A government watchdog group has sent a letter to congressional committees in charge of financial oversight asking them to challenge the government’s reliance on financial self-regulatory organizations like the Financial Industry Regulatory Authority (FINRA).

The nonprofit group, Project On Government Oversight (POGO), argues in its letter that FINRA, which oversees thousands of securities brokerage firms that do business in the U.S., is just one of many self-regulatory organizations (SROs) that feature prominently in the nation’s financial regulatory regime. In its letter to Congress, POGO argued that FINRA and other SROs have “an incestuous relationship” with the industry they are tasked with regulating, and therefore should not be trusted with the important job of protecting the investing public.

Danielle Brian

“In light of FINRA’s abysmal track record, and the flawed premise of self-regulation in general, POGO calls on Congress to consider vastly curtailing the power of self-regulatory organizations,” said Danielle Brian, executive director of Washington, D.C.-based POGO, in the letter. “Effective, independent and efficient government regulation is the only proper way to safely oversee our markets.”

POGO’s request, which comes as FINRA seeks Congress’ approval to expand its authority, suggests that FINRA and other SROs “failed to prevent virtually all of the major securities scandals dating back to the 1980s, according to the group.

POGO said that under the leadership of Mary Schapiro, its chairman, FINRA failed to regulate many of the larger firms that were at the heart of the financial crisis, including Bear Stearns, Lehman Brothers, and Merrill Lynch, and also failed to detect the Ponzi schemes run by Bernie Madoff and R. Allen Stanford. Amidst the economic collapse of 2008, during which FINRA itself lost $568 million in its investment portfolio, and despite its failure to adequately conduct oversight of the securities industry, FINRA awarded its top 20 senior executives $30 million in salaries and bonuses, according to POGO.

“The cozy relationship between FINRA and the securities industry has resulted in pervasive conflicts of interest, and ought to raise doubts about whether FINRA can ever be an effective regulator,” the letter said.

“FINRA’s disastrous track record should be all the evidence Congress needs to conclude that self-regulators can’t be trusted with protecting investors. Our fragile economy shouldn’t be left in the hands of a regulator that’s in bed with the same industry that brought the financial system to the brink of collapse,” Brian added.

Copies of the letter, dated Feb. 23, were sent to House Committee on Financial Services, the House Committee on Oversight and Government Reform, the Senate Committee on Banking, Housing, & Urban Affairs, and the Senate Committee on Finance.