Finra trims operating loss but compensation costs climb

Revenue climbs as regulator ekes out net income gain, sets rebate to member firms

Jun 20, 2014 @ 3:54 pm

By Mark Schoeff Jr.

finra, annual report, results, operating loss, net income, compensation
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The Financial Industry Regulatory Authority Inc. increased its revenue and lowered its operating loss last year to eke out $1.7 million in net income, according to the regulator's annual report, which was released Friday.

Finra brought in $900.7 million in net revenue in 2013, compared with $878.6 million in 2012, and lowered its operating loss to $73.4 million, from $89.2 million. Expenses grew slightly, reaching $998.9 million last year, from $992.7 million in 2012.

The brokerage industry self-regulator held expenses down while distributing $19.5 million in severance payments and $12.7 million in service credits to participants in its retirement program. The expenditures were mitigated by real estate and administrative cost savings, Finra chairman and chief executive Richard G. Ketchum said in a letter accompanying the annual report.

“Financially, 2013 was a solid year,” Mr. Ketchum wrote. “Our managed spending across the organization, coupled with pricing actions, resulted in net cash flow in excess of our 2013 annual budget.”

(See how Finra did in 2012: Finra turns a profit, helped by investments, fee increases)


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Still, Finra's compensation and benefits spending continued to climb. While the staffing level of about 3,400 held steady last year, Finra paid out $700.3 million in compensation and benefits, compared with $628.9 million in 2012. As a percentage of overall expenses, compensation reached 70%, up from 63% in 2012.

Finra paid four of its top 10 executives more than $1 million in 2013. Mr. Ketchum's total compensation was $2.6 million. Todd Diganci, executive vice president and chief financial officer, made $1.2 million. Susan Axelrod, executive vice president for regulatory operations, earned $1.013 million, while J. Bradley Bennett, executive vice president of enforcement, made $1.064 million.

The report indicates that two additional executives — Steven Randich, executive vice president and chief information officer, and Robert Colby, executive vice president and chief legal officer — have base salaries of more than $1 million for 2014.

“Finra's compensation philosophy for all employees is a pay-for-performance model seeking to achieve pay levels in line with the competitive market, while meeting the objectives of attracting, developing and retaining high-performing individuals who are capable of achieving our mission, and to provide rewards commensurate with individual contributions and Finra's overall performance,” the annual report stated.

(Compensation also was an issue in 2012: Finra hampered by rising compensation costs, stagnant revenue)


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The “better-than-expected financial performance” prompted the Finra board to approve a one-time discretionary rebate of $20 million to its member firms at the end of 2013, Mr. Ketchum said. That resulted in a $1,200 rebate to all firms in good standing to offset Finra's minimum gross income assessment fee. They also received a rebate on other Finra regulatory fees.

Finra's regulatory revenue increased to $414.6 million in 2014, from $406.9 million in 2012, thanks to an increase in the branch office assessment, which was boosted in order to cover rising costs in registration and examinations, the report stated.

Increases in annual registration and renewal, corporate financing and other fees boosted user revenue. But dispute resolution revenue dropped from $41.7 million in 2012 to $36.2 million in 2013 due to a 13.6% decrease in the number of new cases filed.

Finra depends on the financial markets to augment its operating income. Finra's portfolio returns declined to 5.7% in 2013 from 7.1% in 2012. In 2013, investment income was $99.9 million, a decrease from $124.6 million in 2012.

“Last year's investment returns were lower year over year, as a result of holding losses on the bond portfolio, partially offset by the performance of our broadly diversified multiasset fund,” Mr. Ketchum wrote.

Finra oversees nearly 4,100 firms, 161,000 branch offices and 636,000 registered representatives.

(Read Bruce Kelly's take on the 2012 results: Finra's financial woes no recipe for viability)


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