FINRA Releases Cost Estimate to Become Investment Adviser SRO

The Financial Industry Regulatory Authority (FINRA) has responded to the Boston Consulting Group (BCG) study that estimated the cost of FINRA becoming the investment adviser self regulatory organization (SRO). The BCG study, which we have discussed in a previous blog, was sponsored by the Financial Planning Coalition, comprised of the Certified Financial Planner Board of Standards Inc., the Financial Planning Association and the National Association of Personal Financial Advisers. The Financial Planning Coalition, along with a number of other groups, is urging Congress to maintain investment adviser oversight by the Securities and Exchange Commission (SEC).

The BCG study concluded that, if FINRA were to become the investment adviser SRO, the one-time start-up cost would be between $200 million and $255 million, and the annual cost would be about $550 million to $610 million. In response to the BCG study, last month FINRA released its own cost estimates. According to FINRA, its start-up cost would be approximately $12 million to $15 million, with annual cost of about $150 million to $155 million. FINRA contends that the BCG projection is inaccurate because “BCG used as its base the costs for establishing the PCAOB (Public Company Accounting Oversight Board) and the CFPB from scratch. BCG used figures – set up costs for organizations that didn’t even have one desk or employee to start with – and provided for only a 20% discount off the from-scratch start-up costs to allow for efficiencies in FINRA’s existing infrastructure.”

FINRA believes that it will have to hire 900 full-time employees, most of which would be examinations staff. It claims that the BCG report “vastly underestimated our ability to leverage existing staff, district offices and the technology underlying our existing nationwide examination program.” FINRA’s executive vice president for corporate communications, Howard Schloss, also stated, “The BCG study was a political document to make their clients happy. The methodology they used was non-sensical. The numbers they put out were wildly inflated.”

As we have previously blogged, many oppose the idea of FINRA becoming the SRO. Opponents are concerned that costs for investment advisers will increase, and some advisers do not want to become accountable to FINRA because they believe it lacks expertise in administering a fiduciary duty standard. Broker-dealers adhere to a suitability standard as opposed to a fiduciary duty standard.

The Financial Planning Coalition questions the accuracy of FINRA’s cost estimates, claiming the one-and-a-half page FINRA document is too superficial and not comparable to the 38-page study released by the BCG. The Coalition believes FINRA’s estimate “lacks any analysis, backup assumptions or data.” It also maintains that the BCG study “utilized publicly available data, including FINRA’s actual costs and the SEC’s actual IA examination costs, and was based on rational and fully disclosed assumptions.”

Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.