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FINRA Posts Loss for 2015 as Costs Rise, Fines Drop 30%

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The Financial Industry Regulatory Authority saw hefty jump in costs and a slight dip in total revenue, leaving it with a net loss in 2015, according to the group’s annual report released Thursday. Fines, which represent close to a tenth of FINRA revenue, were off sharply last year – declining close to 30% from 2015 to $93.8 million.

The group’s total revenue weakened by $4 million from 2014 to end last year at $992.5 million. The industry-funded organization had a net loss of $39.5 million vs. a gain of $129 million a year ago. Expenses rose to $1.04 billion, a jump of nearly 8%.

FINRA Chairman and CEO Richard Ketchum insists the group’s financial position is healthy, with about $2.3 billion of total assets, including $2.0 billion of cash and investments, and approximately $1.5 billion in equity.

“While we operated at a loss of approximately 4% of revenues in 2015, that loss was primarily driven by planned improvements related to our continuing efforts to migrate to the cloud, which will generate cost savings in future years, and expanding investor protection through cross-market, cross-product and options surveillances,” he said in a letter that was part of the report.

“Additionally, we invested in an advertising campaign aimed at increasing investor awareness about BrokerCheck and promoting it to the public as an indispensable, free tool to obtain critical information about brokers and firms,” he explained.

Portfolio returns fell by $91 million last year, and fines dipped by close to $39 million. The jump of $73.3 million in expenses included a nearly $26 million cost for expanding options surveillance, while some $48 million was tied to planned investments in moving data and technology services to the cloud. Other funds were spent on BrokerCheck advertising and compensation increases tied to the hiring employees from the Chicago Board of Options Exchange, according to the report.

Regulatory revenue, which represents about 45% of total revenue and includes trading fees as well as related charges, grew 4% last year to $445 million.

But compensation costs grew at a larger pace, rising 6% from last year to $688.7 million. FINRA now employs about 3,500 people vs. 3,400 last year.

In terms of its executives, Ketchum’s total pay (including incentive-based and deferred compensation, along with other benefits) rose to about $2,914,000 in 2015 from $2,894,000 in 2014. Chief Financial Officer Todd Diganci’s full compensation was $1,372,000 last year vs. $1,299,000 a year earlier.

Big Jump in Restitution

In 2015, FINRA brought 1,512 disciplinary actions against registered brokers and firms and levied $93.8 million in fines.

“In addition, we ordered $96.6 million in restitution to harmed investors — almost three times the amount of restitution ordered in 2014,” the firm said. “For example, we ordered two firms to pay a total of $15.3 million in restitution to customers in Puerto Rico, in connection with the firms’ supervisory failures related to the sales of Puerto Rican municipal bonds and closed-end funds.”

FINRA also ordered restitution to investors who did not receive applicable sales-charge discounts. Some 12 firms paid more than $4 million in restitution for missed sales charge discounts for unit investment trust sales, while 10 firms were required to pay more than $48 million in connection with sales charge discounts for charities and retirement accounts.

The group says that since 2013, more than 230 “high-risk brokers” have been barred from the securities industry.

“In 2015, we conducted 170 targeted registered representative exams and designated an additional 159 individuals for surveillance. We referred 20 examinations for formal disciplinary action,” it stated.

It also referred some 900 potential fraud, manipulation and insider trading cases to the Securities and Exchange Commission and other enforcement agencies.

FINRA says it currently regulates close to 4,000 brokerage firms, some 162,700 branch offices and more than 643,000 registered reps.

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