Finra denies WSJ report that regulator has underperforming portfolio

Regulator says Journal's analysis makes improper comparison of returns

Oct 6, 2017 @ 1:33 pm

By InvestmentNews

A spokeswoman for the Financial Industry Regulatory Authority denies that its investment portfolio has underperformed relevant benchmarks, as a recent Wall Street Journal article asserts.

"The portfolio has exceeded Finra's benchmark on a risk-adjusted basis," spokeswoman Nancy Condon told InvestmentNews today in response to the Journal report.

"In 2009, after the financial crisis, Finra decided to reallocate its assets to pursue a more conservative approach, with the majority of the portfolio invested in fixed income securities. Instead of comparing Finra's returns against a similar asset mix, the Journal's analysis compares Finra's returns to a much more aggressive asset mix of 50% equities and 50% fixed income securities. That is a flawed comparison."

From Finra's origins in 2004 through 2016, the Financial Industry Regulatory Authority's actively managed $1.6 billion investment portfolio has returned 3.4%, or $440 million less than a 6% return had the self-regulator invested in a balanced mix of global stocks and U.S. bonds, according to Wall Street Journal calculations of figures in Finra's annual reports.

The returns have bottom-line ramifications for the brokerage industry, the Journal reports, noting that higher portfolio returns could have translated into lower costs for Finra's 3,800 member firms, which support the organization's $1 billion budget.

(More: Finra: Who's watching the watchdog?)

When Finra's revenue from fees, fines and investment returns exceeds forecasts, the regulator may rebate fees to the member firms it regulates. The regulator has not rebated such fees since 2014. Instead, since opening its portfolio, Finra has increased certain fees, partly because revenue has come under pressure as its membership declined from 4,600 firms in 2010.

Finra's managed portfolio — which the Journal said is unusual for regulators, since such entities normally invest in short-term securities — goes back to money received in 2001 after the National Association of Securities Dealers, the previous incarnation of the regulator, unloaded its stake in Nasdaq.


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