Wanted: New FINRA investment management team

Does the Financial Services Industry Authority (FINRA) need a new investment manager? Maybe.

According to the Authority’s Annual Report, FINRA’s investment portfolio suffered a 2.3% decline precipitating a $68.7 million loss despite increased revenue, decreased expenses.

FINRA suffers same 2018 fourth quarter slump as other mortals

In his analysis, InvestmentNews Reporter Mark Schoeff, Jr., notes that the regulator was on track to record a net-positive year. In 2018, net revenue, and interest and dividend income were $946.1 million, up from $919 million in 2017. Expenses dropped to $975.3 million in 2018 from $992.3 million in 2017.

But a loss of $29.2 million, along with a $51.1 million drop in FINRA’s investment portfolio (combined with other incremental input factors), resulted in a $68.7 million net loss. The portfolio, which represents the organization’s financial reserves, fell 2.3% in 2018 compared to an 8.8% gain in 2017.

FINRA is taking its investment losses in stride, noting that the fourth quarter of 2018 generally was characterized by broad-based losses in global equity markets. In the notes of its Annual Report, FINRA states that, “Although the portfolio lost 2.3%, this loss is modest relative to several common market indices and standard portfolios of equities and bonds.”

FINRA is not poor

Not by a long shot! Net assets in 2017 totaled $1.6 billion and dropped to $1.5 billion net at the end of 2018. The regulator typically draws from investment returns from its balance sheet to fund regulatory operation expenses that exceed annual revenue.

In a letter accompanying the annual report, FINRA Chief Executive Robert W. Cook wrote that the authority would continue “to closely manage our spending.” He also noted that over the last five years, FINRA has a cumulative net income of $120.1 million and an average annual 0.4% decrease in annual expenses.

However, FINRA expenses to exceed revenues

According to Cook, FINRA projects 2019 expenses will again exceed operating revenues. However, as in previous years, the authority says it will not increase member fees, drawing from its financial reserves to fund regulatory operations instead.

So, FINRA will still be watching

But maybe fining (or collecting) less. Also noted in the annual report, FINRA conducted more than 6,300 exams in 2018, levied $61 million in fines (down from $64.9 million in 2017), and provided $25.5 million in restitution to harmed investors. The regulator also expelled 16 firms, suspended 472 brokers and barred 386 brokers last year.

What does that mean for you?

That FINRA will still be watching. Expect continued regulatory oversight and demand for compliance. More work for compliance professionals. And, likely, more public shaming of those caught compliant deficient. For more than 25 years, Patrina has been helping compliance professionals like you keep track of “bad apples,” and stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective, designated third-party services, our comprehensive 8-module compliance solution, and compliant data capture & file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered. Let’s talk.