According to a report issued by the Financial Industry Regulatory Authority, Inc., the U.S.’s self-regulatory organization responsible for broker-dealer oversight spent $81.1 million on a variety of capital and strategic initiatives and on investor education and efforts to promote compliance by broker-dealers. The bulk of these funds came from fines imposed by FINRA. Of these funds, just over 81 percent were allocated for capital and strategic purposes, while just under 19 percent were allocated for educational and compliance purposes. FINRA’s first full report on fines was issued pursuant to its Financial Guiding Principles, which it published in January 2018 as part of an effort to improve the transparency of its operations. Previously, FINRA had issued an interim report on fine monies roughly in the time frame that it adopted its Financial Guiding Principles.
FINRA’s 2018 report indicates that it made fines-eligible expenditures based on $61.0 million in fines issued, which it then combined with $20.1 million in reserves to arrive at a total expenditure of $81.1 million. Although FINRA’s Financial Guiding Principles document lists four purposes for which its board or finance committee may use these funds, the report divided expenditures across just two more generalized categories: capital/strategic initiatives and educational/compliance initiatives.
FINRA spent $65.7 million (81 percent of its total expenditures) on capital/strategic initiatives. Expenditures in this category included migrating applications to cloud-based platforms, machine learning tools to better detect suspicious market behavior, and improvements to FINRA’s examination program. These expenditures, however, did not include the costs of FINRA’s participation in the consolidated audit trail (CAT) consortium and the related costs of FINRA having been selected to be the CAT’s plan processor.
With respect to educational/compliance initiatives, FINRA spent a total of $15.4 million or nearly 19 percent of its total expenditures. These funds were allocated across three areas: (1) compliance resources ($7.3 million); (2) FINRA staff training ($4.6 million); and (3) investor education ($3.5 million).
A comparison of the 2018 report to the 2017 interim report, at least on the surface, implies significant differences regarding how FINRA funded its capital/strategic and educational/compliance initiatives (more use of reserves in 2018 than 2017), and how it allocated funds between capital/strategic and educational/compliance initiatives (more funds for capital/strategic initiatives than for educational/compliance goals in 2018 versus 2017). However, as FINRA’s interim report cautioned, the numbers for 2017 may not reflect “full implementation” of the requirements for fines contained in its Financial Guiding Principles. The 2018 report is the first full report on FINRA’s use of fine monies.
More generally, FINRA explained that it collects funds from two revenue streams. One stream focuses on providing restitution to harmed investors (FINRA said this is its “highest priority”), while the other stream, fines, focuses on deterring misconduct. Funds collected through the imposition of fines are accounted for separately and do not appear in FINRA’s operating budget, nor are fines used to set FINRA employees’ pay. FINRA said it follows a set of guidelines for imposing fines in specific cases and that it does not seek a minimum amount of fines.
A comparison of the 2018 report to the 2017 interim report, at least on the surface, implies significant differences regarding how FINRA funded its capital/strategic and educational/compliance initiatives (more use of reserves in 2018 than 2017), and how it allocated funds between capital/strategic and educational/compliance initiatives (more funds for capital/strategic initiatives than for educational/compliance goals in 2018 versus 2017). However, as FINRA’s interim report cautioned, the numbers for 2017 may not reflect “full implementation” of the requirements for fines contained in its Financial Guiding Principles. The 2018 report is the first full report on FINRA’s use of fine monies.
More generally, FINRA explained that it collects funds from two revenue streams. One stream focuses on providing restitution to harmed investors (FINRA said this is its “highest priority”), while the other stream, fines, focuses on deterring misconduct. Funds collected through the imposition of fines are accounted for separately and do not appear in FINRA’s operating budget, nor are fines used to set FINRA employees’ pay. FINRA said it follows a set of guidelines for imposing fines in specific cases and that it does not seek a minimum amount of fines.