Statistical Voodoo in the 2020 FINRA Industry Snapshot Report

August 3, 2020

The Financial Industry Regulatory Authority just published its "2020 FINRA Industry Snapshot," which purports to provide an industry overview "ranging from the number of FINRA-registered individuals to the overall revenues of firms, and from trading activity to how firms market their products and services. All of the data are reported in aggregate to respect the confidentiality of regulatory information." at Page 1 of 2020 FINRA Industry Snapshot  (FINRA Report) As with so many overview efforts of this ilk, the reports are largely doomed as irrelevant the minute they are published because the underlying data is often stale by the date of publication -- pointedly, virtually the entirety of FINRA's 2020 "snapshot" was snapped as of December 2019, which is not only some eight months ago but, frankly, of a different era and world given the 2020 COVID pandemic.  

I have been a persistent and singular voice hectoring FINRA for many years to display both the mathematical "mean" and "median" when publishing its key membership metrics. During my nearly two decade campaign seeking to prompt the disclosure of a more accurate picture of FINRA's membership and associated persons, the self-regulatory-organization deflected and deferred but in 2018 caved in and got it right. See, for example: "Mean Spirited FINRA Must Respect Membership Median" ( Blog / August 10, 2018) As such, I congratulate FINRA Chief Executive Officer Robert Cook and his administration for staying the course and continuing to present a more accurate statistical picture of FINRA. 

In the 2020 FINRA Industry Snapshot, we are informed on page 4 that for calendar year 2019, the mathematical "average" number of registered representatives for FINRA member firms was 179 but the mathematical "median" was only 11!  All of which supports my ongoing complaint that FINRA's definition of a "Small" FINRA Member Firm as having up to 150 registered representatives is absurd because, in fact, the "median" number of reps for the entire FINRA community is only 11. Further, as noted on page 15 of the 2020 FINRA Industry Snapshot, 1,661 FINRA member firms have 10 or fewer repswhich means that over 47% of FINRA's 3,517 member firms don't even have 11 reps!

Page 12 of the 2020 FINRA Industry Snapshot asserts that as of year-end 2019, FINRA had 168 "Large" firms (500 or more reps); 198 "Mid-sized" firms (151 to 499 reps); and 3,151 "Small" firms (1 to 150 reps). FINRA's artificial definition of its Small Member Firms takes the 11 reps signified by its median-sized firm, multiplies that number by 13.6, and speciously presents the product of that math (11 X 13.6 = 150) as a legitimate label for a small firm. Given that the dead-center "median" size of FINRA's 3,517 member firms (as of December 2019) is only 11, it is idiotic, moronic, absurd, and ridiculous to pretend that a Small Member Firm is aptly characterized as one with up to 150 registered representatives! 

If you review the data on page 15 of the 2020 FINRA Industry Snapshot, you find that of FINRA's 3,517 member firms, 47% (1,661) have 10 or fewer reps -- which further distills into the fact that 53% of FINRA's 3,151 Small Firm Members have that same attribute. Odd, isn't it, that FINRA still characterizes a so-called "small" member as one with as many as 150 reps? In fact, only 107 of the 3,151 small firms have between 101 and 150 reps (about 3.4%) , and only 83 firms have between 76 and 100 reps (about 2.6%). If we simply consider the number of FINRA Small Member firms with up to 25 reps, we find that they constitute a whopping 69% of FINRA's 3,517 members (2,431)

Why do all these numbers and statistics matter? 

First and foremost, the math matters because FINRA is a regulator charged with protecting the public and overseeing the industry.  As set forth in part in the Maloney Act of 1938 (Section 15A of the Securities Exchange Act of 1934):

(b) Determinations by Commission Requisite to Registration of Applicant as National Securities Association. An association of brokers and dealers shall not be registered as a national association unless the Commission determine that --

. . .

(4) The rules of the association assure a fair representation of its members in the selection of its directors and administration of its affairs and provide that one or more directors shall be representative of issuers and investors and not be associated with a member of the association, broker, or dealer.

. . .

(6) The rules of the association are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers, to fix minimum profits, to impose any schedule or fix rates of commissions, allowances, discounts, or other fees to be charged by its members, or to regulate by virtue of any authority conferred by this chapter matters not related to the purposes of this chapter or the administration of the association.

. . .

(8) The rules of the association are in accordance with the provisions of subsection (h) of this section, and, in general, provide a fair procedure for the disciplining of members and persons associated with members, the denial of membership to any person seeking membership therein, the barring of any person from becoming associated with a member thereof, and the prohibition or limitation by the association of any person with respect to access to services offered by the association or a member thereof.

(12) The rules of the association to promote just and equitable principles of trade, as required by paragraph (6), include rules to prevent members of the association from participating in any limited partnership rollup transaction (as such term is defined in paragraphs (4) and (5) of section 78n(h) of this title) unless such transaction was conducted in accordance with procedures designed to protect the rights of limited partners, including-

. . .

the right not to have their voting power unfairly reduced or abridged. . .

FINRA had 3,517 member firms at the end of 2019. Doing the math, the 168 Large firms accounted for about 5% of the membership, the 198 Mid-sized Firms accounted for about 6% of the membership, and the 3,151 Small firms accounted for about 90% of the membership. The shameful statistic that jumps out at you is that FINRA's gerrymandered Board of Governors affords only 12.5% of its Board seats to 90% of the organization's membership -- while affording the same 12.5% of the Board seats to the 5% of the organization's membership represented by Large Member Firms. This diminution of the small firms' influence is further socially engineered throughout the self-regulatory organization. Consider that the Small Member Firms lack any seat on five of FINRA's eight standing committees (non-representation highlighted in red):

Audit Committee
Executive Committee
Finance, Operations & Technology Committee
Investment Committee
Management Compensation Committee
Nominating & Governance Committee
Regulatory Policy Committee
Regulatory Operations Oversight Committee

FINRA's voodoo math is nothing more than a transparent bit of self-serving spin designed to give the false appearance of an organization populated with larger firms and to foster the denigration of the prevalence of smaller members. This abusive form of governance favors the agenda of FINRA's Large Member Firms and muffles the voice of the self-regulatory-organization's core membership. Worse, the institutional bias in favor of larger firms encumbers FINRA's regulatory staff with inappropriate business pressure that inhibits effective regulation and discourages vigorous enforcement against larger members. As such, I will continue to argue, FINRA's rules do not "assure a fair representation of its members" when the Small Firm community does not have proportionate representation on FINRA's Board, when that community is disgracefully shut out of representation the majority of the organization's Standing Committees, and when the self-regulator perverts the membership statistics in order to pursue an agenda more in keeping with the needs and desires of larger but less representative members. 

I have long called for splitting FINRA into three separate regulators for its large, mid-sized, and small members, and the rationale for that reconstitution continues to emanate from the organization's refusal to embrace its core nature. When all is said and done, FINRA is an organization of predominantly smaller firms.

As reported on page 24 of the 2020 FINRA Industry Snapshot, there were 5,106 FINRA member firms as of year-end 2005; and as of year-end 2019, that number has dwindled to 3,517 -- which means that we have lost 1,589 member firms during that period. Equally concerning as set forth on FINRA's website at FINRA currently has about 3,600 employees -- which means that there are now more FINRA employees than member firms! 

The "trend" is not FINRA's friend. The 2020 COVID pandemic devastation will likely manifest itself is troubling ways on the 2021 FINRA Industry Snapshot