Welcome to Financial Advisor IQ

Finra’s 2018 Budget Might Reveal Sweeping Changes

By Rita Raagas De Ramos November 14, 2017

Finra’s board is expected to make “tough choices” when it meets in December to discuss and approve the self-regulator’s budget for 2018, according to Finra CEO Robert Cook.

“We’re working to re-think in some ways the whole combination of our budget, fees, fines, endowments,” Cook said last month at the Sifma annual meeting in Washington, D.C.

Cook acknowledged Finra is facing budgetary challenges, including “declining industry revenues” and “shortfalls.”

“We have a combination of factors to think through,” he said, without giving any details on the direction the board plans to take with next year’s budget.

One of the issues raised at the Sifma annual meeting, and in other forums and events in recent weeks, is the lack of transparency over how Finra uses the fines it collects.

Cook reiterated that the SEC has proposed that the fines collected by Finra be “allocated to capital and strategic regulatory initiatives,” but said he understands why “people want transparency over that.”

Finra ordered broker-dealers to pay fines totaling $26.6 million in the first eight months of 2017, sharply lower than $173.8 million in 2016.

The fines collected by Finra last year – a record high – helped offset the decline in the self-regulator’s operating revenues to $844.6 million in 2016 from $898.7 million in 2015. The majority, or 53%, of Finra’s operating revenues last year came from regulatory revenues including gross income assessment, personnel assessment, branch office assessment and trading activity fees. User revenues -- including registrations, qualification examinations, Finra-sponsored educational programs and conferences, and reviews of advertisements, corporate filings and disclosures -- made up 22% of operating revenues last year, which the self-regulator says is consistent with the level generated yearly.

The fines helped Finra achieve $1.018 billion in net revenues in 2016, up from $992.5 million in 2015. It also helped Finra produce a net profit of $57.7 million in 2016, a turnaround from a net loss of $39.5 million in 2015.

Finra cannot always rely on fines to boost its bottom line, however, with Cook noting that fines can go “up or down.”

Last year’s total fines were boosted in part by cases with larger fines closing toward the end of 2016 rather than in 2017. One case that involved a $10 million fine was under investigation by the regulator’s enforcement division for around two years and happened to close on Dec. 28, 2016.

In 2016, four cases made up around $62 million of the total fines imposed in 2016. These included two AML-related cases involving Raymond James (May 2016) and Credit Suisse (December 2016), with fines totaling $24 million; a MetLife variable annuities case with a $25 million fine; and a Deutsche Bank supervisory case with a $12.5 million fine.

The fines collected by Finra are segregated into a separate account. They are meant to be used to fund capital expenditures and specified regulatory projects related to protecting investors and ensuring market integrity.

Robert Cook (Getty)

At the Sifma annual meeting, Lynette Kelly, executive director of the Municipal Securities Rulemaking Board, said transparency is also often an issue raised with the MSRB. Like Finra, MSRB is an SRO subject to SEC oversight.

Kelly said one solution the MSRB has put forward is publishing earlier this year it’s “first-ever” budget summary, which it plans to produce annually.

“We’ve always published our financial statements that of course look back to the year that passed, but the budget summary gives a better understanding of how the resources or the money that has been entrusted to us are being spent. The level of transparency around that is appreciated,” she said.