Investor advocates and securities lawyers delivered sharp criticism of Wall Street’s primary broker regulator Thursday, warning lawmakers that the system meant to police brokerage firms is drifting toward an “industry-first” posture that undermines protections for retail investors.
The hearing before the House Financial Services Subcommittee on Capital Markets examined the role of self-regulatory organizations, including the Financial Industry Regulatory Authority, which oversees about 3,500 brokerage firms and roughly 620,000 registered brokers nationwide.
Rep. Andrew Garbarino, who chaired the hearing, told lawmakers that organizations like Finra wield enormous influence over U.S. markets and must remain accountable to Congress.
“These are not minor organizations,” Garbarino said, noting that regulators such as Finra and the Municipal Securities Rulemaking Board sit at the center of how U.S. capital markets function. Decisions about rules, enforcement and compliance costs can have far-reaching consequences for investors and financial firms alike, he said.
Finra’s budget has grown to roughly $1.5 billion, funded largely through fees paid by the brokerage firms it regulates. That funding model raises legitimate questions about incentives and oversight, Garbarino said, emphasizing Congress’ duty to periodically review whether self-regulatory organizations are fulfilling their statutory mission.
Ranking member Brad Sherman said lawmakers should carefully examine whether the self-regulatory model still works but stopped short of endorsing major structural changes.
“The policy issue before us is whether the SRO should be folded into the SEC,” Sherman said. “I am a very faithful agnostic on that issue. I do not know.”
Sherman added that Congress must weigh whether regulatory authority should ultimately reside within government agencies accountable to voters or remain delegated to private organizations like Finra.
The hearing came as Finra launched a sweeping review of its arbitration system — the dispute-resolution process that typically handles conflicts between brokerage firms and their clients.
Earlier this week, Finra issued a request for public comment seeking feedback on more than 60 questions about the arbitration process, including arbitrator qualifications, eligibility rules and whether certain disputes should be heard outside the Finra forum.
The review is part of the regulator’s broader “FINRA Forward” modernization initiative, which aims to update rules governing brokerage firms and market participants.
Investor advocates, however, say the effort risks weakening long-standing protections for retail investors.
Jennifer Shaw, executive director of the Public Investors Advocate Bar Association, told lawmakers the arbitration system already tilts toward brokerage firms and warned that proposed changes could make it harder for investors to pursue claims.
According to statistics cited in her testimony, investors prevail in fewer than 30% of Finra arbitration hearings. Even when they win, collecting damages can prove difficult.
In 2024, 37 cents of every dollar awarded to investors in Finra arbitration went unpaid, Shaw said, and roughly one in four arbitration awards was never collected. Between 2020 and 2024, approximately $80 million in awards owed to investors went uncollected.
“These investors did everything right,” Shaw told lawmakers. “They followed the rules, brought their claims and won — but they never received their money.”
Another witness, Valerie Mirko, a partner and leader of securities regulation and litigation at Armstrong Teasdale LLP, also raised concerns about the direction of recent reforms.
Mirko warned lawmakers that changes under consideration could tilt arbitration procedures toward repeat industry participants that appear frequently before arbitration panels, potentially undermining confidence in the fairness of the forum.
The hearing also touched on compensation at the regulator itself. Critics and lawmakers noted that Finra’s chief executive, Robert W. Cook, received about $3.8 million in compensation in 2020 and could earn more in other years.
Asked whether that level of pay was appropriate, Shaw declined to weigh in on the fairness of the compensation but said she would rather see resources directed toward helping investors recover losses.
“I would prefer to see some of those funds go back to defrauded investors,” she said.
Investor advocates urged Congress to consider sweeping reforms, including creating an investor recovery pool to compensate investors when arbitration awards go unpaid. Such a fund could be financed through modest assessments on brokerage firms, potentially costing as little as about $23 per registered broker annually, according to estimates cited in testimony.
Other proposals included requiring brokerage firms to carry professional liability insurance and expanding Finra’s jurisdiction so holding companies and control persons behind broker-dealers share responsibility for arbitration awards.
Finra defended its modernization effort.
In a statement, a Finra spokesperson said the regulator is committed to strengthening its dispute-resolution system and ensuring it works for all participants.
“Finra is committed to continuous improvement that draws on deep engagement with its members, the investing public and other interested parties,” the spokesperson said. “Finra strives to provide a fair, efficient and effective arbitration forum for all participants.”
Still, critics told lawmakers that the stakes are high.
With millions of Americans relying on brokerage firms to manage retirement savings and investments, they argued the self-regulatory model only works if investor protection remains its central priority.