FINRA Offers Guidance on Net Capital Computation of Covered Loans


The Financial Industry Regulatory Authority (FINRA) is providing additional guidance for member firms and temporary relief from certain rules and requirements, ranging from best execution to reporting requirements, in light of the COVID-19 pandemic. As broker-dealers grapple with understanding and applying for the financial relief programs that are available through the CARES Act, FINRA is offering guidance on how firms can benefit from these programs while staying in compliance.

In addition to traditional Small Business Administration (SBA) funding programs, the CARES Act established new temporary programs to address the COVID-19 outbreak, including the Paycheck Protection Program and the Economic Injury Disaster Loan advance.

FINRA addresses these programs in its Frequently Asked Questions Related to Regulatory Relief Due to the Coronavirus Pandemic. Specifically, the FAQ addresses net capital treatment of covered loans under the CARES Act, and answers the following questions:

  • Q: Can member firms add back to net capital amounts that they expect to be forgiven under Section 1106 of the CARES Act?
    • A:  A member firm that has included a covered loan as a liability on its balance sheet may add the Forgivable Expense Amount back to net capital to the extent the firm has recorded expenses for the costs and payments making up the Forgivable Expense Amount, provided that the add-back to net capital may not exceed the amount of the balance sheet liability for the covered loan that the firm reasonably expects to be forgiven pursuant to Section 1106 (taking into account among other things the limits under Section 1106(d) on the amount of forgiveness).  Since the add-back cannot be greater than the balance sheet liability for the covered loan, the add-back cannot increase net capital by more than the balance sheet liability for the covered loan.
    • A member firm that makes such an add-back must create and retain documentation of the basis of the add-back, including a record of its computation of the Forgivable Expense Amount, a record of the costs and payments making up that amount, and a record of its estimate of any limits under Section 1106(d) with the basis for such estimate.  On the firm’s FOCUS Reports, the add-back must be reported in Item 3525 (Other (deductions) or allowable credits).
  • Q: Can a member firm that has obtained a covered loan exclude the amount of the covered loan from aggregate indebtedness?
    • A: A member firm that has included a covered loan as a liability on its balance sheet may exclude such covered loan from aggregate indebtedness during the 8-week “covered period” after the origination of such covered loan.  After the end of the covered period, such firm may exclude from aggregate indebtedness the amount of its liability for such covered loan that the firm is permitted to add back to net capital, as described above.  Any part of the covered loan excluded from aggregate indebtedness may be included on the firm’s Statement of Financial Condition in its FOCUS Report Part II in Item 1380 (Other – Accounts payable and accrued liabilities and expenses”) or in Item 1385 (Accounts payable, accrued liabilities, expenses and other) in its FOCUS Report Part IIA.

Visit FINRA’s FAQ for more information on COVID-19 relief and guidance.

Note that FINRA has stated that “when coronavirus-related risks decrease, member firms should expect to return to meeting any regulatory obligations for which relief has been provided.”

At Kaufman Rossin, we are watching the latest regulatory developments related to the COVID-19 crisis and will be sharing more information as it becomes available. Contact me or another member of our risk advisory services team to learn more about FINRA’s guidance and what it could mean for your firm.

Bao Nguyen, CAMS, CFE, CRCP, is a Risk Advisory Services Principal- Broker-Dealer & RIA Leader at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.

Stephanie Richards is a Broker-Dealer & Investment Adviser Services Director at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.

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