This past week, FINRA very, very quietly released its Annual Report for 2016.  Too quietly, as they say in the movies.  No press release.  No press conference.  No media attention at all, hardly.  As President Trump just asked about State Election Commissioners who refused to respond to a request from his Election Fraud taskforce for a vast array of personal information about voters, “what is it hiding?”  Well, seems to me there are a couple of things in the Report that, frankly, FINRA would prefer not become the topic of too many conversations.

First, of course, is the embarrassing annual parade of FINRA millionaire employees. At first glance, you may be buoyed by the fact that only three of the top ten earners are slated actually to make $1 million or more in 2017, down from six in 2016.  But, that is deceiving, as the 2017 figures revealed in the Report do not include deferred comp, which isn’t determined until the end of year.  Once that is tallied up, undoubtedly, the number will climb.  Plus, even absent a consideration of deferred comp, no one on the list is struggling to make ends meet.  The lowest comp number is still a whopping $728,000.  And, one of the poor guys who doesn’t make $1 million (absent deferred comp) is Tom Gira, who made a cool $2.6 million last year (due to a one-time pension thing), more than anyone else at FINRA.  Tom is nice guy, and I personally like him, but there is simply no way that he brought $2.6 million of value to the table.

FINRA may be a not-for-profit company, but its management compensation sure looks a lot more like a Silicon Valley tech success than a stuffy old regulator. These insane comp numbers make Robert Cook’s boast that he is addressing FINRA’s expected “operating revenue challenges” this year by “freezing officer salaries” sound more than a bit ridiculous.  What?  You’re going to freeze my salary at a paltry $1 million??”

The second thing of note about the Report is that it makes abundantly clear just what FINRA views its job to be, and what, presumably, it feels the public deems important. And believe me, it is not to make the lives of broker-dealers easier. To the contrary, what FINRA leads its Report off with is a self-congratulatory recitation of its Enforcement work, extolling $173.8 million in fines, $27.9 million in restitution to harmed investors, 24 firms expelled, 727 brokers suspended, 517 brokers barred, 1,434 disciplinary actions, 785 cases referred for prosecution to the SEC and other federal or state law enforcement agencies, 439 potential market manipulation cases referred to the SEC, and 97 potential Reg M violations detected by cross-market patterns referred to the SEC.

In fact, FINRA notes in the Report that it collected so much money in fines last year that this single part of its revenue stream was alone more than enough to address the loss that FINRA suffered in 2015. The Report states: “We reported net income of $57.7 million in 2016 versus a loss of $39.5 million in 2015.  The change is primarily related to two areas: fines and portfolio returns.  An increase in fines revenue more than offset the decrease in operating revenues for the year….”  I suppose the good news, therefore, if you were a respondent in a FINRA Enforcement action last year and paid a fine, is that you can rest easier at night knowing that you helped FINRA turn around its financial problem.[1]

Perhaps it wouldn’t be so difficult to stomach FINRA’s Report if it was clear that it was doing a good job and that it was spending its money wisely. But, anecdotally, anyway, based on comments from the very members who pay those salaries through assessments, fees and fines, FINRA is failing to meet its statutory mandate.  It still spends way too much time and money going after firms and individuals who don’t represent a true threat to the integrity of the markets.  It refuses to settle cases for a reasonable sanction, even though such sanctions are not supposed to be punitive.  It sends out examiners who lack sufficient knowledge and understanding of how firms run their businesses, leading to miscommunications and time wasted, at a minimum.  It is way too focused on headlines, especially negative ones, that is, on the appearance of accomplishing something, than actually accomplishing it.  It is very fast to jump on problems that others have discovered, rather than proactively identifying such problems itself and nipping them in the bud.

Ultimately, it boils down to whether member firms feel like they are getting what they’re paying for with FINRA, and, at least as I see it, the consensus is a resounding “no.”


[1] To be fair, FINRA “do[es] not view fines as part of [its] operating revenues.  The use of fine monies is limited to capital expenditures and regulatory projects, such as [its] efforts to leverage technology innovations and the Cloud initiative, and other projects as appropriate, which are reported to and approved by [its Finance, Operations and Technology Committee and Board.”