Finra anticipates decline in operating revenue this year

Finra expects an operating loss this year as its revenue declines as a result of a drop in corporate filings and market trading volume, while its expenses increase as the organization returns to normal operations following the pandemic.

The Financial Industry Regulatory Authority Inc. said it projects revenue of $1.095 billion, a 5% decline from 2021, according to the 2022 budget summary the organization released Monday.

The primary source of Finra’s cash flow is regulatory fees, which include fees assessed on member firms based on their gross income and personnel, as well as a trading activity fee.

The number of brokerages and registered representatives have been shrinking for years, according to the annual Finra Industry Snapshot. Finra expects that contraction to continue this year and hurt revenue. It also anticipates a slowdown in market trading, which will crimp the trading activity fees.

The decline in operating revenue is expected to be offset by an increase in the fees Finra charges member firms, which was approved last year and will be phased in over the next three years, according to the budget summary.

The broker-dealer self-regulator anticipates operating costs will rise this year as it bounces back from the pandemic.

“We project an increase in operating expenses during 2022 as we resume more normal activities, including increased travel, as well as higher compensation costs as we backfill vacancies and, where necessary, hire new staff to reflect the increased scope and challenges of our regulatory activities and responsibilities,” Finra board budget chair Eileen K. Murray and Finra CEO Robert W. Cook wrote in a letter accompanying the budget summary.

The summary, which Finra has released each year since 2018, outlines how the organization plans to allocate its resources. The document complements Finra’s annual financial report, which is usually released in June and provides the financial results for the previous year.

“Finra remains committed to appropriately funding our mission of protecting investors and promoting market integrity in a manner that facilitates vibrant capital markets,” Murray and Cook wrote.

The Finra board approved $120.5 million for capital initiatives that focus on technology improvements and other strategic investments. The board also approved $62 million in one-time multiyear special projects, which include improving firm filing and reporting systems, upgrading enforcement technology and bolstering Finra’s analytic capabilities.

Finra could tap $164 million from its reserves to cover the expected operating loss, the budget summary says. Finra reserves are essentially its investment fund, which totaled about $1.5 billion at the end of 2020.

But it may not have to dip that far into its reserves. The regulator said it uses a conservative budgeting philosophy. The projected operating loss assumes that the organization collects no fine monies and that there are no investment gains or losses on its financial reserves. In reality, Finra will collect fine monies and the reserves will fluctuate.

In coming weeks, Finra is expected to release a report on how it used its fine monies in 2021.

The budget summary and the fine report are results of Finra’s effort to be more transparent about its finances, a goal that was part of its Finra 360 organizational self-examination.