June 30, 2012 / 12:38 AM / 6 years ago

Securities regulator FINRA lost $84 million in 2011

(Reuters) - The Financial Industry Regulatory Authority, the U.S. securities industry’s self-funded regulator, lost $84 million last year on higher, one-time project expenses.

Weaker collection of fees due to low industry trading volume and thin returns on its investment portfolio also depressed earnings.

FINRA, whose top five executives received $6.86 million in compensation for 2011, said in its annual report released on Friday that it is seeking approval to raise fees for its brokerage firm members “in light of our robust regulatory responsibilities but static funding levels.”

The loss at FINRA, formed through the 2006 merger of the National Association of Securities Dealers and the New York Stock Exchange, is its first since it bled $700 million during the depth of the financial crisis in 2008. The regulator’s red ink, combined with relatively high executive compensation and the plan to raise fees, will weigh on an industry that is suffering from a weak economy, new regulations and investor caution.

Chief Executive Richard Ketchum, who received $2.68 million in salary, bonus and benefits last year, attributed the loss to “declining industry revenues and transaction volumes,” from which FINRA collects fees, and a more conservative investment allocation policy.

The 2008 loss reflected huge deterioration in its investment portfolio.

FINRA, which oversees nearly 4,400 brokerages, registers 630,000 brokers and organizes arbitration proceedings for brokers and their clients, has been lobbying intensely to extend its regulatory sway to roughly 12,000 investment advisers. The thinly staffed U.S. Securities and Exchange Commission examines advisers roughly once every 11 years and is studying whether to hand those duties to a self-regulatory group.

The annual report also said FINRA incurred heavy expenses to build two data centers and an enhanced surveillance system during the year.


Ketchum telegraphed problems at FINRA in April when he sent an email to members about plans to raise their fees because of a “significant loss.”

The SEC, which oversees the self-regulatory group, last week approved FINRA’s request for a 25 percent hike in equities trading fees. The increase, effective July 1, “is designed to ensure proper funding of FINRA’s regulatory program,” despite a continued decline in trading volume at brokerages, he wrote.

It also approved higher fees for new membership applications, review of corporate finance filings and other activities.

FINRA radically altered its investment portfolio in 2009 to avoid embarrassing losses, shifting to what it said was a conservative investing strategy. The group ended 2011 with a 2 percent return on a portfolio at year’s end of about $1.5 billion. Just under 70 percent of the portfolio was invested in cash and bonds and 14 percent in equities.

The total return trailed Barclays US Aggregate bond index’s return of 7.8 percent and just about matched the 2.1 percent return of the S&P 500 index.

A FINRA spokeswoman did not return a call for comment.

FINRA said in its report that it is engaged in aggressive cost-cutting, reducing its 2012 budget by $36 million from last year. It expects the belt-tightening efforts to result in nearly $60 million of savings by the end of 2013, Ketchum wrote.

A recent shuffling in FINRA’s executive ranks may reflect the cost-savings campaign. The regulator recently hired a former SEC official to replace two top lawyers who left in May. One of those lawyers, former general counsel for regulation Marc Menchel, earned more than $1.6 million in total compensation in 2010. His 2011 pay was not disclosed.

FINRA’s top public relations and lobbying executive, Howard Schloss, who earned $830,014 last year and over $1 million in 2010 is also leaving in September.

“They’re doing the same cutting now that everyone else is doing because their money is tight as well,” said David Sobel, general counsel and chief compliance officer of Abel/Noser Corp, a New York-based broker-dealer.


FINRA has long faced questions about whether its compensation packages for executives are overly generous for a regulator, albeit one that is privately run.

Ketchum’s 2011 pay was virtually flat with the $2.6 million he received in 2010, according to the report. However, it towers over the $165,300 received by SEC Chairman Mary Schapiro in her government post. Schapiro earned much more when she was FINRA’s chairman. She left for the SEC in 2009 with a package of pay and benefits worth $7.3 million.

“As FINRA looks to tighten its belt, it should take a close look at its lavish pay packages,” said Michael Smallberg, an investigator with the Project on Government Oversight, a Washington-based watchdog group. “It’s hard to see how FINRA can justify paying its officers seven-figure pay packages, especially when the organization is operating at a loss,” he said.

The packages were too generous, Smallberg said, even though many of FINRA’s top executives earned less in 2011 than in 2010. For example, Stephen Luparello, FINRA’s vice chairman, earned $1.38 million in 2011, compared to $1.43 million in 2010. Martin Colburn, FINRA’s chief technology officer, earned $1.05 million in 2010 and $972,698 in 2011.

Compensation for top FINRA executives is higher than at similarly structured organizations, said Steven Hall, a New York-based compensation consultant. He pointed to Fannie Mae and Freddie Mac, which now cap their pay at $500,000. Donald Layton, a longtime bank executive, became the head of Freddie Mac in May.

Fannie and Freddie CEOs earned as much as $6 million, with deferred pay and bonuses, before the companies were taken into government receivership in 2008 amid massive mortgage losses.

Some FINRA members said the high pay scale at the self-regulatory group is necessary.

“Better people don’t come with less money,” said Sobel, adding that Ketchum makes less than such predecessors as Schapiro and Frank Zarb. “FINRA does a government job, but it is not the government,” Sobel said.

Reporting By Jed Horowitz and Suzanne Barlyn; Additional reporting by Margaret Chadbourn; Editing by John Wallace, Tim Dobbyn and Richard Chang

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