Last month, the Financial Industry Regulatory Authority put out its yearly report for 2012. According to the results, the self-regulatory organization is hurting. Its operating losses are huge-nearing $90 million for the second year straight. Meantime, its staff has grown 13%, with benefits and compensation rising 41% in the last five years to hit $628.9 million last year. That’s a significant jump from 2007 when the SRO’s compensation and benefits was $446.1 million. Retirement and pension expenses have risen 89% in the last five years.
While observers say that FINRA’s operating losses are not an immediate danger, no one can say for sure. Some are even asking how could a regulator facing potential financial trouble do its job and protect investors? Unlike its last five yearly reports, FINRA’s 2012 report pointedly says that the will keep observing the changing economy and assessing any effect on the organization. If there were to be a huge market collapse, however, FINRA’s equity would take a beating.
The private SRO is the National Association of Securities Dealer’s successor. NASD’s merger with the New York Stock Exchange (NYSE) Regulatory Division is one reason for the increase in FINRA’s compensation. After its merger with the NYSE Regulatory Division, NASD soon changed its name to the Financial Industry Regulatory Authority (FINRA).
“”In order to divest itself of its non-market making regulatory responsibilities the NYSE exchange actually paid the NASD over $150 million, approximately $35,000 per NASD member firm, ” said FINRA arbitration attorney William Shepherd.
Like others in the securities’ industry, FINRA’s portfolio also was hit by the financial crisis.
Meantime, as broker-dealers continue to close shop, with middle and small sized firms upping costs to keep up with compliance and regulation costs, FINRA’s brokerage firm membership has gone down.
“FINRA remains an association of securities dealers, not a government regulator as many may believe.,” said Securities Attorney Shepherd. “FINRA still derives some of ts income from its members through dues, fees and fines. As a self-regulatory organization (SRO) FINRA must answer to the Securities Exchange Commission (SEC) regarding rule changes, etc. Some therefore call FINRA and other self-regulatory financial SRO’s ‘quasi-governmental’ regulators. ”
To “balance the books,” Stockbroker fraud lawyer Shepherd offers some simple suggestions:
• First, stop paying your head regulators 7 figure incomes – yes, over a million per year. Real regulators on government pay make a fraction of that!
• Next, fine your members ’til it hurts. Strike some real fear into would-be wrongdoers to clean up their acts.
• Moreover, strike fear into bosses who either ignore what’s happening or do not want to kill any gold laying geese. The fear of getting caught is not severe if the penalty does not fit the crime.
“Beyond some flashy exceptions, too many fines remain mere wrist slaps. Too many times smaller firms and ‘rogue’ brokers are crushed, while large firms and those charged with supervision and/or ‘control person liability’ even go unscathed,” said Shepherd. “When firms and supervisors have no real worries, bad actors simply become expendable – but only when their costs outweigh their contributions to firm revenue.”
FINRA securities lawyer Shepherd is the founder of Shepherd Smith Edwards and Kantas, LTD, LLP, a securities fraud law firm that represents institutional and individual investors throughout the US.
Finra’s financial woes no recipe for viability, Investment News, July 14, 2013
Annual Reports & Financials, FINRA
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FINRA Delays Audit Trail Plan, Proposes Arbitration Rule Changes, Asks for Firm’s Social Media Use Data, Warns About Cybersecurity Breaches, Stockbroker Fraud Blog, June 28, 2013
FINRA Orders Wells Fargo & Banc of America’s Merrill Lynch Ordered to Pay $5.1M for Floating-Rate Bank Loan Funds Sales, Stockbroker Fraud Blog, June 4, 2013
FINRA Chief Ketchum Calls for Brokers To Better Inform Investors of Fixed Income, Structured Product Risks, Stockbroker Fraud Blog, May 29, 2013