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FINRA Issues Guidance to Small Firms on Annual Assessment and Net Capital due to COVID-19

Due to the economic impact of  COVID-19, especially on smaller broker-dealers, FINRA  will allow small firms more time to pay their Annual Assessment (comprised of the Gross Income Assessment and the Personal Assessment).  Also, FINRA has amended, at least for now, the treatment of the assessment pursuant to net capital rules.  We had previously addressed FINRA guidance to firms on net capital treatment of PPP loans here, and guidance to individuals receiving PPP loans here.  This further guidance speaks directly to the Annual Assessment for small firms.

The Annual Assessment is normally invoiced to firms in April and payment in full of the Annual Assessment is due by the end of the month.  However, FINRA has stated that small firms, identified under the FINRA By-Laws as firms with no more than 150 registered representatives, are permitted to treat the invoices for the Annual Assessment as if they were billed on August 1, 2020.  In addition, small firms are now allowed to spread out their payments, at their election, and “pay 50% of the amount due on September 1, 2020, and the remaining 50% on December 1, 2020”.  FINRA has also stated that any firm “that exits FINRA membership before September 1, 2020, will not be expected to pay the annual assessment for 2020.”

For purposes of net capital treatment, FINRA warns that small firms should apply Generally Accepted Accounting Principles (GAAP), in combination with FINRA net capital rules, to “determine whether they should accrue a liability for the 2020 annual assessment”.  If a small firm deems that it has accrued a liability for the unpaid annual assessment, FINRA states that “small firms will be permitted, until September 1, 2020, to add back the amount of such liability to their net worth for purposes of computing net capital and, to the extent applicable, to exclude the liability from their aggregate indebtedness in computing their minimum net capital requirement”.  Any liability or “add back” should be identified in either Item 3525, Item 1380 or FOCUS Report Part II or IIA.

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Pete S. Michaels

Member / Co-Chair, Financial Services Practice

Pete S. Michaels is a Mintz attorney who focuses his practice on securities litigation, regulatory proceedings involving financial service companies and products, and compliance matters. He represents financial services firms and insurance companies and their employees, directors, and officers.