Finra releases budget for first time, foresees declining operating revenues

Regulator reveals plans to hold senior officer salaries flat, and other financials, in transparency effort

Jan 18, 2018 @ 2:49 pm

By Mark Schoeff Jr.

Finra projects declining operating revenues this year but will not raise membership fees in 2018, the broker-dealer regulator said Thursday.

In its first-ever publicly released budget summary, the Financial Industry Regulatory Authority Inc. said operating revenue — generated from fees assessed on a firm's gross revenue, trading volume and number of personnel as well as from user fees — would total $822 million, down from $828.7 million in 2017.

The organization is anticipating its lowest revenue levels since 2013.

"They're taking head-on the industry criticism that they're sitting on a big pile of cash," said Daniel Nathan, a partner at Orrick, Herrington & Sutcliffe and a former Finra vice president and director of regional enforcement. "They're willing to let the industry and public keep them honest and make sure they follow through on their commitments."

Operating expenses this year are projected to be $888 million, down from $890 million in 2017, while capital expenditures are slated for $90 million this year, a decrease from $109.1 million in 2017.

The fiscal pinch comes as the number of brokerages the regulator oversees has decreased from 4,146 in 2013 to about 3,700 today, while the number of registered representatives has remained stable at about 630,000. Finra staff has increased to 3,585 this year, up from 3,489 in 2013.

"Despite our revenue challenges, we will not seek to increase member firm fees at this time," Finra president and chief executive Robert W. Cook and board chairman William H. Heyman wrote in a letter accompanying the summary. "Instead, in line with the [financial guiding] principles, we will leverage our reserves to support our operations while deferring fee increases."

The organization anticipates taking $136 million out of reserves this year to fund the operating shortfall. In the report, Finra said its goal is to maintain a reserve at the level required for one year's expenditures.

The agency said it is holding its costs flat in part by better managing pay.

"We have reduced incentive compensation and held senior officer salaries flat for the last two years and will hold senior officer salaries flat again in 2018," Mr. Cook and Mr. Heyman wrote.

Finra is trying to live within its means given the changes the brokerage industry is undergoing, said Mark Cresap, president of Cresap Inc. and a former Finra board member.

"Finra is very conscious about not propping up revenues on the back of the industry," Mr. Cresap said. "Robert Cook really understands that you can't just raise revenue 5% to 10% and get away with it. [He] is really interested in right-sizing Finra."

Finra's budget is an example of how it is adjusting to industry developments, according to Financial Services Institute president and chief executive Dale Brown.

"It is clear that Finra has made a concerted effort to adapt to our changing industry, better serve investors and provide more effective oversight of firms," Mr. Brown said in a statement.

Managing the Finra budget will be an ongoing challenge, said Christopher Iacovella, chief executive of the Equity Dealers Association, a trade group of regional broker-dealers.

"They're going to have to really scrutinize their operating expenses if operating revenues continue to decline as they have over the last few years," Mr. Iacovella said.

Finra released its budget for the first time in response to criticism that its operations are opaque. One of the areas that was mentioned in an in-depth InvestmentNews analysis of Finra last fall was the secrecy surrounding its use of fine proceeds, which hit a record $173 million in 2016.

In the budget summary, Finra outlined some ways it has spent fine money in the past, such as funding technology improvements, and pledged to give a "full accounting" of the use of fine money this year in the 2018 annual report.

"At least they're committed to do it," said David Burton, senior economic fellow at the Heritage Foundation. "It's not clear why they didn't do it with respect to 2017. I would prefer that the money be used for wronged-investor reimbursement when they can't recover the money from the firm or the broker."

Finra's transparency effort has emanated from the Finra360 self-examination Mr. Cook launched last year.

Mr. Iacovella said releasing the budget is another way Finra is improving communication.

"This opens up a constructive dialogue between the industry and Finra on a variety of subjects," he said.

Mr. Brown also endorsed Finra's increased transparency.

"They have taken our concerns to heart, and we're encouraged by their progress," he said.


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