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April 25, 2012 at 05:30 PM
The Financial Industry Regulatory Authority (FINRA) has released an estimate of what its start-up and ongoing annual investment costs would be should it become the self-regulatory organization (SRO) for advisors—an estimate far below projections released by the Boston Consulting Group (BCG).
Covering a universe of 14,500 advisory firms out of the current population of more than 26,000, FINRA says it estimates that its one-time start-up cost would be approximately $12 million to 15 million, while its ongoing costs would total approximately $150 million to $155 million annually. This compares to BCG’s start-up investment projection of $200 million to $255 million and an ongoing cost of $460 million to $510 million.
FINRA said it used the 14,500 advisory firm total in an attempt to reflect an approximate number of firms that could be subject to SRO examinations, given that pending SRO legislation introduced Wednesday by House Financial Services Committee Chairman Spencer Bachus, R-Ala., “provides exemptions for IAs with institutional customer bases as well as for state-regulated IAs for which examinations are conducted by state regulators an average of once every four years.”
FINRA said it “assumed a risk-based examination program across all firms, and assumed that all firms would be examined at least once every four years.” The risk based examination program would be based on factors such as custody arrangements, business lines, personnel, customer complaints and assets under management, FINRA said.
The problem with BCG’s cost projections, FINRA said, is that “BCG used as its base the costs for establishing the PCAOB (Public Company Accounting Oversight Board) and the CFPB from scratch. BCG used these figures—set up costs for organizations that didn’t even have one desk or employee to start with—and provided for only a 20% discount off the from-scratch start-up costs to allow for efficiencies in FINRA’s existing infrastructure.”
In its estimate, FINRA said it would need to hire additional staff members—about 900 full-time employees, the vast majority of which would be for the examinations staff—to serve as an SRO for investment advisors, the broker-dealer regulator said it believed BCG “vastly underestimated our ability to leverage existing staff, district offices and the technology underlying our existing nationwide examination program.”
