Compliance and financial reporting experts are criticizing the Financial Industry Regulatory Authority's proposal for broker-dealers to cough up more detailed and frequent financial reports.
In public comments, they say the proposed requirements would be too cumbersome and costly.
In a regulatory notice issued late last month, Finra said it wants companies 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 regulator of broker-dealers also wants fee income broken out by type of business, such as investment banking, research services, 12b1 fees and execution and clearing services.
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 of a company's revenues. Firms would have to supply the name of the offering party (the entity receiving proceeds of the securities sale), the amounts sold to investors and the commission received on the deal.
Finra wants the more detailed and timely information to help it enhance risk modeling, Nancy Condon, a Finra vice president, wrote in an e-mail Monday.
Though broker-dealers already file quarterly and even monthly Financial and Operational Combined Uniform Style, or FOCUS, reports, these documents typically do not break out revenues, expenses and commissions by security type. The reports only give consolidated information.
"Finra is asking for over 60 categories of income and 35 categories of expense, and its definitions aren't clear," said Michael Brown, the president of B/D Solutions Consulting, an Atlanta consultancy serving broker-dealers.
Many brokerage firms could find it difficult to comply with Finra's proposed reporting rules.
Nicholas Tsafos, a partner in the New York accounting firm of EisnerAmper, said that brokerage firms must either aggregate the information daily 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. Some self-clearing brokers might have such granular data, but their clearing firms might not.
Perhaps the most difficult part of complying with Finra's proposed requirement, said Brown, is that broker-dealers may actually have to prove they executed no transactions in certain asset types. It is akin to being guilty until proven innocent.
Brown also recommended that Finra require brokerages to include the additional financial data on their existing FOCUS reports rather than having to do supplemental reports.
"Finra is basically requiring every broker-dealer to produce a second profit-and-loss statement in the format it wants, which includes almost 100 different categories," he explained. "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% or more of total income or total expense and then require firms to submit that P&L statement with the FOCUS report?"