Key Takeaways
- •The subcommittee examined whether FINRA and the MSRB have drifted from their industry-led origins into unaccountable quasi-governmental entities, focusing on governance reforms and the "FINRA Forward" modernization initiative.
- •Valerie Mirko (Partner and Leader of Securities Regulation and Litigation Practice, Armstrong Teasdale) recommended SEC review of all expulsion decisions, while Jennifer Shaw (Executive Director, Public Investors Advocate Bar Association) argued that FINRA’s modernization efforts weaken protections for retail investors.
- •Rep. Andrew Garbarino (R, NY-2) questioned Mike Nicholas (CEO, Bond Dealers of America) on MSRB board composition, with Nicholas arguing that public-member dominance dilutes necessary market expertise in municipal securities regulation.
- •Republicans criticized FINRA’s "gotcha" enforcement and lack of transparency, while Democrats emphasized the need for better investor recovery pools and addressed climate-related financial risks in municipal bond markets.
- •This hearing signals potential legislative action to restructure SRO boards and increase SEC oversight of enforcement manuals, aiming to balance industry expertise with constitutional due process and public accountability.
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Hearing Analysis
Overview
The House Financial Services Subcommittee on Capital Markets, chaired by Rep. Andrew Garbarino (R, NY-2), held a hearing on March 5, 2026, to examine the efficiency, accountability, and statutory roles of the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB). The hearing focused on whether these self-regulatory organizations (SROs) have drifted from their original industry-led mandates to become "quasi-governmental" entities that exercise significant enforcement power without the transparency or procedural safeguards required of federal agencies. Rep. Garbarino noted that FINRA’s $1.5 billion budget and the MSRB’s oversight of the $4 trillion municipal securities market necessitate periodic congressional review to ensure they remain true to their 1938 and 1975 statutory foundations.
Key Testimony
The witness testimony reflected a divide between industry representatives seeking more expertise-driven governance and investor advocates concerned about weakening protections. Mr. Mike Nicholas, CEO of the Bond Dealers of America (BDA), argued that the MSRB has become overly focused on technology, with 60 percent of its budget dedicated to infrastructure like the EMMA website, while its board composition—mandated by the Dodd-Frank Act to have a public majority—dilutes necessary market expertise. Conversely, Ms. Jennifer Shaw, Executive Director of the Public Investors Advocate Bar Association (PIABA), criticized the "FINRA Forward" initiative, claiming it rolls back investor protections to the 1980s by allowing remote supervision and making it easier to dismiss arbitration cases. She highlighted the "unpaid award" crisis, noting that 37 cents of every dollar awarded to defrauded investors in 2024 went unpaid.
Policy Proposals
Policy discussions centered on several specific proposals and legislative ideas. The MSRB Reform Act was discussed as a vehicle to return the MSRB board to an industry-controlled model, which Mr. Nicholas argued would better serve the markets. Ms. Valerie Mirko, Partner at Armstrong Teasdale LLP, presented ten recommendations for reform, including amending the Exchange Act to require SEC review of every FINRA bar or expulsion decision and requiring that significant SRO rules be approved by a majority of SEC commissioners rather than staff. Professor Onnig Dombalagian of Tulane University School of Law suggested that while the SRO model is a "time-tested" synthesis of expertise, Congress should address the asymmetry in disciplinary history displays and revisit the timetables for the SEC’s rule review process.
Industry Impact
The industry impact of these discussions is broad, affecting approximately 3,500 brokerage firms and 620,000 registered brokers regulated by FINRA, as well as the municipal advisors and dealers governed by the MSRB. Small broker-dealers were a particular focus; Rep. Ann Wagner (R, MO-2) and Mr. Nicholas discussed how "gotcha" enforcement for minor "foot faults" can drive smaller firms out of business. Rep. Sean Casten (D, IL-6) raised concerns regarding the municipal bond market's exposure to climate risk, arguing that a lack of transparency in climate data could lead to significant property value losses and market instability.
Overview
Several organizations were central to the discussion. FINRA was scrutinized for its $1.5 billion budget, its lack of a public enforcement manual (though one was recently announced), and its "FINRA Forward" modernization program. The MSRB was criticized for its fee structure, where broker-dealers provide 80 percent of revenue but lack board control, and for its high technology spending. The SEC was discussed as the primary oversight body, with Ranking Member Brad Sherman (D, CA-32) suggesting it could potentially appoint all FINRA board members, similar to the Public Company Accounting Oversight Board (PCAOB) model. The Government Accountability Office (GAO) was mentioned regarding its triennial review of SEC oversight, with Ms. Mirko suggesting these reviews should specifically include FINRA’s enforcement program.
Industry Impact
Partisan dynamics showed general agreement on the need for SRO accountability but disagreement on the method. Republicans emphasized reducing regulatory burdens and increasing industry representation on boards. Democrats, led by Rep. Sherman, were "agnostic" about folding SROs into the SEC but insisted that any such move must include transferring the SROs' revenue sources to the SEC to avoid budget shortfalls. Notable exchanges included Rep. Lisa McClain (R, MI-9) challenging Professor Dombalagian on whether FINRA’s power to levy fines makes it a "duck" that should be treated as a government agency, and Rep. Sherman questioning why FINRA CEO Robert Cook’s multi-million dollar salary remains largely opaque to the public.
Overview
The hearing concluded with a call for further transparency. Rep. Wagner and Ms. Mirko emphasized the importance of FINRA finally publishing an enforcement manual, a move recently signaled by FINRA leadership. The subcommittee set a deadline of April 9, 2026, for witnesses to respond to additional written questions, signaling that legislative reforms regarding SRO governance and SEC oversight remain under active consideration.
Transcript
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.
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