Bond rout hits Finra investments

Finra is feeling some pain from the bond-market sell-off. The organization's investment portfolio, on which it relies to make up for operating losses, was flat over the first two quarters, said John “Jack” Brennan, The Vanguard Group Inc.'s chairman emeritus and lead governor on Finra's board. “Through June, as you might imagine, given the volatility, we're about flat” on the $1.6 billion portfolio, Mr. Brennan said in a video update last Thursday. As of year-end 2012, 63% of Finra's investment assets were allocated to high-quality bonds and cash. Twenty percent was in equities and 13% in alternatives. The Barclays Capital Aggregate Bond Index was down 2.44% through the first six months of the year as a result of the second-quarter bond market sell-off over concerns about the Federal Reserve ending its bond purchases. Bruce Kelly: Finra's financial woes no recipe for viability Mr. Brennan, who heads Finra's investment committee, said the regulator's conservative investment policy results in a fixed-income allocation of “between 45% to 60%, which lately has been at the upper end of that [range] both for tactical reasons and because fixed income has fared so well.” Finra's portfolio has “performed precisely as we forecast it would,” Mr. Brennan added. Last year, the organization produced net operating cash flow of about $44 million, he said, helped by the 7.1% return on its portfolio, as well as cost cutting and member fee increases. Last year's $59.1 million gain on its investment portfolio put Finra in the black with a profit of $10.5 million, reversing an $84 million loss from 2011. However, Finra posted an operating loss of $89.2 million last year, slightly better than the $89.8 million operating loss it suffered in 2011. Finra's investment portfolio consists largely of the proceeds from the sale of the Nasdaq stock market more than a decade ago. In 2008, Finra lost $568 million on its investments, some of them hedge funds and other limited partnerships. As a result, in 2009, Finra began to reduce risk in its portfolio dramatically.