Finra projects operating loss, potential drawdown of reserves

Finra projects operating loss, potential drawdown of reserves
Broker self-regulator says it will not increase regulatory fees for member firms this year
MAY 08, 2020

Finra is projecting that its expenses will exceed revenues this year, potentially forcing the broker-dealer self-regulator to draw on its reserves, the organization said Friday.

In its 2020 budget summary, the Financial Industry Regulatory Authority Inc. said it expected operating expenses to total $950.8 million, a 2.8% increase over last year. It also projects $74.6 million of capital initiatives this year and $79.4 million of extraordinary initiatives.

Operating revenue is projected to be $868.9 million, which is flat compared to last year. The organization plans to draw about $210 million from its reserves to help cover the deficit.

Finra is planning once again to tap reserves, which are essentially its investment accounts, rather than raise regulatory fees for the 3,517 brokerages that it oversees.

“Over the last several years, we have relied on our reserves to fund budget deficits instead of increasing member firm fees, with 2020 marking the seventh consecutive year we have not increased fees,” Finra chief executive Robert W. Cook and chairman William H. Heyman wrote in a letter accompanying the budget summary. “As a result, Finra has drawn down approximately $650 million from its reserves since 2010.”

The budget summary, which Finra has released each year since 2018, outlines how it plans to allocate its resources. The document complements Finra’s annual financial report, which is usually released in June and provides the financial results for the previous year.

This year, the budget summary came with a warning. The Finra board approved it before the extent of the COVID-19 pandemic became apparent. The outbreak has significantly disrupted both brokerage firms and Finra itself.

“We expect to continue to adjust our operations as appropriate to best achieve our mission as this situation evolves,” Cook and Heyman wrote. “These adjustments and the pandemic’s impact on our member firms may have implications for our financial performance relative to the projections in the 2020 budget.”

For budgeting purposes, Finra does not assume that fine money will be available to support capital initiatives or extraordinary initiatives.

Actual financial results may differ from the budget summary because they will include fines, investment returns and other accounting adjustments. That means that Finra might not have to siphon as much from its reserves as it’s projecting. For instance, the anticipated drawdown in 2018 was $138.1 million, but the net loss for the year turned out to be $68.7 million.

Finra said it will publish a separate report on how it used fine money in 2019. It issued similar reports for 2017 and 2018.

Even though operating expenses have exceeded revenues for two years in a row and may continue to do so, Finra said it does not anticipate raising regulatory fees in the near future.

The regulator's plans "include continuing to draw down excess reserves over the next five years (including the amount budgeted for 2020) before reaching a minimum targeted reserve level of one year of operating expenses; continuing to focus on prudent management of our expenses; and, as we have previously stated, eventually raising regulatory fees,” Cook and Heyman wrote.

The budget summary and the fine report are part of Finra’s effort to be more transparent about its finances, a goal that was part of the Finra 360 organizational self-examination.

Latest News

JPMorgan tells fintech firms to start paying for customer data
JPMorgan tells fintech firms to start paying for customer data

The move to charge data aggregators fees totaling hundreds of millions of dollars threatens to upend business models across the industry.

FINRA snapshot shows concentration in largest firms, coastal states
FINRA snapshot shows concentration in largest firms, coastal states

The latest snapshot report reveals large firms overwhelmingly account for branches and registrants as trend of net exits from FINRA continues.

Why advisors to divorcing couples shouldn't bet on who'll stay
Why advisors to divorcing couples shouldn't bet on who'll stay

Siding with the primary contact in a marriage might make sense at first, but having both parties' interests at heart could open a better way forward.

SEC spanks closed Osaic RIA for conflicts, over-charging clients on alternatives
SEC spanks closed Osaic RIA for conflicts, over-charging clients on alternatives

With more than $13 billion in assets, American Portfolios Advisors closed last October.

William Blair taps former Raymond James executive to lead investment management business
William Blair taps former Raymond James executive to lead investment management business

Robert D. Kendall brings decades of experience, including roles at DWS Americas and a former investment unit within Morgan Stanley, as he steps into a global leadership position.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.