Financial Advisor (July 2, 2018) —

After decades of criticism, Finra is finally clearing up the mystery surrounding where the fine money it collects actually goes. The self-regulatory organization said in a new budget report that it is using the money to enhance regulation.

In the first disclosure of its kind, Finra said that it collected $64.9 million in fines in 2017 and spent $49.9 million on regulatory projects such as technology and compliance oversight of member firms, with $4.5 million going toward investor education. Fines are down sharply from $173.8 million in 2016, Finra said in a financial report

That didn’t silence critics, however—especially those who argue that Finra has yet to reimbuse the growing number of investors who are stiffed by broker-dealers and registered reps after winning their claims in Finra arbitration.

“It’s clear that Finra has been spending this fine money, but the $64,000 question is whether unpaid arbitration awards are an important enough priority for Finra that they use some of the fine money on reimbursement,” said Andrew Stoltmann, president of the Public Investors Arbitration Bar Association (PIABA), which is pressing Finra to create an investor recovery pool for unpaid Finra awards.

Unpaid Finra awards from 2012 through 2016 totaled $199 million. PIABA studied the 2017 award data and found that the trend continues: 36% of the investors who won their cases collected nothing, and 28 cents of each dollar awarded have gone unpaid, according to the PIABA report released in March: “The PIABA report: Unpaid Arbitration Awards: The Case for An Investor Recovery Pool (https://piaba.org/piaba-newsroom/unpaid-awards).”

PIABA’s investor recovery pool mirrors the recovery mechanism in a bipartisan bill introduced by U.S. Sen. Elizabeth Warren (D-Mass.), which would require Finra to establish a fund to cover arbitration shortfalls. Warren said Finra could use the fines it collects from broker-dealer firms that violate its rules or find another funding mechanism.

“Finra has complete discretion with regard to where this fine money is allocated,” Stoltmann said. “If lawmakers force Finra to fund this unpaid arbitration pot, they’ll have no choice. My preference has been Finra voluntarily do this without Congress’s hammer coming down,” said the attorney, who also helms Chicago-based Stoltmann Law Offices.

Investors who work with a broker-dealer are required to sign a mandatory arbitration waiver that requires them to use arbitration and prevents private lawsuits.

“It’s such a simple solution for Finra and the Securities and Exchange Commission to help the people who have been defrauded who actually went through Wall Street’s mandatory arbitration process, proved their case and won their awards,” Stoltmann said. “These people should be at the top of the pyramid in terms of who should be helped.”

While Finra has discussed a recovery fund as one possible solution to unpaid arbitration, neither Finra nor the SEC have proposed the creation of such a pool. But they do have the authority to create such a pool through regulation, Stoltmann said.

Finra ordered firms to pay $66.8 million in restitution to harmed investors last year, however, investors who were stiffed by Wall Street and Main Street brokers in unpaid arbitrations for $14 million in 2016 or a total of $199 million between 2012-2016 haven’t recovered a dime.

Finra salaries

In other financial disclosures yesterday, Finra revealed that CEO Robert W. Cook received total compensation of $2.4 million in 2017, while two other Finra executives—the CFO and CIO—received more than $1 million in total compensation. They collect a little over $1.2 million and $1 million, respectively.

Rather than raise membership dues to make up for a financial shortfall in 2017, Finra tapped its $1.6 billion in reserves, created by the sale of NASDAQ in 2006.

“Instead, we are again leveraging our financial reserves to fund our regulatory operations,” Cook wrote in a letter accompanying the financial report. “In addition, under the supervision of our board, we will continue to review and manage our overall expenses to ensure they are appropriately calibrated to our mission of protecting investors and promoting the integrity of our markets.”

Finra’s operating revenue fell to $828.1 million in 2017 from $844.6 million in 2016. While Finra cut expenses to $992.3 million in 2017 from $1.04 billion in 2016, that still gave the SRO a 2017 operating loss of $73.3 million. Finra’s net income, however, was offset by investment portfolio gains of $41.6 million in 2017, down from $57.7 million in 2016.