Bachus Reintroduces SRO Bill

FINRA released a statement just after the proposal was released stating that the “bipartisan bill […] is an important and thoughtful effort to address a serious gap in investor protection. The bill recognizes the need for regular exams of investment advisers, while rightly focusing on retail accounts.”

The same day, FINRA released its projections for assuming an SRO role. Covering a universe of 14,500 advisory firms out of the current population of more than 26,000, FINRA estimates that its one-time startup 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 startup investment projection of $200 million to $255 million and an ongoing cost of $460 million to $510 million.

FINRA says 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 Bachus’ pending SRO legislation “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.”

The problem with BCG’s cost projections, FINRA said, is that it based its startup cost estimates on firms that were starting 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 startup costs to allow for efficiencies in FINRA’s existing infrastructure,” FINRA said.

The annual ongoing cost, FINRA said, reflects the full staffing estimate, “even though the staffing is unlikely to be complete in the first year.” This ongoing cost estimate also includes overhead and support costs for examinations and enforcement, FINRA said. However, “it does not include costs for testing, advertising review or dispute resolution,” FINRA said. “If Congress or the [Securities and Exchange] Commission determine that those functions should be included, then the annual ongoing investment would increase by approximately $10 million.”

In addition, FINRA says “BCG used existing FINRA regulatory and user fee totals to estimate examination program costs. [...] Secondly, they used current SEC numbers to estimate the number of annual exams per examiner, which is less than current FINRA ratios.”

But the Financial Planning Coalition says FINRA’s estimate “lacks any analysis, backup assumptions or data, [compared] with the comprehensive, 38-page BCG study” released in December 2011. BCG’s data, the Coalition says, “utilized publicly available data, including FINRA’s actual costs and the SEC’s actual IA examination costs, and was based on rational and fully disclosed assumptions.”

FINRA, the Coalition says, shows “no accounting for enforcement costs, which are required under the Bachus-McCarthy legislation and which BCG estimated at $130 million annually. They also left out the cost estimates for the legally required oversight by the SEC, which BCG estimated at $90 [million] to $105 million annually and which is an essential component of the overall cost of an SRO.”

The Coalition concludes that when FINRA’s “very brief cost estimates are set beside BCG’s comprehensive Economic Analysis, we are not comparing apples to apples.” FINRA’s estimate “raises more questions than it answers. The limited budget that they attribute to setting up a FINRA IA-SRO raises concerns about its independence and ability to understand and meet the unique needs of IAs and their clients.”