Have FINRA’s “Poor Investments” Affected its Members?


In a recent report, the Wall Street Journal said FINRA’s investments are underperforming. The self-regulatory organization boasts a $1 billion yearly budget, and it easily collects over $100 million per year through the imposition of fines.

According to WSJ journalists, throughout its existence, FINRA’s $1.6 billion investment portfolio has yielded $440 million less than what could have been obtained from a mix of balanced stocks and bonds.

After the industry’s recent questioning of how FINRA uses fine money, the new criticism appears as a new blow to its image at a time when it has been trying to show a willingness to reform in response to member feedback.

As FINRA’s revenue from member fees surpasses forecasts, it could actually offer firms some rebates, but that has not happened in nearly four years. In 2010, FINRA had 4,600 members.

Now, it has under 3,800, and as small firms tend to merge to avoid failure, the SRO has actually raised some of its fees in order to stabilize revenue.

Meanwhile, comparing FINRA’s investments to a 6%-yielding half-stock, half-bond portfolio, the Regulatory Authority has secured annual returns of a considerably lower 3.4%. And for some financial analysts, FINRA might have reduced membership fees if it had made smarter investments.

After the publication of the WSJ article, FINRA quickly responded that its investments were in no way underperforming. “The portfolio has exceeded FINRA’s benchmark on a risk-adjusted basis,” the SRO’s spokeswoman Nancy Condon told journalists.

Condon claims that FINRA has had good reason to simply opt for low risky investments. “In 2009, after the financial crisis, FINRA decided to reallocate its assets to pursue a more conservative approach, with the majority of the portfolio invested in fixed income securities.

Instead of comparing FINRA’s returns against a similar asset mix, the Journal’s analysis compares FINRA’s returns to a much more aggressive asset mix of 50% equities and 50% fixed income securities. That is a flawed comparison,” Condon has commented.

It remains to be seen whether FINRA will eventually change its investment strategy in response to potential pressure from an industry which is demanding increasing transparency and accountability.

FINRA demands transparency and accountability from its members but here the tables are turned. The regulatory organization is not infallible and not always right, whether in its own investments or in targeting a member firm or RA for discipline If you or your firm are wrongly targeted by FINRA, a proactive approach from a position of strength is always best.

At Herskovits PLLC we level the playing field. With two decades of experience standing up to FINRA, the SEC and other securities regulators, with great results, Herskovits PLLC can help when your career and finances are in jeopardy. Talk to a securities attorney now. 212.897.5410

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