HFSC Hearing: The Role of Self-Regulatory Organizations in US Markets

Summary

SIFMA commented to the House Committee on Financial Services Subcommittee on Capital Markets, providing input on the Committee's examination of the role of Self-Regulatory Organizations (SROs) in U.S. capital markets.

Excerpt

The Securities Industry and Financial Markets Association (SIFMA) ¹ and its member firms appreciate the opportunity to provide input on the Committee's examination of the role of Self-Regulatory Organizations (SROs) in U.S. capital markets. SIFMA applauds the Committee's work to review the SRO model and to ensure proper oversight of these regulatory bodies. SROs, namely the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB), have been tasked by Congress to ensure fairness, transparency, and adequate supervision of U.S. capital markets. We greatly appreciate the Committee's attention to these issues and thank you for the opportunity to provide our views.

Recommended FINRA Reforms

SIFMA believes the SRO model, as envisioned by Congress, has and can be a valuable tool in providing market integrity and investor protection. However, like any regulatory organization, SIFMA believes that FINRA has opportunities for improvement. Notably, FINRA itself has recognized the importance of periodically reviewing its rules to determine their effectiveness. In April 2025, FINRA announced its FINRA Forward initiative, one aspect of which is to modernize and update FINRA's regulatory requirements applicable to broker-dealers and associated persons. FINRA has an expansive role in overseeing the U.S. capital markets, and it maintains a voluminous rulebook that covers a wide range of activities and issues affecting retail and institutional investors. Accordingly, in response to FINRA's modernization efforts, SIFMA has provided FINRA with an extensive list of recommendations for updating its rules and requirements. ² While our recommendations cover a broad range of topics, below is a discussion of certain high priority areas we believe are particularly ripe for reform.

Among the most important and urgent of these topics is improving the FINRA arbitration forum. Virtually all disputes between broker-dealers, associated persons, and customers are resolved in FINRA's arbitration forum. Given the forum's central role in the securities industry, it is essential that it operates efficiently and delivers fair and predictable outcomes to all participants. Indeed, FINRA's arbitration forum provides a valuable dispute resolution service for the industry. And in many cases, particularly those involving main street investors and lower value claims, this forum provides the most efficient and cost-effective option for resolving disputes. But as markets evolve and disputes become more complex, shortcomings in the FINRA arbitration process have the potential to undermine the efficiency and fairness of the forum. Thus, reform is needed to preserve the benefits of the FINRA arbitration process, while also enhancing its transparency and parties' confidence in the process.

SIFMA has provided FINRA with specific recommendations for improving the FINRA arbitration forum, including:

• permitting agreements to adjudicate certain narrow categories of claims in alternative forums;
• permitting agreements to preclude or limit punitive damages awards where permitted by applicable law;
• improving the fairness of adjudicating Form U5 defamation claims;
• amending certain procedural rules governing arbitrations; and
• enhancing requirements to improve arbitrator quality and accountability.

We recognize that any changes must balance the interests of all stakeholders in FINRA arbitration, and, above all, ensure investor protection. And we believe our recommendations achieve that balance by focusing on improving the overall fairness and efficiency of the forum.