Funding FINRA’s Mission
Dear Member Firms,
As a not-for-profit membership organization, FINRA is committed to openness and engagement with our member firms regarding our financial plans. In that spirit, we are writing to update you on FINRA’s current financial situation and our path forward for funding FINRA’s mission of protecting investors and promoting market integrity while facilitating vibrant capital markets. As we have stated in several prior financial reports and communications, this path forward must eventually include an increase in member fees.
We are now planning for this fee increase to begin in 2022 and to be phased in gradually between 2022 and 2024, as described more fully below. Although the fee increase is deferred until 2022, FINRA is moving forward at this time to establish a transparent framework under which it can (i) provide member firms with significant advance notice of the increase, (ii) permit the increase to be phased in over multiple years, and (iii) continue to strategically spend down our reserves over the next several years.
Current Financial Situation
The circumstances driving this future fee increase are straightforward. Over the last 10 years, FINRA’s regulatory obligations have expanded substantially. Despite these additional responsibilities, FINRA has not increased members’ core regulatory fees since 2013, and has not imposed any significant fee increase since 2010. We have been successful in deferring fee increases for so long by strategically reducing our reserves and carefully managing our expenses, consistent with our Financial Guiding Principles, but these measures alone are not sufficient to support FINRA’s mission in the years ahead.
Expanding Responsibilities
FINRA’s regulatory responsibilities have grown significantly over the last decade, driven by the proliferation of new investment products and services, the increase in the number of trading venues and trading volumes, the adoption by the Securities and Exchange Commission (SEC) of important new rules that FINRA is charged with overseeing, and other regulatory mandates and market developments. These new regulatory obligations have been layered on top of FINRA’s longstanding responsibilities, which have remained undiminished – as evidenced, for example, by the fact that the number of registered representatives has remained essentially flat since 2010.
Leveraging Our Reserves
To help support this expanding regulatory mission and manage our budgetary deficits, FINRA has relied on our reserves, which originally derived from the sale of Nasdaq. From 2010 through 2019, FINRA used over $600 million of reserves to defer fee increases. On average, this support amounted to 6.6% of FINRA’s operating budget per year. Leveraging these funds, while prudent in the short term, obviously is not sustainable over the long term given the finite amount of available capital.
Managing Our Expenses
Careful expense management has been another key element of FINRA’s budget approach. Over the last decade, FINRA has controlled costs through various initiatives, including FINRA360, a comprehensive effort to improve effectiveness and efficiency while meeting our expanded scope of responsibilities. We have also been making significant investments in technology capabilities, such as by migrating to the cloud, enhancing our cybersecurity, and strengthening our data analytics, to better automate our processes, reduce inefficiencies and do more to leverage the work of our professionals.
Additionally, FINRA has taken important steps to sensibly manage compensation costs, which – given the nature of our work – have always been the largest driver of FINRA’s budget. We have maintained relatively flat staffing levels over the last decade, and our compensation expenses during that time grew at a lower rate than that of the average U.S. worker’s compensation, due to careful management of turnover and targeted adjustments at the senior staff levels. FINRA also has been successful in reducing our non-compensation-related expenses in recent years, with significant reductions in the last five years across operating expenses (excluding technology) and non-recurring expenses.
As a result of these collective efforts, FINRA’s total expenses grew at less than the rate of inflation from 2010 through 2019 and were significantly outpaced by FOCUS-reported revenue and expense growth at member firms. Specifically, FINRA’s expenses increased by 16% cumulatively during that period, while U.S. core inflation grew 19%, member firm revenues grew 52%, and member firm expenses grew 42% (which, as in the case of FINRA, was likely driven in part by increased regulatory responsibilities).
Our Path Forward
While we will continue to carefully manage costs and spend down reserves over the next several years, adjustments to FINRA’s fee structure are also warranted as part of a long-term sustainable financial strategy. Accordingly, after careful analysis over many months, FINRA’s Board has approved a schedule of future fee increases – to take effect from 2022 to 2024 – designed to address our structural budget deficit and provide sustainable funding to carry out our regulatory mission. This schedule (with additional background) was filed with the SEC on October 2, 2020.
The overall approach reflected in this plan was informed by feedback FINRA received from member firms during consultations with our advisory committees. Firms emphasized the importance of having reasonable advance notice of any fee increases for budgetary planning purposes and expressed a strong preference for any new fees to be phased in over a reasonable period of time. We agree with this perspective and have structured our plan accordingly.
Proportional Assessment
Our plan is designed to maintain fair and reasonable fee assessments across our diverse member firms – both in terms of the level and timing of a fee increase, and in the impact of the increases across different types of firms. To that end, FINRA plans to increase the (i) Gross Income Assessment (GIA), (ii) Trading Activity Fee (TAF), and (iii) representative-based fees (the Personnel Assessment (PA), member registration fees, and qualification examination fees). Collectively, these fees generate the bulk of FINRA’s fee revenues and reflect the critical components driving FINRA’s regulatory costs (the size of the firm, the firm’s trading activity, and the number and role of persons registered with the firm). FINRA is not addressing at this time fees related to other specific services or functions (such as reviews of corporate filings or trade reporting facilities), which may be separately adjusted from time to time based on the circumstances of those services or functions.
The fee increase will be split evenly across the three categories listed above (one third from each category). This approach is designed to provide greater certainty and maintain consistency with FINRA’s existing fee distribution. It will also reduce the potential for unintended impacts on the services provided by member firms, and the business models they adopt, that could arise from significant changes to the existing distribution of fees among member firms and among the three relevant fee categories.
After implementing these planned adjustments, our total revenue across all FINRA fees is projected to increase at a compounded annual growth rate of 5% between 2020 and 2024, and 2.4% between 2011 and 2024. Our revenue from the subset of FINRA fees subject to the plan filed with the SEC is projected to increase 6.5% between 2020 and 2024, and 3.1% between 2011 and 2024.
Assuming no increase in firm revenues over the next five years, we anticipate the average firm will experience a six basis point (0.06%) increase in the affected fees as a percentage of FOCUS revenues. The actual increase in fees paid by firms may be substantially lower after accounting for the fact that many firms pass along most or all of their TAF, PA, and certain other assessments to their customers or registered representatives.
Delayed Implementation and Phase-in Period
As noted above, the delay and phase-in period associated with these fee increases are designed to give member firms multiple budget cycles to plan for the increases. In addition, postponing the implementation of these fees recognizes the existing near-term demands on firm resources arising from the COVID-19 pandemic and from complying with important regulatory initiatives that are already underway or recently effective, such as the Consolidated Audit Trail and Regulation Best Interest. During the delayed implementation period, FINRA will continue to monitor the financial performance of our member firms and the many other factors that collectively drive FINRA’s revenues and expenses.
Continued Use of Reserves
A key element of this plan – and one that enables the deferral and phase-in of the fee increases – is that FINRA will continue to draw more than $400 million from our reserves to support our operations during the phase-in period. By 2024, our projected remaining reserves will align with the Board-approved target level of reserves, noted in the Financial Guiding Principles, equal to one year of operating costs.
Ensuring Accountability
Moving forward, there are three key measures that will help ensure this fee increase, and the future expenses it will help fund, remain appropriately calibrated to our regulatory responsibilities: Board and SEC oversight, transparent financial reporting, and rebates. The effectiveness of these mechanisms is demonstrated by FINRA’s below-inflation expense growth over the last decade, as described above.
Board and SEC Oversight
First, FINRA’s funding and operations – including the planned fee increase – are subject to several layers of oversight through the FINRA Board of Governors and the SEC. FINRA’s Board and our Committees – which include member-elected industry representatives from firms of various sizes and business types – provide oversight of our annual budget, compensation, fees, and capital initiatives. In addition, within the SEC, the Office of Compliance Inspections and Examinations maintains its FINRA and Securities Industry Oversight program, which is primarily dedicated to overseeing FINRA (along with the Municipal Securities Rulemaking Board). Examiners in this program oversee all of FINRA’s operations, including FINRA’s overall financial management and the adequacy of the resources devoted to our regulatory programs. In 2019, the SEC conducted over 160 examinations of FINRA. In addition, new rules or fees put forth by FINRA are subject to review by the SEC and its staff and public comment.
Transparency and Reporting
Second, FINRA has committed to providing transparency regarding our financial performance on an ongoing basis. Each year, we publish an extensive audited Annual Financial Report and an Annual Budget Summary regarding our operations, as well as a report on our use of fine monies, among other public documents. FINRA’s Board also reviews and affirms the Financial Guiding Principles each year. Collectively, these reports provide comprehensive information regarding our policies and operations with respect to our budgets, revenues, costs, reserves, use of fine monies, capital and strategic initiatives and compensation of senior executives, among other information.
Rebates
Third, FINRA’s commitment as a not-for-profit organization to aligning our revenues with costs includes providing rebates when revenues exceed costs. This commitment ensures that the revenues from these planned fee changes will remain in line with FINRA’s regulatory costs. FINRA distributed rebates to members each year from 2000 to 2014, and following implementation of the fee increase we will continue to be guided by our historical approach to rebates – as well as our Financial Guiding Principles – if revenue exceeds costs by a material amount.
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As we look forward, we are confident that the plan described above will put FINRA on a firmer financial footing to support our mission in the years to come and offer member firms additional certainty and transparency regarding their regulatory costs. If you would like to provide feedback on this plan, as always we encourage you to do so, either through written comment or by contacting FINRA’s leadership team.
Eileen Murray, Chairperson Robert W. Cook, President and Chief Executive Officer