Finra’s financial viability isn’t in question

At the Financial Industry Regulatory Authority Inc., we take our fiscal and fiduciary responsibilities seriously and think that…

At the Financial Industry Regulatory Authority Inc., we take our fiscal and fiduciary responsibilities seriously and think that it is important to set the record straight regarding the On Advice column “Finra’s financial woes no recipe for viability” (InvestmentNews, July 15).

The key measure of financial health for Finra, as is the case for many not-for-profit organizations, isn’t operating profit or loss but rather cash flow from operations. In carrying out our fiscal responsibilities, Finra strives to achieve breakeven or better cash flow performance on an annual basis.

Case in point, in the past two years where operating losses have occurred and were noted in the column, Finra’s cash flows have essentially been at breakeven — at $9 million last year and $8.4 million in 2011.

With respect to the sustainability of Finra’s business model, the regulator has maintained an equity balance in excess of $1 billion during the past five years while increasing cash balances to more than $350 million, from $85 million. Furthermore, during that time period, revenue and total expenses have increased 4% and 3%, respectively.

Based on these facts, Finra’s financial viability or sustainability remains strong and isn’t in question.

In response to other statements, since the consolidation of NASD and New York Stock Exchange member regulation functions in 2007 to create Finra, our employee population has increased in line with the increase in our regulatory responsibilities. During the past five years, we have also assumed responsibility for regulation of the NYSE under a regulatory service agreement contract, and we have completed the internalization of Finra’s data center operations.

These initiatives have resulted in an increased workforce and compensation expenses, while minimizing redundant regulation and closing regulatory gaps.

Finra is very fortunate to have a strong and sophisticated Investment Committee of the board that is responsible for overseeing our portfolio. Our investment policy is to preserve principal, in real terms, while seeking rates of returns commensurate with an acceptable level of risk.

As a result, when markets rise, our returns won’t rise as high. However, when markets decline, our declines should be less.

Earnings from investments are used to fund Finra’s annual operating budget and thereby help keep member fees down.

As I stated at the beginning, we take our responsibility as financial stewards of the organization seriously and think your readers should have the facts.

Todd T. Diganci
Executive vice president and CFO
Finra
Washington