FINRA Manual: Contents
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02-05 Changes To FOCUS Resulting From Certain Disclosure And Asset Recognition Requirements Under FASB 140
Financial Accounting Standards Board
The National Association of Securities Dealers, Inc. (NASD®) has modified the FOCUS Report to include disclosure, pursuant to Financial Accounting Standards Board Statement 140 (Statement 140), of amounts of inventory pledged, non-cash collateral received in secured financing transactions, and residual interests carried as a result of asset-collateralized securitizations. Beginning with the December 2001 FOCUS Report, members, who are required to file FOCUS Report, Part II, need to disclose:
Members should initially direct any questions on the applicability of the disclosure requirements of Statement 140 to their outside auditors. Questions concerning the disclosure reported on the FOCUS Statement of Financial Condition ("Balance Sheet") may be directed to Andrew Labadie, Member Regulation, NASD Regulation, at (202) 728-8397.
In September 2000, the Financial Accounting Standards Board (FASB) issued Statement 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." While the primary focus of Statement 140 is to provide guidance for, and facilitate consistent treatment of, transfers of financial assets and settlements of financial liabilities, it also requires firms to disclose the extent to which they have (1) encumbered (that is, permitted third parties to sell or re-pledge) inventory that has been pledged to obtain financing, and (2) received non-cash financial assets as collateral in secured lending transactions. In addition, firms need to disclose the fair value of any residual interests retained in an SPE. (SPEs are often a vehicle for the issuance of asset-collateralized securities, such as interests in the cash flows obtained from credit card receivables).1
The Securities and Exchange Commission requested the New York Stock Exchange (NYSE) and the NASD to determine the extent to which broker/dealers encumber pledged inventory, engage in secured financing transactions, or originate securitizations in which they retain residual interests. The NYSE and the NASD have included additional fields in the Balance Sheet of the FOCUS Report to capture such information. Accordingly, beginning with the December 2001 FOCUS Report, members will need to disclose the market value of proprietary securities that are not under their control as encumbered assets, and recognize, as assets and liabilities, non-cash collateral received in certain secured transactions, as well as indirect interests in certain securitized assets that do not qualify for sale treatment under Statement 140.
Application: FOCUS Report Part II Filers
Pages 2 and 3 of the FOCUS Report have been revised to accommodate the new disclosure and recognition Items; the specific line item fields are currently reflected in Web FOCUS.
Assets and liabilities reported on FOCUS solely to provide disclosure pursuant to Statement 140 will have no impact on the computation of net capital or the customer reserve calculation. Haircut charges will continue to apply unchanged to the inventory categories in Lines 7A through 7I. The amount reported in Item 120 on Line 7J will not be subject to an additional haircut charge. The amounts reported in Items 536 and 537 are included in allowable assets and the amounts in 1386 and 1387 are excluded from aggregate indebtedness.
1 Statement 140 became effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The collateral re-classification and recognition requirements became effective for financial statements for fiscal years ending after December 15, 2000. Statement 140 replaces, and yet is essentially a refinement of, Statement 125, which was released in June 1996.
2 Members are responsible for determining how Statement 140 applies to the member's use of customer securities, e.g., bank loan versus customer margin securities. Members should consult with their independent public accountants as to the recognition of such securities on the FOCUS Balance Sheet. If so recognized, the market value of these securities would also be disclosed on Line 15E, Item 536, and Line 23G, Items 1386 or 1686 on the FOCUS Balance Sheet.