FINRA Podcast: Regulatory and Examination Priorities - Part 3 (with Lofchie Comment)
FINRA released its podcast for April 9, 2013, focusing on financial and operational priorities. See the outline below.
Accuracy of Reporting
- FINRA is especially concerned with the accuracy of books and record regarding the valuation of assets and liabilities on balance sheets in regards to consumer asset protection.
- FINRA inspectors have recently noticed during net capital reviews that some guarantees have not been properly recorded.
- Deductions from net worth and net capital computations must properly reflect any assumption of an affiliate or subsidiary's liability.
- Liability must be recorded in the case of an adverse award in litigation even if the award is under appeal. In the absence of taking a charge, a company is required to produce the opinion of an outside counsel, and identify adverse awards as a contingent liability.
Margin-Lending Practices
- FINRA is concerned with the valuation of certain collateral and the potential mismatch of market value and liquidation value, especially with concentrated positions in muni bonds and highly structured Collateralized Mortgage Obligations.
- Firms acting as the principal or clearing agent in clearing must use independent risk techniques in determining whether margin requirements are adequate.
- Maturity mismatches between assets and liabilities create liquidity risks. Assets with a significant proportion of reverse repurchase transactions and margin loans with no stated maturity are a cause of concern.
- Firms relying exclusively on parent financing for their contingency funding need to analyze their situation to make sure they are able to operate under adverse circumstances.
Lofchie Comment: This is an important list of concerns. The above list largely reflects the basic blocking and tackling that firms must be attentive to (although the notion that a broker-dealer can survive the failure of its parent company is pure wishful thinking, as the regulators should have learned from the failure of Bear Stearns and Lehman). Focus on (i) margin lending levels and compliance with the SRO margin requirements and (ii) the proper recording of inter-affiliate transactions.
Listen to Podcast here (links externally to FINRA website).