Finra gives first report on where it spent money collected from fines

Regulator says most of the money was spent on improving regulatory functions and compliance by member firms.

The Financial Industry Regulatory Authority Inc. has routinely been criticized for not telling members what it does with all the money it collects in fines. So this year, it decided to come clean.

In its first report on fine money, Finra said that it collected $64.9 million in fines in 2017 — down sharply from $173.8 million in 2016 — and spent $49.9 million on projects that improve regulatory functions and compliance by member firms. The remaining $16.1 million was spent on investor education and Finra employee training.

“The initiatives we undertook in 2017 with the support of fine monies further Finra’s goal to implement efficient oversight programs that protect investors and the markets, strengthen our ability to track trading across markets, modernize critical securities industry infrastructure, facilitate compliance among member firms and equip investors with the knowledge and resources they need to capably navigate ever-evolving markets,” the fine report states.

For instance, Finra allocated $15.4 million in fine monies to bolster its use of risk-based analytics for examinations and investigations.

“One key area of focus of these initiatives is helping Finra better identify the brokers and firms that may present the greatest risk to investors and the markets,” the fine report states.

The document is the first overview of how Finra uses the fine money it collects from member firms that violate its rules. Next year, it will present a report with itemized spending.

The fine report, as well as a budget summary and financial guiding principles released earlier this year, are steps Finra has taken to be more transparent about its finances as part of the Finra 360 self-evaluation initiative.

The regulator also released on Friday its annual financial report. That document shows that Finra’s operating revenue dropped to $828.1 million in 2017 from $844.6 million in 2016. Finra cut expenses to $992.3 million in 2017 from $1.04 billion in 2016.

Those results gave Finra a 2017 operating loss of $73.3 million. Finra’s net income was positive thanks to gains in its investment portfolio but still dropped to $41.6 million in 2017 from $57.7 million in 2016.

Finra returned $66.8 million to harmed investors last year.

Despite its declining financial results, Finra did not increase membership dues in 2017 because it tapped its $1.6 billion in reserves, which were originally created by the sale of NASDAQ in 2006.

Finra said that it does not anticipate raising member dues in 2018, even though expenses are again projected to exceed revenue.

“Instead, we are again leveraging our financial reserves to fund our regulatory operations,” Finra CEO Robert W. Cook wrote in a letter accompanying the financial report. “In addition, under the supervision of our board, we will continue to review and manage our overall expenses to ensure they are appropriately calibrated to our mission of protecting investors and promoting the integrity of our markets.”

The annual report also shows that three Finra executives are earning more than $1 million in 2018, with several more likely to exceed that level after deferred compensation has been determined. Mr. Cook’s total base salary and incentive compensation is $2.4 million.