Finra posts net loss of $218.1 million for 2022

Finra posted a net loss of $218.1 million last year, primarily as a result of operating and investment losses, the regulator said.

The Financial Industry Regulatory Authority Inc.’s financial results represented a sharp drop from the $218.8 million in net income the broker-dealer self-regulator obtained in 2021.

Finra lost $166.9 million on its investment portfolio in 2022 and $60.2 million on its operations, which was offset by $9 million in interest and dividend income.

Finra revenue fell as a result of a decline in the market transactions on which Finra charges fees. There was a decrease last year in the number of public offerings and lower trading activity fees, Finra CEO Robert W. Cook and the organization’s chief financial and administrative officer, Todd T. Diganci, wrote in a letter accompanying the Finra annual report, which was posted on the Finra website Friday afternoon.

The report also indicates that the total amount of fines Finra imposed on member brokerages dropped to $54.5 million in 2022 from $103 million in 2021. The 2022 fine amount includes disgorgement of $6.4 million. Finra returned $26.2 million to harmed investors last year.

The organization’s expenses increased due to costs related to its 3,900-person staff. Total expenses were $1.4 billion in 2022, up from $1.3 billion in 2021. Most of the cost was related to compensation and benefits, which rose from $802.5 million in 2021 to $870 million in 2022. The second largest expense category was cloud computing and software, which increased to $242 million last year from $189 million in 2021.

“The increase in our operating expenses was driven in part by investments in staff and technology to strengthen our capabilities to fulfill long-standing regulatory responsibilities, address more recent expansions in the scope of our duties, and meet new challenges in the markets,” Cook and Diganci wrote. “The increased costs also reflect steps we took to manage evolving workforce conditions, including wage inflation and competitive labor markets.”

Finra’s reserves, essentially its investment portfolio, declined 6.4%. But Cook and Diganci said that result was “favorable relative to the double-digit declines in the global equity and U.S. investment grade bond markets.”

The Finra leaders said the operating loss last year was expected and in line with Finra’s strategic plan, which involves drawing down its reserves to help pay operating expenses.

Finra anticipates that revenue and expenses will both increase in 2023, according to its budget summary.

“We further expect that expenditures will outpace revenues over the next several years, even taking into account fee increases that were filed with the SEC in December 2020 and phased in over three years, beginning in 2022,” Cook and Diganci wrote. “Accordingly and aligned to our multiyear financial strategic plan, we expect to continue drawing down our reserve portfolio to meet our operating and capital needs, to invest appropriately for the future and to support gradual fee increases.”

Compensation increased for Finra’s top executives, according to the report. Cook’s total compensation rose to $3.7 million in 2022, up from $3.3 million in 2021. Diganci’s pay increased to $1.8 million last year, up from $1.5 million in 2021. Other executives named in the report include Steven J. Randich, executive vice president and chief information officer ($1.7 million in 2022; $1.6 million in 2021); Robert L.D. Colby, executive vice president and chief legal officer ($1.4 million; $1.3 million); and Greg Ruppert, executive vice president for member supervision ($1.2 million; $960,306).

The report also shows that in 2022, Finra expelled seven firms from the industry, suspended 328 brokers and barred 227.