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FINRA 2018 Budget Shows no Rate Increases for Member Firms

As a step toward increasing transparency, the Financial Industry Regulatory Authority (FINRA) for the first time has released its annual budget, showing that the 2018 budget does not include a fee rate increase for its member firms, despite certain “evolving” challenges.

FINRA’s Financial Guiding Principles and a summary of its 2018 budget explains that the organization will instead rely on excess reserves and take other steps to reduce costs for the industry.

In a letter accompanying the budget document, Chairman William Heyman and CEO Robert Cook note that FINRA’s regulatory responsibilities “are as extensive and complex as ever,” as total assets under management by member firms have increased, the number of registered representatives has remained constant and innovations in financial technology pose new challenges. In addition, they note the SEC is relying more heavily on FINRA to supervise broker-dealers.

The summary projects 2018 operating revenue of approximately $822 million. Heyman and Cook note that FINRA obtains nearly half of its revenues from industry fees that are primarily based on firms’ gross revenue and trading volume, as well as firms’ total number of registered representatives. Overall revenue generated through these three fees is projected to decline to its lowest level since 2013, according to the summary.

It notes that average daily trading share volume, which drives the Trading Activity Fee, is projected to fall in 2018 to below the 6.2 billion level seen in 2013. In addition, gross industry revenue, which determines the Gross Income Assessment, is projected to continue to increase in 2018, but FINRA’s rate structure includes provisions that have kept that assessment relatively flat since 2013.

“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,” Heyman and Cook write.

Allocation of Fines

The budget summary further explains that during 2018 there are no fine monies allocated to support FINRA’s capital initiatives and no investment gains (or losses) on its reserves. As a result, the difference between its projected 2018 revenues and expenses could result in a draw on reserves of $136 million.

Heyman and Cook note that, “Budgeting zero fines for 2018 is consistent with our Principles — to underscore that enforcement decisions are not driven by revenue targets — and budgeting zero investment gains is appropriately cautious for an organization like FINRA.”

The Guiding Principles explain that any fine monies collected in 2018 may be used only with the prior approval of the Board or its Finance Committee. At its December 2017 meeting, the FINRA Board identified several projects for which fine monies — if collected — may be used in 2018, including a project to enhance FINRA’s tools for monitoring trading in U.S. Treasury securities. The initiative involves developing additional customer protection surveillance patterns and market integrity patterns, building on the data integrity surveillance patterns launched in 2017, the summary notes. The Board also approved the use of any fine monies that may be collected to transform the technological infrastructure of the registration systems for member firms and individuals.

The summary shows that the overall 2018 budget is allocated according to the following functions:

  • Member regulation (32%)

  • Market regulation (14%)

  • Other regulatory operations (13%)

  • Enforcement (12%)

  • Non-recurring capital initiatives (9%)

  • Transparency services (8%)

  • Registration and disclosure (7%)

  • Dispute resolution (5%)

Meanwhile, on Jan. 8 FINRA released its 2018 Annual Regulatory and Examination Priorities Letter noting that, similar to last year, the organization plans to address fraudulent activities, high-risk firms and brokers, and operational and financial risks.