FINRA is submitting this proposed rule change to increase the revenues that FINRA, as a not-for-profit self-regulatory organization ("SRO"), relies upon to fund its regulatory mission. The proposed fee increases are designed to better align FINRA's revenues with its costs while preserving the existing equitable allocation of fees among FINRA members. FINRA has not raised its core member regulatory fees since 2013, even though the overall costs of FINRA's operations have exceeded its total revenues for most of the last decade.Although the proposed fee increases will not begin to take effect until 2022, FINRA is submitting this proposed rule change now so that it can: (1) provide significant advance notice of the proposed fee increases to member firms; (2) permit the proposed fee increases to be phased in over multiple years; and (3) continue to strategically "spend down" financial reserves over the next several years, to allow the proposed increases to be gradually phased in as much as possible. The proposed fee increases are intended to provide responsible and sustainable longer-term funding to enable FINRA to accomplish its regulatory mission in a manner consistent with FINRA's public Financial Guiding Principles ("Guiding Principles").
Economic BaselineThe baseline for this proposed rule includes FINRA's historical costs and revenues, the current schedule of fees assessed by FINRA, and the direct and indirect allocation of those fees across member firms, associated persons, third parties, and investors. The baseline also encompasses the scope of activities conducted by FINRA today to meet its mission, and FINRA's current ability to meet changing market activities and conditions through investment in staff, physical infrastructure and technology.As discussed previously, as a not-for-profit organization, FINRA's operating principle is to target reasonable cost-based funding that allows it to appropriately fund its regulatory mission. Between 2010 and 2019, FINRA's costs grew by a compound annualized growth rate (CAGR) of 1.7%, or 16% over the entire period. Over the same period, reported costs increased by 42% for the industry, while U.S. core inflation grew by 19%.At the same time, FINRA has seen capital markets grow in size and complexity, and an increase in its own regulatory responsibilities. Substantial increases in trading volume in listed equities, options and OTC equities (over 75% increase since 2015) and complexity of the securities markets (the number of registered securities exchanges significantly increased since 2011, from 13 to 25) have led to a more complex trading environment. This, in turn, has required new approaches to enhance surveillance and investigations by FINRA staff. New SEC regulations (an estimated 15 significant new rules in the broker-dealer space since 2010 based on a FINRA analysis), FINRA rulemaking designed to support federal initiatives (e.g., crowdfunding, fixed income mark-up disclosure), and MSRB rules that require FINRA implementation have all increased FINRA's regulatory responsibilities substantially.During this period, the SEC has increased reliance on FINRA as the "first line supervisor" for broker-dealers. In response, FINRA continued to invest in its surveillance and examination programs. The SEC also created an updated oversight framework with substantially more inspections and reviews of FINRA, which in turn has required FINRA to commit significant new resources to support those inspections and reviews.Over the last decade, FINRA has observed changes in the number of registered persons and member firms. Between 2009 and 2018, the number of registered member firms decreased from 4,720 to 3,607 (a change of approximately 26.3%) while the number of registered representatives decreased from 633,280 to 629,847 (a change of 0.5%). Between 2009 and 2018, approximately 97% of the decrease in registered member firms came from small firms. Over the same period, the percentage of registered persons affiliated with small member firms dropped by a much smaller amount, from 12% to 10%. Despite the consolidation in the number of member firms, aggregate supervision costs fell minimally.There are at least two drivers for this result. First, the exiting firms tended to require fewer supervisory resources because they were generally assessed as posing lower risks to investors and markets; higher-risk firms typically require more oversight. Relatedly, exiting firms generally conducted a smaller, simpler set of activities; larger, more complex firms typically require more oversight. And second, the number of registered persons remained fairly constant as persons from exiting firms migrated to other firms, requiring FINRA regulatory resources to shift accordinglyDespite the increased responsibilities and changes in its own oversight by the SEC, FINRA achieved the relatively low growth in its costs through a variety of mechanisms. Staffing generates the majority of FINRA's expenses and has been held relatively flat over the last decade. In that period, total compensation costs for FINRA employees engaged in carrying out its core business operations rose by 15% on a cumulative basis, compared to 24% for the average U.S. employee. Further, FINRA has been successful in reducing non-compensation related expenses in recent years, with a 12% cumulative reduction across operating expenses (excluding technology) over the last 5 years, and a 25% decrease in non-recurring expenses. FINRA's expenses have grown less rapidly than those of member firms. In addition, FINRA's proportional share of aggregate regulatory fees reported by member firms in total has fallen meaningfully. Charts 2 and 3, attached in Exhibit 3, present these findings.Over the same period between 2010 and 2019, FINRA's regulatory and use-based revenues remained effectively flat, influenced by few fee increases and a relatively steady number of registered persons. FINRA's total revenues grew at a compound annual growth rate of 1.1% per year, or 10% between 2010 and 2019. Between 2010 and 2013, FINRA increased regulatory fees by an aggregate amount of less than $22 million. The period between 2013 and 2020 represents one of the longest windows in which FINRA has not raised regulatory fees. As a comparison, as illustrated in Chart 4, member firm revenues grew at a compound annual growth rate of 4.8% per year, or 52% between 2010 and 2019. As a not-for-profit regulator, FINRA has also maintained a policy of returning revenues in excess of its operating costs through rebates. Over the same review period that is the focus of this analysis, 2010 through 2019, FINRA rebated regulatory fees to member firms five consecutive years between 2010 and 2014. The aggregate amount rebated was approximately $57 million. . . .
Statistical Voodoo In The 2020 FINRA Industry Snapshot Report (BrokeAndBroker.com Blog / August 3, 2020)http://www.brokeandbroker.com/5353/finra-2020-snapshot/The Merry-Go-Round Of FINRA Reform. This Time It Won't Be Any Different Again
(BrokeAndBroker.com Blog / September 6, 2017)http://www.brokeandbroker.com/3583/bill-singer-finra-reform/