If you are like me, and spend your idle time twiddling around the FINRA website, then you already know that FINRA publishes a variety of mathematical statistics, updated periodically, that provide, along with the sobering tally of the Enforcement actions brought and fines imposed, a good insight into the composition of the membership.  Yesterday, FINRA went one better and released what it called the 2018 FINRA Industry Snapshot, basically, an enhanced version of the data already available on the website.

There are no real surprises here, especially to those who, well, to anyone who knows anything about FINRA and its history. But, for the few readers who need some reminding, here are the central themes of the new report.

First, the membership of FINRA is predominantly made up of small firms. In 2017, there were a total of 3,726 broker-dealers.  Of that total, almost half – 48.3% – had ten or fewer registered reps.  If you look at firms with 20 or fewer RRs, then it goes up to 65.4% of the total.  Using FINRA’s own criteria for firm size, the number of small firms relative to the total is even more telling:

Small Firms (defined as 1 – 150 RRs):       90.0%

Mid-Size Firms (151- 499 RRs):                  5.2%

Large Firms (500+ RRs):                              4.8%

But, this is not news. FINRA has always looked like this.  It has always been dominated by small firms.  Unfortunately, despite their numbers, the revenues they generate for FINRA, even in the aggregate, cannot come close to matching those of the large firms.  Thus, while FINRA technically remains a one-firm/one-vote organization, don’t delude yourself into thinking it’s truly democratic.  The voices of large firms are heard way more loudly than the small firms because that’s where FINRA gets its money from.

It is no surprise, therefore, that when this report discloses the “Aggregate Financial Information” for the member firms, FINRA does not bother to break the numbers down by firm size. Instead, all we are shown is the total revenue for all firms, the total expenses, and the total pre-tax net income.  If FINRA were to publish these data points separately for small firms, mid-size firms and large firms, it would demonstrate that the top 5% or so of broker-dealers are responsible for the lion’s share of the revenues and the profits, as well as FINRA’s own revenues.  And that is not something FINRA is comfortable revealing.

Second, and more troubling, is the continuing decline in the number of FINRA member firms.[1]

The Snapshot contains data only going back to 2013, and they show a drop in the total number of firms in excess of 10%.  If you think that’s scary, how about going back ten years, to 2017.  In that ten-year period, FINRA lost 1,273 firms, or fully 25.5% of its members.  The oldest figures available are from 2003, when FINRA had 5,261 members.  By 2017, that number fell by over 29%.

There have been lots of articles written about the difficulty of running a small broker-dealer today, what with the high cost of compliance and the sheer number of man-hours required each year just to deal with FINRA and its seemingly incessant requests for documents and information. The resultant migration away from FINRA to the investment advisory world is amply demonstrated by the data in the Snapshot.  From 2008 – 2017, the number of BD-only firms, i.e., firms only registered with FINRA as broker-dealers, dropped 21.1%, from 3,969 to 3,132.  Not surprisingly, the number of dually registered BD/IA firms also fell, and by an even greater percentage, 35.9%.  During that same time period, however, the number of investment advisor-only firms, i.e., firms registered with the SEC or with the states only as investment advisors (and not registered with FINRA as BDs), increased 22.6%, from 24,147 to 29,599.

My point with this blog was not necessarily to offer an opinion about the data that FINRA published, but that’s really because the numbers, as they say, speak for themselves. And they are saying this:

  • FINRA is still mostly composed of small firms
  • But the number of those firms, and the influence they wield on FINRA’s direction, continues to diminish
  • If the trend continues, the landscape for broker-dealers will no longer look as it does today, as “mom-and-pop” shops will go the way of the paper tickertape and the handwritten order ticket

Maybe FINRA would prefer only a few hundred members, like the NYSE, who knows. But, if it’s not careful, that may be where this all ends up.

[1] A couple of years ago, in a blog regarding this same topic, I pointed out the dubious irony of the fact that despite the drastic reduction in the number of firms it regulates, FINRA’s annual expenses continue to climb dramatically.

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Alan Wolper

Alan focuses his practice exclusively on defending regulatory investigations and enforcement actions brought by the Financial Industry Regulatory Authority (FINRA), the United States Securities & Exchange Commission (SEC), and state securities commissioners against brokers, broker-dealers, and investment auditors. He was previously Director of the National Association of Securities Dealers (NASD) Atlanta District Office, where he oversaw nearly 600 member firms and thousands of branch offices. Alan also served as a member of the NASD’s Department of Enforcement, where he had the primary responsibility for prosecuting hundreds of formal disciplinary actions.