Finra fee rise said to hurt small B-Ds

Jul 29, 2012 @ 12:01 am

By Dan Jamieson

Saying they can't afford a series of fee hikes by Finra, brokerage firms are asking the Securities and Exchange Commission to rescind the charges.

Some of the increases took effect July 2, while others will be phased in starting Jan. 2.

“Smaller firms feel the impact disproportionally, and that's one of the many reasons we oppose the fee increases,” said Dale Brown, chief executive of the Financial Services Institute Inc., which represents independent-contractor firms.


The higher fees will be a “huge hit to us,” said Robert Seawright, chief investment officer at Madison Avenue Securities Inc.

Smaller firms are especially affected because of their slim profit margins, said Mr. Seawright, whose firm has about 125 representatives.

The proposal for the hikes was filed with the SEC in June under a process that gave Finra the go-ahead to implement them immediately. But the SEC, which took comments through July 19, could still suspend the increases.

The FSI and other industry groups have urged the SEC to take that action.

Finra spokesman George Smaragdis declined to comment, as did SEC spokesman John Nester.

The higher fees “will result in additional failures” of independent firms, which are already under financial pressure, the FSI wrote in a comment letter.

The increases apply to advertising reviews, corporate financing approvals, Central Registration Depository filings and membership and branch-office registrations.

A new continuing-membership application fee will be a “killer” for small firms looking to expand, said David Sobel, general counsel at Abel/Noser Corp. and chairman of the National Association of Independent Broker-Dealers Inc.


The revised application fee, now $5,000 or more, applies to those seeking approval for material changes in their businesses. Because Finra will be earning revenue from such applications, Mr. Sobel expects that the agency will be less likely to let firms expand without going through the formal process.

In comment letters, several industry groups said that Finra failed to justify the increases.

Finra should provide an “explanation of the analysis of how current budgets and costs were reviewed in order [to] find additional funding, [or cut] outdated or unnecessary Finra programs,” the Committee of Annuity Insurers wrote.

“Unfortunately, the descriptions from Finra ... indicate little or no evidence of the consideration of any options that Finra contemplated beyond simply moving directly to a determination to raise the fees,” the CAI wrote.

Meanwhile, the Investment Company Institute said Finra's arguments for higher advertising review fees were “illogical.”

Finra claimed that higher review volumes made the changes necessary, the ICI wrote in a comment letter. But Finra's existing per-filing charge should have led to economies of scale with higher volume, the ICI wrote.

“A more plausible explanation for the fee increase appears to be ... Finra's overall budget shortfall, which was caused in part by declining overall regulatory fees and also by a decline in Finra's investment returns,” the ICI wrote.


Higher fees might be justified, but it's hard to know what Finra is doing internally to deal with its budget squeeze, Mr. Seawright said. “It seems to me that raising fees is not the first thing you do. You have to budget appropriately,” he said.

Mr. Brown suggested that Finra should take another look at ways to improve its operations.

“All of our [broker-dealer] members have faced those same [budget] pressures and increased costs,” he said. “But they don't have the luxury of raising prices without consequences.”

Members point to Finra's executive salaries as a place to cut.

“It's hard to see this organization that's living off its members [having] multiple employees with high salaries,” said Brent Owens, president of Creative Financial Designs Inc.

Finra's annual lobbying outlay of about $1 million has also raised eyebrows. The agency spent $550,000 on such activity in the first half this year, about the same as a year earlier, according to disclosure reports filed this month.

Although the amount is a small percentage of Finra's overall budget of nearly $1 billion, members question the expenditure, especially in light of the organization's continuing losses, cost cuts elsewhere and fee increases.

For his part, Mr. Seawright wonders why member firms should be financing Finra's lobbying activity.

In its filing last month, Finra said that member fees haven't been raised in years and that it needed higher levies to cover the costs of regulating a more complex business.

The FSI noted, however, that the SEC approved an increase in Finra's personnel- and gross-income assessments in November 2009.

“Finra argued at the time that the proposed fee increases ... would "stabilize its revenues and provide protection against future industry downturns,'” the FSI comment letter said. “Unfortunately, neither of these statements proved true.”

The hikes couldn't come at a worse time, industry members said.

The higher fees come on top of “astronomical increases in SIPC assessments, SEC fees, fidelity bond premiums, errors-and-omissions insurance premiums, and significant uncertainty concerning the financial markets and ... regulatory requirements,” the FSI wrote in its comment letter. Twitter: dvjamieson


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