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Finra’s proposed fee hike draws ire of FSI, SIFMA

Two major industry organizations are pushing against Finra's proposed fee increase for advisers and broker-dealers.

Two major industry organizations are pushing against Finra’s proposed fee increase for advisers and broker-dealers.

Last month, the Financial Services Institute Inc. told its broker-dealer and adviser members that they should not bear the burden of increased fees from the Financial Industry Regulatory Authority Inc. after the regulator’s “failure to properly prepare for the inevitable market downturn,” according to a notice the FSI sent to broker-dealers.

And the Securities Industry and Financial Markets Association joined the fight to contain the damage of potential fee increases that representatives and broker-dealers could face from changes proposed in August by the securities industry’s self-regulator.

At the end of last week, SIFMA intended to file a letter with the Securities and Exchange Commission stating its concerns over the proposed increases.

In August, Finra filed a proposal with the SEC to double each individual rep’s “personal assessment” and alter the method of calculation of broker-dealers’ gross-income assessment.

“The sole purpose of the fee proposal is to even out revenues and make them more predictable so Finra can meet its obligations as a regulator, regardless of market conditions,” said Herb Perone, a Finra spokesman.

The notice, or “call to action” memo, from the FSI — a trade group that represents 113 broker-dealers serving independent-contractor representatives — urges broker-dealers to fight the proposed increases by submitting comment letters to the SEC. The memo includes four talking points recommended for firms to highlight in their letters.

“Our primary concerns with the fee increase are timing and context,” said Dale Brown, the FSI’s chief executive.

“Independent broker-dealers, independent financial advisers and their clients have all been impacted by the market downturn and continued increases in compliance costs,” he said. “Moreover, this fee in-crease comes on top of astronomical in-creases in [Securities Investor Protection Corp.] fees.”

The FSI is drawing attention to Finra’s fees just as the losses suffered by Finra’s $1.6 billion investment fund last year are gaining notice. The fund decreased in value by 27% last year because of an aggressive investment strategy.

The fund has since shifted to a much more conservative strategy and is up 12% so far this year, compared with 14% for the S&P 500.

Finra wants to increase the assessment it charges individual registered reps to be-tween $130 and $150 a year, from $65 to $75.

According to the FSI memo, the “root cause” of Finra’s losses was its lack of preparation for the market downturn. Therefore, it is “unfair to burden the broker-dealers, financial advisers and their clients, all of whom suffered greatly during the recent market downturn, with these additional fee assessments,” the memo stated.

The memo also added that the doubling of the individual reps’ assessment is “unjustified by any reasonable calculation of inflation over the five-year period since the last increase in this assessment.”

What’s more, the independent broker-dealers and reps will feel a greater sting than others from the proposed changes in the gross-income assessment because of the “unique” aspects of their business model, according to the FSI memo.

Instead of increasing the assessment right away, SIFMA wants Finra to phase in the fees over a period of years.

The assessment increase would come at a time when the brokerage industry is in a deep funk, SIFMA’s letter stated.

“SIFMA has several concerns about the proposed increase, not the least of which is the considerable financial impact the assessment will have on member firms during a time when the industry as a whole is experiencing a profound downturn,” the letter said.

According to SIFMA research, in the third quarter last year, U.S. broker-dealers reported pretax losses of $8.7 billion, with gross revenue dropping almost 21% from the prior quarter. The SIFMA letter didn’t cite more current figures.

It highlighted a variety of fee increases that broker-dealers already face — including an in-crease in the annual assessment from the SIPC — that cost many of them thousands of dollars at a time when business has dropped significantly.

InvestmentNews obtained a draft of the SIFMA letter last Thursday, a day before it was slated to be filed with the SEC.

E-mail Bruce Kelly at [email protected].