Finra Projects Widening Budget Gap
The Financial Industry Regulatory Authority on Thursday projected a widening hole in its operating budget for 2019 as its regulatory responsibilities expand, but said it will not seek to increase member fees for the sixth straight year.
The industry-funded self-regulator projected 2019 operating revenue of $846.9 million against operating expenses of $922.5 million, creating a $75.6 million hole that exceeds the $66 million and $61.4 million operational budget gaps of 2017 and 2018, respectively, according to its annual budget summary. The numbers do not include adjustments for investment returns and other non-operational items.
Part of the growing expenses reflect $15.5 million for relocation costs. The 3,550-employee Virginia-based organization plans to renegotiate some New York City leases that expire next year, and will relocate “some functions to lower-cost properties,” the report said.
Finra’s projected operating revenue is relatively flat with 2018’s $822.0 million, while expenses are projected to rise 3.7%, primarily due to increases in compensation and technology costs. Compensation represents 65% of budgeted expenses for this year, followed by 22% for technology costs.
“The compensation-related increases in 2019 follow several years of reductions to incentive compensation and salary freezes for more senior employees,” Finra Chairman William Heyman and Chief Executive and President Robert Cook wrote in their introductory letter to the preliminary budget.
Compensation to top executives are not reported until Finra’s annual report filing in the summer, but five Finra executives collected more than $1 million in 2017. Cook, who collected $1.45 million in his first year on the job, donated $675,000 to Finra’s Investor Education Foundation.
The budget’s “intentionally conservative methodology” excludes fines collected from member firms and investment gains or losses on its reserves, the letter said. Finra’s board or finance committee must approve uses of fine money, and the regulator said it will publish those uses in a separate report.
Finra expects regulatory fees from firms to increase, reflecting higher gross revenue in the industry despite flat growth in number of registered representatives and a decline in trading volume. The fees are the regulator’s biggest source of operating revenue, representing 45% of its budgeted cash flow.
So-called user fees, representing approximately one-third of the SRO’s operating revenue, are expected to decrease due to lower registration fees, changes in transparency services’ trade volume in the over-the counter market and declining testing exam volume.
“FINRA’s regulatory responsibilities remain extensive and complex, and continue to expand as the SEC relies more heavily on FINRA to supervise broker-dealers,” Heyman and Cook wrote. “Total assets under management by member firms have increased, the number of registered representatives has remained largely constant, and market innovations in financial technology and other areas continue to present new regulatory challenges.”
Finra also expects to accelerate its capital project spending by almost $21 million to $97.3 million this year. It is renovating its “external-facing digital platform in an effort to facilitate compliance by member firms,” the report said, and redesigning staff training and development programs as well as upgrading trade reporting facilities so firms can meet their requirements at reduced costs.
The regulator also is putting more of its applications on the cloud. The investment is aimed at avoiding “the long-term costs of maintaining our own data centers and enables FINRA to promptly and automatically add data processing and storage capacity,” the preliminary budget report said. The upgrades will also make registration systems more efficient for firms and brokers, and should bolster compliance, according to the budget summary.
The difference between projected 2019 revenues and expenses could result in a total draw on reserves of $185.8 million, Heyman and Cook noted, but added that such a high drawdown is unlikely once fines and investment returns are calculated.
Ultimately, however, relying on some use of reserves in lieu of member fee increases will result in several years of net losses, they warned.
“Those will be reported in our Annual Financial Report as they occur, until the level of reserves approaches our annual expenditures, at which point fee increases will become necessary.”