From Ulmer’s Broker-Dealer Law Corner Blog
By Alan M. Wolper
Last year, for the first time, FINRA produced a statistical report designed to provide some perspective on the firms that comprise its membership. I blogged about it, and concluded at the time that the report basically demonstrated the following:
- 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
This week, FINRA issued its 2019 version of that Snapshot and – spoiler alert – it appears that those same alarming trends continue.
First, perhaps the least surprising data point in the entire report is that the number of FINRA member firms continues to shrink. As of 2018, FINRA is down to 3,607 firms, representing an overall loss of 119 firms. Since 2014 – the earliest year for which data is included in the Report – FINRA has lost over 11% of its membership. Going back to 2003, which the earliest year for which I can find any statistics, the number of FINRA member firms has dropped by over 31%. Consistent with this, there was also a continuation in the drop in the number of RRs, albeit a modest one.
Second, FINRA membership still consists overwhelmingly of small firms. When you consider the three different size categories that FINRA employs – small (which FINRA defines as 1 – 150 RRs), mid-size (151 – 499 RRs) and large firms (over 500 RRs) – the data show that 3,242 of the total of 3,607 firms are small. In other words, over 90% of FINRA member firms are small.
Third, and perhaps the most alarming, it is readily evident that the reduction in the overall number of firms was driven almost entirely by the loss of small firms. Of the 119 firms that were lost in 2018, 112 of them – over 94% – were small. And of those 112 firms, 104 of them were BDs with 10 or fewer RRs. You can see why the concern I voiced last year about the demise of “mom-and-pop” shops was legitimate, and why it is even more true today. Of course, the data in the report also show why FINRA doesn’t really care about this phenomenon: of the approximately 630,000 RRs who work for FINRA member firms, only 10% work for small firms. Yes, you read that right: while fully 90% of FINRA members are small, only 10% of all the RRs work at those firms.
Fourth, FINRA’s statistics again reveal clearly that it is hardly the regulator of choice in the securities industry. This is evident from the data that show that while the number of BDs continues to plummet, the population of investment advisors – who are not, of course, regulated by FINRA – is going in the opposite direction. Every year since 2009, the number of investment advisor firms NOT registered with FINRA has increased, up a total of 22.5% over that ten-year period. By comparison, over that same time period, the number of FINRA members – whether BD-only or IA/BD dually registered – has dropped by 23.5%. Stated another way, in 2009, there were about 20,000 more IA-only firms than BDs; ten years later, however, as people in the securities industry migrate away from the BD world to avoid having to deal with FINRA, there are now 26,639 more IA-only firms, an increase of 33%.
As I said before, except for the last observation about the continuing migration away from BD world to IA world, I highly doubt that FINRA cares about the fact that its population of member firms continues to drop every year, or that small firms are quickly going the way of Blockbuster video rental stores. I mean, who would complain about having fewer firms to worry about at the same time that your number of employees, your compensation, and the amount of money you spend continue to go up? Less to do with more people to do it, sounds like a fantastic combination. At some point, I suppose it is possible that FINRA will have to justify its continued existence. Based on her history, Senator Elizabeth Warren does not appear to be a big fan. I do not doubt that certain people in FINRA management are keeping a very close eye on who turns out to be the nominee from the Democrats.
 Given that the overwhelming number of FINRA members are small, isn’t it odd that according to FINRA’s By-Laws, small firms get allocated the exact same number of seats on the National Adjudicatory Council as large firms?