Finra makes up for 2016 operating revenue hit with big increase in fine income

Broker-dealer self-regulator reports that fines increased to $173.8 million in 2016, up from $93.8 million in 2015.

The Financial Industry Regulatory Authority Inc. experienced a 6% decline in operating revenues in 2016 but still managed to attain positive net income thanks to a big increase in fine revenue, the broker-dealer self-regulator said in its annual financial report posted Friday afternoon on its website.

Finra’s operating revenues dropped to $844.6 million in 2016 from $898.7 million in 2015, according to the report. But fines increased to $173.8 million in 2016, up from $93.8 million in 2015.

In addition, Finra attained $17.1 million in investment gains in 2016, compared to a $7.4 million loss in 2015, and $29.7 million in equity earnings from other investments, up from a $13.5 million loss in 2015. Overall, Finra achieved $57.7 million in net income in 2016, after losing $39.5 million in 2015.

On its balance sheet, Finra shows $1.6 billion in net assets.

In a letter accompanying the report, Finra president and chief executive Robert W. Cook attributed the decline in operating revenues to “changes to the scope of regulatory functions” Finra provides under service agreements, less income from financing fees for initial and secondary public offerings and lower continuing education revenue after Finra moved the classes to a “lower-fee online delivery format.”

Mr. Cook foresees more downward trajectory.

“We expect operating revenue challenges to continue this year, with a projected decline of 1% for 2017,” Mr. Cook wrote.

Expenses for 2017 will increase about 2%, while operating cash flows “are anticipated to break even in 2017,” the report states.

On the other side of the ledger, Mr. Cook said that Finra “tightly managed expenses in 2016.” Its operating costs remained flat, coming in at $1.037 billion in 2016, compared to $1.038 billion in 2015.

The organization kept expenses down by lowering incentive compensation by 9% and transitioning 1,100 employees from a defined benefit pension to a defined contribution 401(k) plan, saving approximately $80.2 million. Finra has more than 3,500 employees.

The compensation squeeze will continue in 2017, according to Mr. Cook, as Finra freezes officer salaries and promotions and reduces annual merit increases for non-officers.

Seven Finra executives made more than $1 million in total compensation in 2016, including: Todd T. Diganci, executive vice president and chief financial officer ($1.5 million), Steven Randich, executive vice president and chief information officer ($1.3 million), Robert L. D. Colby, executive vice president and chief legal officer ($1.2 million), Susan F. Axelrod, executive vice president for regulatory operations ($1.2 million), Michael Rufino, executive vice president and head of member regulation – sales practice ($1.05 million) and Thomas R. Gira, executive vice president for market regulation ($2.7 million). A footnote explains that Mr. Gira’s compensation includes “a one-time cliff vesting event.”

Mr. Cook, who took the Finra helm last August, also earns seven figures. He is listed as having a $1 million salary for 2017 and earning $442,312 for a partial year of work in 2016. He declined incentive compensation last year. Deferred compensation and other benefits for 2017 haven’t yet been determined.

Finra has taken advantage of positive investment returns, $78.2 million in 2016 compared to $7.3 million in 2015, to cap membership fees for the 3,800 brokerages that are registered with the SRO.

“We have used approximately $50 million of yield from our investment portfolio annually to fund our operations, which has enabled us to defer fee increases to members,” Mr. Cook wrote. “As a result, member fees were last increased five years ago.”