FINRA Reports $84M Fiscal Year Loss


The Financial Industry Regulatory Authority, the U.S. securities industry's self-funded regulator, lost $84 million last year because of weak industry trading volume and low returns on its investment portfolio.

FINRA, whose top five executives received $6.86 million in compensation for 2011, said in its annual report released Friday that it is seeking approval to raise fees for its brokerage firm members "in light of our robust regulatory responsibilities but static funding levels."

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The loss at FINRA, formed in the 2006 merger of the National Association of Securities Dealers and the New York Stock Exchange, is its first since the depth of the financial crisis in 2008, when it lost $700 million. The loss, together with executive compensation and the plan to raise fees, will weigh heavily on an industry that is already suffering from a weak economy, new regulations and investor caution.

Chief Executive Richard Ketchum, who received $2.68 million in salary, bonus and benefits last year, attributed the loss to "declining industry revenues and transaction volumes," from which FINRA collects fees, and "a more conservative investment allocation policy.

Its 2008 loss was attributed to huge deterioration in its investment portfolio.

Ketchum telegraphed problems in April when he sent an email to members about plans to hike their fees because of a "significant loss.

The U.S. Securities and Exchange Commission, which oversees the self-regulatory group, last week approved FINRA's request for a 25 percent hike in equities trading fees. The increase, effective July 1, "is designed to ensure proper funding of FINRA's regulatory program," despite a "continued decline" in trading volume at brokerages, he wrote.

It also approved hikes for new membership applications, review of corporate finance filings and other activities.

FINRA said it is engaged in aggressive cost-cutting, reducing its 2012 budget by $36 million from last year. It expects the belt-tightening efforts to result in nearly $60 million of savings by the end of 2013, Ketchum wrote.

A recent shuffling in FINRA's executive ranks may reflect the cost-savings campaign. The regulator recently hired a former SEC official to replace two of its top lawyers who left in May. One of those lawyers, former general counsel for regulation Marc Menchel, earned more than $1.6 million in total compensation in 2010. His 2011 pay was not disclosed.

"They're doing the same cutting now that everyone else is doing because their money is tight as well," said David Sobel, general counsel and chief compliance officer of Abel/Noser Corp, a New York-based broker-dealer.

FINRA has long faced questions about whether its compensation packages for executives are overly generous for a regulator, albeit one that is privately run.

Ketchum's 2011 pay was virtually flat with the $2.6 million he received in 2010, according to the report. However, it towers over the $165,300 received by SEC Chairman Mary Schapiro in her government post. Schapiro earned much more when she was FINRA's chairman. She left for the SEC in 2009 with a package of pay and benefits worth $7.3 million.

Compensation for top FINRA executives is higher than at similarly structured organizations, said Steven Hall, a New York-based compensation consultant. He pointed to Fannie Mae and Freddie Mac, which now cap top pay at $500,000. Donald Layton, a longtime bank executive, became the head of Freddie Mac in May.

Fannie and Freddie CEOs earned as much as $6 million, with deferred pay and bonuses, before the companies were taken into government receivership in 2008 amid massive mortgage losses.

Some FINRA members said the high pay scale at the self-regulatory group is necessary.

"Better people don't come with less money," said Sobel, noting that Ketchum still makes less than such predecessors as Schapiro and Frank Zarb. "FINRA does a government job, but it is not the government," Sobel said.

A FINRA spokeswoman was not immediately available for comment.