Finra reforms—ranging from making it part of the SEC to letting other self-regulatory organizations compete with for broker-dealer oversight—are being proposed as part of a massive overhaul of the entire financial regulatory system in a report issued by the conservative Heritage Foundation Tuesday.

Finra suffers from a lack of accountability, transparency and due process, argues Heritage Fellow David Burton.

In addition, the self-regulatory organization (SRO) may be unconstitutional, he argues.

To make Finra more transparent, Congress could put Finra under Freedom of Information Act requirements and open arbitration hearings to the public, Burton writes in the report.

As a substitute for Finra arbitration, the conservative scholars said disputes between broker-dealers and customers could be handled by specialized court such as the Tax Court. A division of the court could handle small claims cheaper and less formally, he says.

He said a specialized court would have two advantages over arbitration. First, it would eliminate fears by customers that Finra arbitration is stacked against them.

“[This fear arises] because, although not controlled by industry, Finra certainly has strong industry influence,” Burton says.

Second, the judges would have the securities law expertise that Finra arbitrators often lack.

He says he would also like to see Finra transparency enhanced by making its rule making subject to federal agency notice and comment period mandates.

Finra's proposed rules are subject to public scrutiny once they are submitted to the SEC for approval, but by that time it is unusual for changes to be made, and the SEC rarely disapproves a rule the SRO proposed, Burton points out.

Under a Burton proposal to make Finra part of the Securities and Exchange Commission, it’s regulatory functions would go to the SEC’s Division of Trading and Markets and its arbitration would be spun-off.

This approach would provide the transparency, due process protections and congressional oversight typically associated with government,” the Heritage scholar writes.

In the Heritage report, Hester Peirce, whom President Barack Obama had nominated to be a Republican SEC commissioner in the last year and a half of his  term, takes a different approach to Finra.

Finra and the other SROs should have competition, says Peirce, director of the financial markets working group at George Mason University’s Mercatus Center.

“Competition among SROs obviates the need for the government to micromanage the approaches that SROs take. SROs can experiment with different approaches, and customers can choose the SRO that establishes the level and nature of regulation they prefer,” contends Peirce and two report co-authors.