The Financial Industry Regulatory Authority on Friday reported that it lost $84 million last year which it mainly blamed on one-time project expenses, lighter collection of fees due to low industry trading volume, and weak returns on its investment portfolio depressed earnings as factors in its loss.
To compensate, Finra executives say they are seeking approval to raise fees for its brokerage firm members in light of its "robust regulatory responsibilities, but static funding levels."
The loss by Finra was its first since it lost an estimated $700 million during the 2008 financial market meltdown. 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.
Finra Chief Executive Richard Ketchum attributed the loss to shrinking 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 and 630,000 brokers, has been lobbying intensely to extend its regulatory sway to roughly 12,000 investment advisers.
The cash strapped Securities and Exchange Commission currently examines RIAs roughly once every 10 years. Congress has crafted legislation that if passed, would transfer those duties to a self-regulatory organizaition (SRO). Finra is being touted as a possible candidate to take on that role.
The SEC last week approved Finra's request for a 25% increase in equities trading fees. The increase, effective July 1, is to provide proper funding of Finra's regulatory oversight, despite a continued decline in trading volume at brokerages. The SEC also approved higher fees for new membership applications, review of corporate finance filings and other activities.
Finra officials said they altered the authority's investment portfolio dramatically in 2009 to avoid embarrassing losses, shifting to what it said was a conservative investing strategy. The group ended 2011 with a 2% return on a portfolio at year's end of about $1.5 billion. Just under 70% of the portfolio was invested in cash and bonds and 14 percent in equities.
Finra in its report says it has made Draconian cost cuts to pare 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.