Can FINRA Help Small Broker Dealer Firms Survive?

October 13, 2017 | James Sprow | Blue Vault

In an article on October 12, Robert Cook, FINRA’s new CEO, was quoted in InvestmentNews as saying at a conference of the American Institute of Certified Public Accountants and the SIFMA Financial Management Society, “We want to create an environment where new Broker Dealers or existing small Broker Dealers feel that they can survive.”

The article states that, over the past 10 years, the number of firms FINRA regulates has declined by 24%, with 3,784 Broker Dealers now in existence. About 90% of those are small firms, and many believe the number of small firms will continue to fall over the next three to five years.

Many small Broker Dealers criticize FINRA for “nickel-and-diming” them with fines and being overly aggressive through their enforcement division. In FINRA’s defense, Cooks says “There are a lot of trends behind this. This isn’t all about FINRA regulation, but we want to play a role in helping support our small firms.”

Smaller Broker Dealers respond by pointing out that regulations and regulators are driving down margins and raising fines. Audits of smaller firms take too long and are costly. They also say that small firms are more likely to be compliant than large firms because the potential losses are greater, proportionally, for the smaller Broker Dealers. The time spent by the key people in small firms in responding to examinations is hurting their businesses and costing them money.

Along with the proposed DOL Fiduciary rule and other regulatory changes, is it possible that increased regulation has proportionately greater impact on smaller organizations, forcing them to consider merging with larger companies or go out of business? As government regulation increases in other industries such as health care, the tendency is for smaller practices to be absorbed by larger institutions in response to the burdens that regulation imposes. Economists would say that there are economies of scale when dealing with regulation and that may be responsible for the trend in the Broker Dealer environment as well.

FINRA may want to stem the drop in membership by “creating an environment” where smaller Broker Deaalers can survive, but if they are exerting increasing regulatory pressure on smaller firms, that environment may not be getting better any time soon.