FINRA Hits Back in Battle Over Advisor SRO

BCG: $460 million-$510 million                   FINRA:$150 million–$155 million

BCG: FINRA’s estimate of $12 million-$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 million-$230 million of the difference between the BCG and FINRA estimates. FINRA: The cost of hiring is not omitted from the FINRA estimate. As clearly stated in FINRA’s investment estimate, FINRA’s setup figures contain only the costs of technology development, training and governance costs required prior to startup. We determined not to include staffing costs in this category because staffing is an ongoing, rather than one-time, cost. As we have also stated, the ongoing cost of staffing reflects the full staffing estimate of approximately 900 additional FTEs for all years, even though full hiring would not be completed in the first year.

BCG: 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 million-$170 million of the difference between the BCG and FINRA estimates; and

FINRA: Correct, we are assuming a higher productivity with the estimated population of 14,500 IA firms that could potentially be subject to SRO examinations. This is due in part to the business models of IAs and the rule set to which IAs are subject. As BCG indicated in its own analysis, “IA examinations…are likely to be less resource-intensive, on average, than BD examinations…” Also, the current legislation exempts many of the larger and presumably more complex institutional advisers from SRO examinations.

In addition, BCG misstates FINRA’s current annual exams per examiner ratio for broker-dealers.

FINRA’s ratio was 3.2 for 2010, including work by examiners, examination coordinators and supervisors (2666 cycle exams; 843 examiners, coordinators and supervisors). In the BD regime, of course, large complex firms are not exempted from SRO examinations.

BCG: FINRA’s estimate does not include overhead costs in its estimate of $150 million-$155 million of ongoing annual investment. Overhead costs account for $135 million-$140 million of the difference between the BCG and FINRA estimates.

FINRA: False. FINRA included the overhead costs for examinations and enforcement in its estimate. As stated, the estimate does not include costs for testing, advertising review or dispute resolution. If it is ultimately decided by Congress or the commission that those functions should be included, then the annual ongoing investment would likely be increased by approximately $10 million.

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Read Government Watchdog Fights Bachus’ SRO Bill on AdvisorOne.