FINRA's Cost Estimates Challenged Leading Financial Services Organizations Respond to FINRA s Estimates

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1 FOR IMMEDIATE RELEASE May 10, 2012 Contact: Dan Drummond (O) or (M) FINRA's Cost Estimates Challenged Leading Financial Services Organizations Respond to FINRA s Estimates Washington, D.C. (May 10, 2012) The Financial Industry Regulatory Authority s (FINRA) estimate of the cost to setup, operate and oversee a self regulatory organization (SRO) for investment advisers (IA) underestimates overhead costs and overestimates IA examiner productivity, according to a new review of FINRA s one and a half page document titled, Investment Estimate for FINRA IA SRO. The review was conducted by The Boston Consulting Group (BCG) on behalf of the Certified Financial Planner Board of Standards, Inc., Financial Planning Association, Investment Adviser Association, National Association of Personal Financial Advisors and TD Ameritrade Institutional. BCG also provided a report in December 2011 that estimated the cost of options to increase examinations of investment advisers, including the creation of one of more new IA SROs. For a copy of that report, click here. FINRA released its cost estimate on April 25 the same day Rep. Spencer Bachus (R AL) and Rep. Carolyn McCarthy (D NY) introduced legislation authorizing the creation of an IA SRO. BCG s review finds: FINRA s estimate omits the cost of SEC oversight ($90 $100 million) and the cost of enforcement ($60 $70 million), both of which are required by the legislation; FINRA s estimate of $12 $15 million in setup costs does not include staff costs incurred during the 12 month setup period, specifically the cost of examiners and support staff.

2 FINRA only includes these expenses as part of its ongoing investment once the SRO is up and running. This omission accounts for $180 $230 million of the difference between the BCG and FINRA estimates; FINRA's estimate of the ongoing annual cost of examining 14,500 IA firms once every four years, assumes that FINRA's IA examiners would be able to nearly double the productivity rate of SEC IA examiners, by performing 5 or more examinations per examiner per year. This compares to SEC IA examiner productivity of 3.0, and FINRA broker dealer examiner productivity of 2.8. This productivity assumption accounts for $150 $170 million of the difference between the BCG and FINRA estimates; and FINRA s estimate does not include overhead costs in its estimate of $150 $155 million of ongoing annual investment. Overhead costs account for $135 $140 million of the difference between the BCG and FINRA estimates. We believe that the review of FINRA's cost estimates confirms the independent economic analysis conducted by BCG last year. We think it would be a mistake to add an unnecessary layer of regulation and cost on small businesses that deliver sound advice to investors, the group sponsoring the BCG review said. We continue to believe that oversight of investment advisers should stay with the Securities and Exchange Commission, the most cost effective alternative. A side by side comparison of the cost estimates can be found here. ###

3 Comparison Chart: FINRA Investment Estimate and analysis by The Boston Consulting Group Category FINRA s Investment Estimate BCG Analysis Reason for Differences 1. Setup of IA SRO $12 $15 million $200 $255 million FINRA s estimate of $12 $15 million in setup costs does not include staff costs incurred during the 12 month setup period, specifically the cost of examiners and support staff. This omission accounts for $180 $230 million of the difference between the BCG and FINRA estimates. 2. On Boarding of New Employees $13,000 $17,000 per employee $25,000 per employee FINRA estimates $8 $12 million less in on boarding costs than BCG. BCG based its on boarding costs on the official SEC budget request. 3. SEC Oversight Not included in FINRA s document $90 $100 FINRA doesn t include the cost of SEC oversight of a new IA SRO, even though current federal law and the proposed legislation both require continued SEC oversight. 4. Total Ongoing Annual Oversight Mandate (Breakdown of costs below) $150 $155 million/annually $460 $510 BCG estimates include proven productivity assumptions, overhead costs for examiners and enforcement costs. 4a.Examiner Costs Not broken out in FINRA document $135 $140 FINRA s estimated ongoing investment of $150 $155 million with 900 additional employees equates to a $170,000 per employee cost, which is unlikely to include overhead. 4b. Enforcement Costs Not broken out in FINRA document $130 No specific reference in FINRA estimates to enforcement personnel. BCG estimated enforcement activity at $130 million per year. Differences in enforcement costs are estimated to account for $60 $70 million between the BCG and FINRA estimates. 4c. Examiner Productivity Not broken out in FINRA document $150 $170 FINRA s estimated costs assume nearly double the per employee productivity of current FINRA broker dealer examinations as well as current SEC IA examiner productivity.

4 Setup Costs Setup costs Two fundamental differences between FINRA's $12-15M estimate of setup costs and BCG's estimate of $ M of setup costs: 1. Staff costs during setup period BCG analysis included staff costs incurred during the setup period in its estimate of setup costs. These costs include salaries, benefits and overhead incurred during the setup period. Setup activities include hiring examiners, developing examination process and guidelines, and new examiner training. i FINRA reflects all staff costs in its ongoing annual investment costs, and not in its estimate of setup costs Staff costs during the ~12 month setup period are $ M. 2. New employee on-boarding costs BCG analysis assumes that employee on-boarding expenses are ~$25,000 per employee, and is based on recent SEC budget request for new OCIE employees. On-boarding expenses include recruiting costs, trainer costs, required equipment and access, etc. FINRA estimate assumes that employee on-boarding expenses are ~$13,000-17, per employee. Comparability is unclear, as FINRA's setup costs include training costs, initial organization, governance and technology costs. The difference in on-boarding cost per new employee is estimated to account for $8-12M of the difference between the BCG and FINRA estimates of setup costs. Copyright by The Boston Consultin ng Group, Inc. All rights re eserved. 0

5 Ongoing mandate costs Ongoing mandate costs Three fundamental differences between FINRA's $ M estimate of ongoing annual investment and BCG's estimate of $ M of on-going mandate costs 1. Examiner Productivity BCG Analysis assumed IA Examiner productivity of 3.0, equal to recent SEC IA Examiner productivity, above current FINRA B-D Examiner productivity of 2.8 FINRA Estimate does not directly reference IA Examiner productivity, but may be as high as 5.5 in order to examine 14,500 IA firms, once every four years on average, with an IA SRO population that does not exceed 900 and includes Enforcement and support staff. The difference in Examiner productivity is estimated to account for $ M of the difference between the BCG and FINRA estimates. 2. Examiner Costs BCG's estimate of Examiner Costs includes Examiner compensation, benefits and overhead and is informed by recent SEC Examiner costs. To reflect scale benefits BCG applied a 19% Scale Factor to the FINRA-IA SRO scenario, meaning that if the organization doubled in size, overhead costs would only increase by 81%. FINRA Estimate does not reference overhead costs. Ongoing annual investment of $ M for 900 employees suggests that on-going annual per employee costs are $170,000, which is unlikely to include overhead. Excluding Examiner overhead costs is estimated to account for $ M of the difference between the BCG and FINRA estimates. Copyright by The Boston Consultin ng Group, Inc. All rights re eserved. 1

6 Ongoing mandate costs & Costs of SEC oversight of an SRO 3. Enforcement Costs BCG Analysis estimated that enforcement activity would cost $130M per year, based on 1.0 IA Enforcement FTEs for every 2.8 IA Examiners, the current SEC examination to enforcement FTE ratio. FINRA Estimate does not reference Enforcement personnel, but the Enforcement to Examiner FTE ratio may be as high as 5 if the staff population does not exceed 900. The difference in the ratio of Enforcement to Examiner FTE is estimated to account for $60-70M of the difference between the BCG and FINRA estimates. Costs of SEC oversight of an SRO The FINRA Estimate makes no reference to the Costs of SEC oversight of an SRO. BCG estimates these costs at $90-100M annually. Copyright by The Boston Consultin ng Group, Inc. All rights re eserved. 2