope we can focus on being rich instead of stupid. Yield back.

The gentleman yields back. The gentleman from Ohio, Mr. Davidson, who is the chair of the Subcommittee on National Security, Illicit Finance, and International Financial Institutions, is now recognized for five minutes.

Thank you, Chairman. Thanks to our witnesses, appreciate your written testimony and your time here today. Professor Dombalagian, my apologies if I did not get that exactly right. 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. So should we have the same concerns about FINRA? What concerns should we have?

I mean, certainly if you want to encourage FINRA as an industry association to gather the views of its members, to be able to develop policy to then put in the form of rules for public debate, I think there is a certain measure of forthrightness that would be lost if FINRA were subject to FOIA rules. That being said, the SEC has plenary authority under Section 15A to think about what the structure of national securities associations should look like and what kind of transparency, what kind of accountability should be built into the registration of entities like FINRA. And I think it would be worthwhile, just as the SEC has done with for-profit stock exchanges, for example, to think about whether there need to be rules governing the fair governance, governing the transparency of SROs. The SEC has done that in the context of for-profit exchanges, the SEC has the power to do it in the context of FINRA. I think it would be a worthwhile conversation to see how the SEC could use its power to improve transparency and accountability.

All right, thank you. If you have further thoughts, look forward to those as well. And frankly, the other witnesses, if you have got thoughts on that topic, love your feedback as well sometime. But Ms. Mirko, FINRA has warned about pump and dump schemes involving crypto and small-cap securities in particular. Are existing surveillance tools sufficient to address these risks, particularly in markets that operate 24/7 across multiple platforms? I mean, you know, a lot of the kind of quote meme coins out there, that has been the one way that the SEC kind of has not gone after things. In fact, when I created the Token Taxonomy Act in 2018, we kind of wanted to get after the things that looked a lot like pump and dump schemes so that the people that were trying to build more functional models were not tainted with this kind of reputation risk.

Thank you, Congressman, for your question. Your question is ultimately perennial, even though you're speaking to recent technologies and recent schemes, it is ultimately about fighting fraud, which is something that I think we can all agree on. And that is also something that industry firms are highly aware of and monitor for as well. In terms of the existing surveillance tools you're asking about, the traditional tools are still in use and they've been supplemented in recent years with AI revolutionizing what we now know of as fraud surveillance. Historically, FINRA has taken an approach to surveillance that involves evaluation, further iteration, and then further evaluation. AI has added an accelerant to that. I will also add, while your question was about FINRA, industry firms have very robust surveillance programs as well, which have been further supercharged through the use of artificial intelligence. Ultimately, this however is an area that could be very well subject to further study by the SEC in its capacity in overseeing FINRA. The sufficiency of surveillance tools that FINRA is using is ultimately something the SEC can and should have oversight over and should be asking questions about. So I think...

Great, thank you. Let me just follow up on that and say, look, the 2026 annual regulatory oversight report notes that broker-dealers involved in crypto assets must take additional diligence and lays out all kinds of specifics. Why isn't materiality adequate? Is there some extra criteria that involves crypto firms or is it just the same standard of materiality, but they of course have different things that would be material?

No, that's an excellent question, Congressman, but ultimately it really comes down to the work of this committee and in particular Chairman Hill and what you've done to advance the Clarity Act to implement laws addressing digital assets.

So passing that would be good?

Yes. And of course, the Senate is also considering legislation to clarify market structure that we hope and we hope to see it ultimately enacted. In the interim, while we are waiting for this, there is still ultimately a complexity to getting regulation correct for digital assets as an asset class. It's too...

Great, thank you. And if you have other thoughts, my time has expired and I appreciate your testimony and everyone else's. I yield back.

The gentleman yields back. The gentleman from Wisconsin, Mr. Steil, who is the chair of the Subcommittee on Digital Assets, Financial Technology, and Artificial Intelligence is now recognized for five minutes.

Thank you very much, Mr. Chairman. Thanks for today's hearing. Appreciate our witnesses and your written testimony. I want to start with you if I can, Mr. Nicholas. Congress tasked the MSRB with both industry rulemaking and creating a data repository. A significant part of the board's budget and staff time are devoted solely to the technology development side of that ledger, it appears. And some have raised concerns that MSRB looks a little bit more like a tech company than a regulator. And so understanding your background, does the MSRB's technology platforms provide a meaningful benefit to its members or does it drive the cost too high and is that taking up too much time of the budget and the staff time, in your opinion?

Well, thanks for the question, Congressman. We, you know, I think we unequivocally think that too much of the budget is dedicated to technology. We think it's about 60 percent of the $50 million annual budget at the MSRB. One issue that we continue to have is it's hard to determine how much direct benefit there is from say the EMMA website at the MSRB because we just can't get usage data from the MSRB on EMMA. There's no doubt that that should be a serious area for this subcommittee to look at in terms of reform of the MSRB structure. We don't think the MSRB is too astray from their original mission, which also included providing market data back in 1975.

Why wouldn't they provide the usage data?

Well, that's a good question. We're still working on that. I'll try to get you an answer to that.

But I mean, should they just make it publicly available and just say, here's our usage data, allow not only themselves but others to do a cost-benefit analysis of it?

No doubt about it. Yes, sir.

Yeah. Appreciate that commentary. I'll jump over to you if I can, Ms. Mirko. Your written testimony, you wrote about how the pace of technological development and SEC rulemaking can render some of FINRA's rulebooks cluttered, a little bit out of date. You suggested it's led FINRA to become overly reliant on regulatory notices, FAQs, and responses to interpret questions. And so obviously those types of communications, they're easier to publish, but of course they don't carry the same weight as rules do. And so I'm kind of looking at that balance between regulatory notices, FAQs, but ultimately substantive rules as technology's moving quickly. Could you provide an example of an area where the regulatory clarity might have been hindered by this dynamic or comment more broadly and in particular, how do you think that balance should be struck at the agency?

Congressman, that's an important question and I think you're referring to recommendation eight of my written testimony where I recommend to review delegated authority for rule approval and the process for rule approval. Specifically, I recommend that the SEC has final approval over economically or systemically important rules, whereas other rules that are being adjusted for inflation can be approved through a simple notice process to the Division of Trading and Markets. Currently only a limited scope of rules can be filed with the Commission for immediate effectiveness. Congress should require that the SEC expand the scope of rules to include inflation adjustments and technical changes related to recordkeeping and document delivery preferences. And further, Congress should require final rule approval by a majority of commissioners rather than the Division of Trading and Markets. But this brings me to answering specifically your question. While the Division of Trading and Markets provides important and valuable technical expertise, oversight of significant rule changes should lie with congressionally approved commissioners to ensure proper oversight of rulemaking. This also ties into the necessity for a review of all outdated regulatory notices and rules, as well as having a cost-benefit analysis framework in place, which is recommendation nine.

But with this, let me just jump in here real quick because we're going to run out of time. But with the speed that some of this technology's evolving, there's definitely a role for FAQs and other aspects. Do you think we're appropriately striking the balance between true rulemaking with the weight that it carries and the more simplified FAQs or other means?

This is really about it being essential for FINRA to review all currently issued guidance still in effect and update or retract guidance no longer applicable.

We're going to be out of time. If you or others on the panel have comments in writing, would appreciate. Yield back, Mr. Chairman.

The gentleman yields back. I now recognize myself for five minutes. Hoosiers understand that the federal government has become increasingly bloated and unaccountable. President Trump is restoring that accountability, but I think it's also important for Congress to examine the self-regulatory organizations. Just because they aren't government agencies doesn't mean that they should be unaccountable and opaque to the industries they regulate and the American people. I'd like to come to you, Ms. Mirko, first to talk about FINRA's budget. FINRA's budget last year was over $1.5 billion. How does that compare to the SEC and would you say a budget of that size is justified?

Congressman, one of my recommendations is specifically for greater transparency around the FINRA budget to answer exactly that question.

Okay. FINRA also collects fines to cover its strategic initiatives subject to its board approval. Could that funding mechanism create a potential conflict of interest?

You know, and that's a question I think about a lot, especially as conflicts of interest are so inherent to how the industry operates because of the importance of mitigating conflicts of interest, disclosing them, managing them. And I do believe currently FINRA's oversight structure, which I'm providing recommendations for improvement, but importantly, as the professor mentioned next to me, these conflicts of interest have existed throughout the existence of SROs and they have been managed. They're not new. The question is, how can we make the SEC's oversight of FINRA even more robust in order to further manage these conflicts?

All right, thank you. Professor Dombalagian, I would like to come to you and talk about accountability. It seems to me that FINRA walks like a government regulator, it talks like a government regulator, but lacks many of the accountability measures that true regulators like the SEC have. That's not just me saying that, even Chairman Atkins has previously emphasized the importance of increasing due process and transparency at FINRA just like at the SEC. Would you say that FINRA is more or less accountable to the public than the SEC is?

I would say that FINRA does not take your life, liberty, and property. All FINRA does is revoke your license to participate in the securities industry. That can have devastating consequences for people whose livelihood depends on it, but FINRA is not in that sense accountable to the public in the way that the SEC is, which does have those powers and other governmental bodies that do have those powers. Congress's response to this problem in the 1970s was to build an accountability process through the mini Administrative Procedure Act in Section 19 of the Exchange Act to make sure that when FINRA adopts rules, there's a notice and comment process. Congress has modified that process to a certain degree to facilitate the adoption of certain rules. It also adopted rules for the review of disciplinary decisions to make sure that they were done in a fair and equitable manner. And again, one can discuss whether or not the interface between the SEC and FINRA is adequate to manage some of the consequences of that process, but the rules exist and they can be developed. In terms of accountability to the public, again, FINRA is a membership organization 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, as Mr. Nicholas was saying, technocratic solutions to the problems that face our capital markets. And I think what makes FINRA unique is the fact that you have this combination of public and private expertise to develop rules that the SEC can give a thumbs up or a thumbs down or rewrite with its authority under the Exchange Act.

I want to just follow up on that. Do you think it's accurate to call FINRA a self-regulatory organization when the industry being regulated lacks a majority of say in its governance?

This is an interesting question and I appreciate it. Part of I think the reason that FINRA and other SROs adopted this structure was in part because of the move overall in corporate governance to try to introduce more independent and disinterested directors on boards. I guess the question is, what do we think of as the role of a public director? Is the role of the public director to be an antagonist to the to the industry members on the board? I can say having been a non-industry member of FINRA's NAC, I mean, I did not view my role as antagonistic. I viewed my role as bringing a different perspective to problems or questions from those who are in the industry. I don't profess to know more about the industry than the folks who are in it, but I think the combination of expertise on a board that's consisted of public and industry members can generate better outcomes than a than a purely industry board or a purely public board.

All right, thank you. My time has expired. I want to now go to the gentleman from New York, Mr. Lawler, who is now recognized for five minutes.

Thank you, Mr. Chairman. Mr. Nicholas, in my view, transparency and stakeholder engagement are key to a successful SRO. My understanding is that there are nearly 160 industry members and 35 non-industry members who participate in FINRA's advisory and regional committees. Now this makes sense to me to ensure the important regulatory work stays focused on the investor protection while being informed by the expertise and experience of those impacted. Mr. Nicholas, given your experience interacting with FINRA, could you explain what FINRA's advisory committees are and whether you think they're helpful and add value to FINRA's work?

Well, thank you, Congressman. And basically the advisory committees are help advise decision making at FINRA, rulemaking at FINRA, specific to markets. One example would be a as an example, would be a corporate bond advisory committee advising FINRA's rules and regs related to the corporate bond market. We think advisory committees are are additive to the overall process at FINRA. It's important to remember though they are not the decision makers at FINRA. So they can advise all they want, but the but the ultimate the ultimate decision makers at FINRA is the board of directors, which we just talked about is not you know, is a public dominated board of directors. That's the issue that I think we have with the advisory committees. They're fine and I can give you lots of examples of working with advisory committees and where where the industry was stonewalled for up to two years on issues and then we were able to take it to to the SEC and ultimately to the board at FINRA and get resolution.

Thank you. Mr. Dombalagian, the SRO framework Congress created in 1934 reflected a very different marketplace, one with slower trading, fewer products, and far less automation. Today's markets operate at a scale and speed that would have been unimaginable at that time. That raises a fundamental question about whether the statutory foundation for SROs still fits the modern environment or whether Congress needs to revisit the model. Do you believe the SRO framework that was created in 1934 when markets were far simpler, do you believe that they the statutory mandate Congress created nearly a century ago still fits the complexity, speed, and scale of today's capital markets?

Thank you for your question. I agree, markets have changed and I think the SRO framework has evolved along with it. I mean, we certainly have the demutualization of the stock exchanges. So to the extent that there are questions about market driven self-regulation, the sort of the transformation of securities markets from floor trading to automation basically eliminated a lot of the need to regulate for brokerage and replaced it with code. So in turn, the SRO framework has evolved to allow exchanges to compete more aggressively not only with one another, but also with alternative trading systems and other proprietary systems that aren't regulated as stock exchanges. The result of that has been that the the business conduct regulatory work has migrated to FINRA. So in many ways we can look at the current framework we can look at the historical framework in the Exchange Act and see how through a process of rulemaking, through a process of reviewing individualized exchange applications, we have moved much of the business conduct regulation to FINRA so that the stock markets can compete as you discuss. Again, the negative the the consequence of that is that the business conduct regulation is now concentrated in FINRA. And the problem I think we're all struggling with is having freed the exchanges to be able to compete with one another, have we now created a structure where FINRA is the sole business conduct regulator? Does it make sense for that structure to persist? I you know, I think it's difficult to imagine somebody wanting to compete with FINRA in the provision of business conduct services. It's got to be funded by membership fees. It has to heavily subsidize dispute resolution. It's a conversation worth having, but I think your insight is correct and I think the the SEC has has done its job in trying to think through how the framework should evolve to to meet that concern.

Dodd-Frank requires the GAO to review the SEC's oversight of FINRA every three years. Can you explain how this report could be improved?

I'm glad you asked this question and as our time is almost up, I would point you to recommendation six of my written testimony and particularly add a review of FINRA enforcement within the GAO oversight report requirements.

Great. Thank you. The gentleman yields back. The chair recognizes the gentlewoman from Michigan, the chair of the Republican Conference, Ms. McClain, she's recognized for five minutes.

Thank you, Mr. Chairman. In 1938, the NASD was created the NASD created a self-regulatory body to oversee stockbrokers under SEC supervision. I think that's important, under SEC supervision, not a full scale national regulator. Now called FINRA, the so-called self-regulatory organization has grown far beyond that original role. 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. 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. So it's time to ask whether those powers should sit directly under the SEC where oversight, transparency, and responsibility to the American people are clear. And this is not a partisan concern. I I actually agree with Ranking Member Waters who stated that FINRA lets broker misconduct go unchecked, permits board members' conflicts of interest, and lacks any cap on executive compensation. In fact, ironically, last year FINRA's CEO, Mr. Cook, made $3.6 million. If that power looks like government power, why doesn't it come with government transparency, right? So I think the real question here is is it a government agency? Is FINRA an SRO? And don't you think they should declare and we should treat them as such? Because how it's operating right now conveniently, right, is when it's convenient to be a government agency, they're a government agency. When it's convenient not, well, it's not. Ms. Mirko, FINRA started as a licensing agency. I've been in the business for 35 years prior to this, and when I started, it was educational. It was like, you know, my CE credits, my licensing up to date. I'm curious as what point did it make that transformation into an enforcement agency?

I think some of the answer goes back to Professor Dombalagian's testimony when you talked about how the enforcement functions of the exchanges because of conflicts of interest had to be moved into FINRA. So I think you'd be better to answer...

Conflicts of whose interest?

I didn't hear your question, sorry.

Conflicts of whose interest? So really, is FINRA a government agency? Is it an SRO? Who's it accountable to? Where's the transparency?

I think when we I appreciate the question and this is a sentiment I hear very often, small firms regularly make this point that FINRA treats...

It's not small firms, it's big firms.

No, I know, every no, I mean, I'm saying small firms, mid-sized firms, large firms, all make this point. There's I think I would parse it in this way. When we say that FINRA is a quasi-governmental agency, are we saying that they have the power again to be able to put people in jail? No.

They do have the power to collect fines, they do have the power to levy fines.

Only for against individuals in the securities industry. FINRA's power...

Okay, but my point is correct. They do have the power. So am I wrong? FINRA can't collect fees and they can't levy fines? That's great. I mean, if that's the case, I'm rolling.

If somebody chooses to walk away from the industry, FINRA does not have the power to go to state court...

Okay, but I'm not asking about somebody who walks away from the industry. I'm asking a question. It's really really simply put, right? Because if it looks like a duck and acts like a duck and it quacks like a duck, it's probably a duck. Yet FINRA doesn't get to do that.

Yeah, FINRA has...

So so it does have power to levy fines. Am I right or wrong on that?

FINRA has the power to levy fines against individuals who want to retain their securities license.

Just check. Yeah. Well, well, in order to practice, that's a great answer. In order to practice in the securities industry.

And that's a decision Congress has made. Congress in the Exchange Act required every broker dealer who wants to conduct a public business to be...

You're right. You are 100 percent right. But you're dodging my question.

I'm trying to answer it.

Okay. When did FINRA get this regulatory power? Enforcement power? When did it go from an educational arm to an a regulatory arm and an enforcement arm?

Exchanges have always had the power to discipline their members. It's the only way to make a floor brokerage system work is to punish people who don't play by the rules. Self-regulatory organizations such as FINRA the NASD back in the day as you said, they didn't need to be able to punish people because if you still look at like section 15 capital A lower case E, oh, sorry.

Well, my time is expired. Thank you.

I'd ask you to finish your response in writing. Thank you. And I want to thank our witnesses for your testimony today. I apologize as chair of the Capital Markets Subcommittee for being a little bit late, but I serve on the Intelligence Committee and I have been in some very important briefings on recent developments in Iran and the Middle East. I want to thank Mr. Garbarino and other members who have opening been opening and carrying on this this hearing and I look forward to the rest of the discussion. Now on with it. 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. If the S in SRO reflects industry stewardship, incentives within the system should encourage compliance outcomes, not simply deterrence through enforcement. Mr. Nicholas, what do you see driving that perception today and what targeted reforms would best realign the system toward compliance rather than deterrence by enforcement?

Thank you, Chair Wagner. I would start by saying that it's there's a an extreme regulatory burden placed on the industry whether you're a large bulge bracket firm or a smaller firm headquartered in in Missouri. And many of those smaller firms frankly don't have the resources to manage some of the demands placed by in this in this scenario FINRA. And thus, it can feel like what we've heard for decades, a gotcha mentality, right? So when the regulator, the regulator is there to regulate, they're looked they're they're there to find problems, thus it's gotcha and there's very little flexibility, less now than there were 10, 20 years ago, the was 10, 20 years ago, on the on any flexibility from the we hear this all the time. Flexibility from the regulator towards what we call foot faults. A minor a minor problem, a minor fault, a trade reporting delay, etcetera, that did not harm the client in any in any material way, but there's a considerable fine levied by FINRA because of it. So we we agree with that. We agree that it it can be punitive at times, certainly very demanding, more felt by the smaller BDs, obviously, than the larger broker-dealers and banks. And it's we think it plays right into the role of this subcommittee and the SEC in terms of oversight and transparency, ensuring that FINRA meets their mission, that they're not inadvertently driving small firms out of the business because of overregulation.

Thank you. I've got limited time here. The SEC Division of Enforcement recently released an updated enforcement manual, which underscores the Commission's ongoing commitment to fairness, transparency, and efficiency in the investigations conducted by the division. On Monday, Bill St. Louis, FINRA's Executive Vice President and Head of Enforcement, released a blog post that announced, and I quote, "While it will take more time, we expect to publish an enforcement manual." Ms. Mirko, how important is it that FINRA follows the SEC's approach and publishes an enforcement manual of their own?

Well, Chair Wagner, thank you for your question. And it is very important that FINRA publishes this enforcement manual. The SEC's enforcement manual has been available publicly for going on 20 years.

How long?

Going on 20 years. It was around late 2008.

And FINRA does not have one.

FINRA's will become available publicly from what we heard on Monday, which I think is a welcome change. I also think this goes back to the importance of the SEC's oversight over FINRA here. Now that we will likely have we expect to have both the SEC and the FINRA enforcement manual both made available publicly, there is a greater there's a continued importance for coordination and alignment as well. So that we'll be able to see once the FINRA enforcement manual is available if they do indeed align and provide comment on it. I think that's a healthy development and I look forward to it.

FINRA's ability to bring enforcement cases against its members gives it enormous power. However, unlike the SEC, FINRA's enforcement proceedings are not bound by a statute of limitations. Professor Dombalagian, I think I've got it right, so sorry if not. Should FINRA's disciplinary action be held to a statute of limitations like that of other federal regulators?

So the challenge is that FINRA's sanctions are supposed to be remedial. If somebody committed fraud 20 years ago, should they be allowed to stay in the industry today? Right? I think this is this is the question. If it's a question of licensure, FINRA always has to have the jurisdiction to be able to revisit that. That being said, there is significant SEC jurisprudence in this area that considers the fairness of FINRA proceedings, which FINRA observes. This includes retention of records, the availability and reliability of witnesses, and those act as practical constraints, much like the doctrine of laches.

Thank you. My time's expired. We look forward to the manual. I look forward to some statutes of limitations too and some equal resolution of this. I now recognize the gentleman from Florida, Mr. Haridopolos, for five minutes.

Thank you, Madam Chair. I want to build on the questions from Congresswoman McClain if I could. Ms. Mirko, the DC Circuit's decision in Alpine Securities versus FINRA addressed FINRA's authority and oversight. What did the court decide and what action should Congress take from that ruling when considering SRO reform?

Congressman, I'm so glad you asked this question because it ties into directly it ties directly into recommendation three of my written testimony, which builds indeed on the court case, whereby I recommend that the Exchange Act be amended to require SEC review before every FINRA bar or expulsion decision becomes effective. Fundamentally, Alpine is about the ability to bar and expel. The Supreme Court did not review it. It's making its way through the court system. So importantly, what we should focus on now is how to make sure that every bar or expulsion decision is reviewed or approved by the SEC. And that requires an amendment by Congress to the Exchange Act. By requiring the SEC's review of these bars, individuals would receive the benefit of an additional and necessary layer of government oversight, helping to better safeguard Fifth Amendment rights. And this is both individuals and firms. The reality is that today, if a firm is subject to a bar or an expulsion, there is a process through which they can request SEC review. Individuals do not have that. So there needs to be an equalizing of those two things and Congress should indeed amend the Exchange Act in order to have that put into place. The other thing that I really wanted to note on this front is there's always the question of, well, what if it's an emergency? What if something needs to move quickly? SEC review could take a while. So I really wanted to note that as part of my recommendation, I added an additional layer of investor protection recourse in the event of egregious misconduct. This would allow for FINRA to ask for a temporary restraining order or preliminary injunction, but this is the important part, through an appointed Article III judge. The goal here is that either the SEC or in the instance of a more emergent matter, a court and an Article III judge make the decision on whether a bar or expulsion should happen.

Thank you. Professor, I want to ask you, what specific reform should Congress consider to improve FINRA and the MSRB while preserving the benefits of industry participation in regulation?

I think that the thank you for your question. I think that the the general theme here is more transparency, more disclosure and and more accountability. And my sense is that the best way to do this is through the existing structure of the Exchange Act, much as the SEC has required for-profit exchanges to change their business model, change their governance, improve transparency, particularly with respect to the use of fines and their allocation for for budgetary purposes. The SEC has demonstrated it has the ability to do this, whether by individual application or whether by rulemaking. I think the SEC's in a position to do the same thing with FINRA. I think the job of this committee and the job of Congress is to to hold the you know, the SEC's feet to the fire and make sure that it does its job.

And with that, Madam Chair, I'll yield back.

Gentleman yields back. I now recognize the gentleman from Montana, Mr. Downing, for five minutes for questioning.

Thank you, Madam Chair, and thank you all for being here. Really glad that we're having this this hearing examining the roles of FINRA and MSRB, and I know it's been a long time since this committee has done so. A little background, back in my days when I was in this business and was a FINRA member, some things that came really obvious to me and some things were difficult. And what I saw at the time, and obviously I do take it with a grain of salt because it was my company that was being examined, but when we'd have examiners come in, it was often very heavy-handed. And it really led me to running for office to be the regulator. So I ended up running for office, I was the securities regulator for the state of Montana for four years because my goal there was, first of all, I saw my job as protect to being there to protect investors. You know, that was my primary job, be there to protect investors. But I also saw an opportunity to partner with industry and figure out how we could make it easier for business to do business while we were still hitting that prime objective of making sure that we were protecting investors. Actually, it's interesting, as a regulator, I'd written a few letters to then Gary Gensler at the time saying, you know, our job is to protect investors, let's make sure we both stay in our lanes. But anyway, long story short, FINRA is obviously a very powerful SRO. It's the primary regulator for broker-dealers and while FINRA is a regulator, its operations are funded through membership fees rather than congressional appropriations. FINRA's also not required to testify before Congress like other regulators. Ms. Mirko, I'm going to start with you. What changes should be made to ensure there is proper congressional oversight over FINRA?

Congressman, thank you for your question. And the root of your question is really delegated authority and how how is the authority that Congress has delegated to the SEC and that the SEC further delegates to FINRA, how is that all overseen correctly? So first and foremost, Congress needs to ensure strong oversight of FINRA by the SEC. That is a core component of my written testimony. There's different ways to bolster that oversight. So for example, I've included recommendations to strengthen the oversight by requiring an SEC chair or SEC commissioner be on the FINRA board, be on an SRO board. We discussed earlier, Congressman, amending the GAO oversight report to include additional functions of FINRA. That's another tool that already exists that could be improved.

Do you do you believe that FINRA should be subject to something similar to the Administrative Procedure Act in its rulemaking?

I'm glad you asked this question, Congressman, because this is another question that goes to the root of what delegated authority means. First and foremost, FINRA rulemaking has two phases. It has the reg notice phase and then FINRA has to after taking in comments and information from stakeholders, submit a submit the rule proposal to the SEC. So fundamentally, the second portion of the FINRA rulemaking process is subject to the APA because it is part of the SEC's rulemaking authority. Now I know that sounds very layered and I care about efficiency, but this layering is exactly how the current framework is ensuring that all rulemaking includes input from every stakeholder at each step. And again, going back to delegated authority, there is an inherent layering to the system because Congress delegated authority to the SEC who and the SEC in turns delegated to SROs. Here we're talking about FINRA. So FINRA is already when it comes to its rulemaking subject to APA.

Right. Thank you. And before I forget, Madam Chair, I request unanimous consent to submit this letter from SIFMA for the record.

So ordered.

Mr. Nicholas, I'm going to move on to you. The Exchange Act generally requires broker-dealers to be members of a registered national securities association. To date, FINRA is the only one. So my question, would market participants be better served by more competition in the SRO space? And if so, what can Congress do to help incentivize that competition?

Thank you, Congressman. I think our focus I think the focus of this subcommittee and the SEC should be on accountability. We are not supportive of multiple layers of SRO regulation in the marketplace. All kinds of logistical problems can result from that. Harmonization issues, fragmentation issues. So we are not supportive of multiple SROs at this point. We are supportive of taking what we think on some level works and making it better through better oversight.

Right. Well, thank you for your answer. And on that, Madam Chair, I yield.

Gentleman's time's expired and he yields back. I see no more questioners, I should say, but I would like to thank all of our witnesses for their testimony today. And without objection, all members will have five legislative days to submit additional written requests for the witnesses to the chair. The questions will be forwarded to the witnesses for their response, and witnesses please respond no later than April 9, 2026. This hearing is now adjourned.