Rare FINRA disclosure predicts budget shortfall in 2018

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FINRA will hold off on raising fees for its member firms despite "revenue challenges," according to an unusual glimpse the regulator gave into its projected 2018 budget.

Projected revenue of $822 million for 2018 is relatively flat when compared to 2013, the last year that FINRA raised fees, the regulator says in its newly released budgetary summary. FINRA derives about half of its total revenue from industry fees.

Expenses, meanwhile, are projected to rise to $888 million for 2018 from $817.4 million for 2013. The industry has rapidly changed over the same time period; fintech innovations such as robo advisors have become a much bigger component on the wealth management landscape. The SEC is also relying more on FINRA to supervise broker-dealers, adding to its growing regulatory burdens (the SEC also must approve any fee increase at FINRA).

Despite the potential mismatch between resources and responsibilities, FINRA will not raise member fees. Firms can be subject to a number of different fees, depending on factors such as size. The charge for new members ranges from $7,500 to $55,000.

"While industry fees are a vital component of our funding model, we must be cognizant of the burdens that fees can place on member firms and registered representatives," the regulator says in its report.

Instead, FINRA intends to rely on its financial reserves to address shortfalls while also managing its expenses. In previous years, it's relied on its reserves, which totaled $1.6 billion as of 2016, to fill shortcomings. In 2018, FINRA may have to draw on $136 million from its fund — though fines issued this year may offset that as it has in other years. For example, in 2016, FINRA anticipated it would have to use about $102 million from its reserves to cover a budget shortfall; instead, the regulator ended the year with approximately $57 million in net income.

The regulator also says it has reduced incentive compensation while also holding senior officer salaries flat for the previous two years. It will hold them flat again in 2018. Total compensation is projected to comprise approximately 64% of its $863.7 million in operating expenses. Some top executives at the regulator earn $1 million or more in compensation. Chief Financial Officer Todd T. Diganci took home approximately $1.3 million 2016, down from about $1.5 million from the previous year.

The new report is part of an ongoing effort to increase transparency at the regulator, an initiative started under CEO Robert Cook, who has led the regulator since 2016. FINRA's publication also included a list of principles that guide its operations. Those principles include protecting investors, safeguarding market integrity, using fines to promote compliance and sustaining financial reserves with a goal of maintaining a level equal to at least one year of the regulator’s expenditures.

"As a not-for-profit, self-regulatory organization whose operations are funded by industry fees — without the support of any taxpayer dollars — we must prudently manage our finances to ensure we can fund our mission to protect investors and promote market integrity in a manner that facilitates vibrant capital markets," FINRA Chairman William Heyman and CEO Cook say in a letter that accompanied the budget summary.

FINRA’s annual financial report usually comes out in June.

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Regulatory reform Regulatory actions and programs Robert W. Cook FINRA