The Financial Industry Regulatory Authority is being told by compliance and financial reporting experts that its proposed requirement for broker-dealers to cough up more detailed and frequent financial reports could be cumbersome and costsly to follow.
In its Regulatory Notice 10-33 issued late last month, FINRA said it wants firms to file supplemental financial reports that would include information on net gains or losses as well as commissions related to trades by asset category. The main industry authority over broker-dealers also wants fee income broken out by type of business such as investment banking, research services, 12b1 fees, execution and clearing services.
The period for commenting on this notice ends in two days: Wednesday, August 18.
When it comes to offerings of unregistered securities in particular – namely private placements – FINRA wants more data if the private placement amounts to 10 or more percent of a firm’s revenues.
Firms would have to supply the name of the offering party – the entity which would receive the proceeds from the sale of securities; the amounts sold to investors and the commission the brokerage received on the deal.
“The proposals are part of our effort to obtain both more detailed information and to get it in a more timely fashion to enable us to enhance the risk modeling that is key to making our examination program as efficient and effective as possible,” says Nancy Condon, a FINRA vice president, in an emailed statement to Securities Technology Monitor on Monday morning.
Although broker-dealers do file quarterly and even monthly Financial and Operational Combined Uniform Style (FOCUS) reports, those documents typically do not break out revenues, expenses and commissions by security type. Those reports only provide consolidated information.
“FINRA is asking for over 60 categories of income and 35 categories of expense and its definitions aren’t clear,” says Michael Brown, president of B/D Solutions Consulting, an Atlanta-based consultancy serving broker-dealers.
Many brokerage firms could find it difficult to comply with FINRA's proposed reporting rules. “Brokerage firms need to have detailed information regarding unregistered offerings to calculate their net capital so they can participate in the offering under current regulations,” says Nicholas Tsafos, a partner with the New York accounting firm of Eisner Amper. “That is the same data FINRA now says will be required on the operational page of the supplemental focus report."
However, as Tsafos notes, brokerage firms may not have broken out their financial results by asset class and neither will some clearing firms.
That means that brokerages will now have to aggregate the information on a daily basis themselves from their portfolio accounting and order management systems or ask their clearing firms to do so on the financial reports they give their correspondent clients.
“As a rule of thumb,” one operations executive at a New York brokerage firm told Securities Technology Monitor on Monday, self-clearing brokers might have the granular data, but clearing firms would not.
Perhaps the most difficult part of complying with FINRA's proposed requirement, says Brown is that broker-dealers may have to actually prove they haven’t executed transactions in certain asset types. It's akin to being guilty until proven innocent.
Brown also recommends that FINRA require brokerages to provide the additional financial data on their existing FOCUS reports rather than having to do so via supplemental reports. Those reports may not give FINRA any additional information.
“FINRA is basically requiring every broker-dealer produce a second profit-and-loss statement in the format it wants which includes almost 100 different categories,” he explains. "Why not just require firms to break out on their P&L statements in a separate income or expense account any of their categories which make up 10 percent or more of total income or total expense and then require firms to submit that P&L statement with the FOCUS report,” Brown said.
