Advisor Groups Refute FINRA’s Cost Estimates for SRO Role

FINRA’s April 25 estimate of its startup and ongoing annual investment costs should it become SRO for advisors was far below projections released by BCG in December.

Highlights of BCG’s review of FINRA’s estimates include the following:

• FINRA’s estimate omits the cost of SEC oversight ($90-$100 million) and the cost of enforcement ($60-$70 million), both of which are required by the legislation;
• FINRA’s estimate of $12-$15 million in setup costs does not include staff costs incurred during the 12-month setup period, specifically the cost of examiners and support staff. FINRA only includes these expenses as part of its ongoing investment once the SRO is up and running. This omission accounts for $180-$230 million of the difference between the BCG and FINRA estimates;
• FINRA’s estimate of the ongoing annual cost of examining 14,500 IA firms once every four years assumes that FINRA’s IA examiners would be able to nearly double the productivity rate of SEC IA examiners, by performing 5 or more examinations per examiner per year. This compares to SEC IA examiner productivity of 3.0, and FINRA broker-dealer examiner productivity of 2.8. This productivity assumption accounts for $150-$170 million of the difference between the BCG and FINRA estimates; and
• FINRA’s estimate does not include overhead costs in its estimate of $150-$155 million of ongoing annual investment. Overhead costs account for $135-$140 million of the difference between the BCG and FINRA estimates.

The trade groups also released a side-by-side comparison of the FINRA and BCG cost estimates the same day.

“We believe that the review of FINRA’s cost estimates confirms the independent economic analysis conducted by BCG last year. We think it would be a mistake to add an unnecessary layer of regulation and cost on small businesses that deliver sound advice to investors,” the group sponsoring the BCG review said in a statement. “We continue to believe that oversight of investment advisors should stay with the Securities and Exchange Commission, the most cost-effective alternative.”

Chris Paulitz, spokesman for the Financial Services Institute (FSI), said in reaction to the BCG review that “FSI has long championed the small business needs of all financial advisors and, at the same time, worked to protect consumers. Instituting even basic RIA examination will level the playing field for all advisors, protect consumers and help RIAs flourish as trust is gained in their business model.”