The following discussion provides a narrative of our financial performance and
condition that should be read in conjunction with the accompanying financial
statements and related notes included under Part I, Item 1 of this Report.
Overview
We are a financial services company and provide a wide variety of financial
services to our clients. We operate in business lines such as retail brokerage,
investment advisory, insurance, technology development, and prime brokerage
through our wholly-owned subsidiaries and VIE.
Results in the businesses in which we operate are highly correlated to general
economic conditions and, more specifically, to the direction of the U.S. equity
and fixed-income markets. Market volatility, overall market conditions, interest
rates, economic, political, and regulatory trends, and industry competition are
among the factors which could affect us and which are unpredictable and beyond
our control. These factors affect the financial decisions made by market
participants who include investors and competitors, impacting their level of
participation in the financial markets. In addition, in periods of reduced
financial market activity, profitability is likely to be adversely affected
because certain expenses remain relatively fixed, including salaries and related
costs, as well as portions of communications costs and occupancy expenses.
Accordingly, earnings for any period should not be considered representative of
earnings to be expected for any other period.
Interest Rates
We are exposed to market risk from changes in interest rates. Such changes in
interest rates primarily impact revenue from interest, marketing, and
distribution fees. The Company primarily earns interest, marketing and
distribution fees from margin interest charged on clients' margin balances,
interest on cash and securities segregated for regulatory purposes, and
distribution fees from money market mutual funds in clients' accounts.
Securities segregated for regulatory purposes consist solely of U.S. government
securities. If prices of U.S. government securities within our portfolio
decline, we anticipate the impact to be temporary as we intend to hold these
securities to maturity. We seek to mitigate this risk by managing the average
maturities of our U.S. government securities portfolio and setting risk
parameters for securities owned, at fair value.
Technology Partner
In third quarter of 2022, Siebert reassessed its technology needs and entered
into a software license agreement with another technology provider for the
development of a new retail trading platform, which resulted in the termination
of our original technology relationship. We believe this new technology provider
will be key to creating a platform for the next generation of retail customers
and the termination of our original technology partnership had minimal impact on
our current operations. Refer to Note 1 - Organization and Basis of Presentation
for further detail on the accounting and financial impact of this transaction.
RISE
Arrangements with GSCO and JonesTrading
On August 30, 2021, GSCO notified RISE that its clearing arrangement with RISE
will be terminated. Due to the termination of RISE's clearing arrangement with
GSCO, substantially all the revenue producing customers of RISE have
transitioned to other prime service providers. Revenue and pre-tax income from
customers that have transitioned to other prime service providers was
approximately $3.2 million and $0.4 million, respectively, for the three months
ended September 30, 2021. Revenue and pre-tax income from customers that have
transitioned to other prime service providers was approximately $11.6 million
and $1.9 million, respectively, for the nine months ended September 30, 2021.
On October 7, 2021, RISE signed an agreement with JonesTrading Institutional
Services, LLC ("JonesTrading") to transfer certain customers of RISE to
JonesTrading. In exchange, JonesTrading agreed to pay RISE a percentage of the
net revenue produced by those clients less any related expenses. For the three
and nine months ended September 30, 2022, this agreement resulted in pre-tax
income of $61,000 and $137,000, respectively. There was no pre-tax income for
the three or nine months ended September 30, 2021 related to this agreement. We
do not anticipate the pre-tax income related to this agreement will offset the
reduction in pre-tax income from customers that have transitioned to other prime
service providers.
Operations of RISE
In 2022, RISE relaunched its business as a woman-owned and operated prime
brokerage with a specific emphasis on aligning the mission-driven initiatives
with the technological needs of institutional customers. Cynthia DiBartolo was
appointed as the new CEO of RISE, and Gloria E. Gebbia, one of Siebert's and
RISE's directors, was appointed as the Chief Impact Officer of RISE. In
addition, on January 21, 2022, RISE entered into an agreement with Hedge
Connection, a woman-owned fintech company founded by Lisa Vioni that provides
capital introduction software solutions for the prime brokerage industry.
Since the relaunch, management decided to change the strategic direction and
leadership of RISE. As part of this, Siebert entered into an agreement to
exchange its 7% ownership of Tigress for Tigress' ownership of RISE, and Siebert
may sell its remaining 17% ownership of Tigress to Gloria E. Gebbia. Siebert
also entered into an agreement with Hedge Connection whereby Siebert re-conveyed
20% of the common stock of Hedge Connection and the related option to acquire
100% of Hedge Connection.
As part of these agreements, Cynthia DiBartolo and Lisa Vioni resigned from
their respective positions within Siebert and RISE, and Ms. DiBartolo will not
stand for re-election for Siebert's Board of Directors. Refer to Note 20 -
Subsequent Events for further detail on these transactions.
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Management is assessing the future strategic direction of RISE, taking into
consideration current market conditions, demand trends, and resources. While we
believe our expertise and industry relationships will enable us to execute a new
strategic direction, our business plan for RISE is untested, and it is uncertain
whether our efforts will attract the customers and revenue necessary to compete
in the market.
Membership Interests of RISE
During the first quarter of 2022, RISE issued and Siebert sold membership
interests in RISE to certain employees, directors, and affiliates of RISE and
Siebert. As a result of these transactions, Siebert's ownership percentage in
RISE declined from 76% as of December 31, 2021 to approximately 44% as of March
31, 2022, and remained unchanged as of September 30, 2022. Management will
continue to assess whether RISE remains a VIE and whether Siebert remains the
primary beneficiary on an on-going basis. Refer to Note 1 - Organization and
Basis of Presentation for additional detail.
Client Account and Activity Metrics
The following tables set forth metrics we use in analyzing our client account
and activity trends for the periods indicated.
Client Account Metrics - Retail and Institutional Customer Net Worth
As of
September 30, 2022 December 31, 2021
Retail and institutional customer net
worth (in billions) $ 12.8 $ 17.3
Client Account Metrics - Retail Customers
As of
September 30, 2022 December 31, 2021
Retail customer net worth (in billions) $ 12.8 $ 16.8
Retail customer margin debit balances (in
billions) $ 0.4 $ 0.5
Retail customer credit balances (in
billions) $ 0.7 $ 0.8
Retail customer money market fund value
(in billions) $ 0.6 $ 0.8
Retail customer accounts 120,929 115,380
•
Retail customer net worth represents the total value of securities and cash in
the retail customer accounts after deducting margin debits
•
Retail customer margin debit balances represents credit extended to our
customers to finance their purchases against current positions
•
Retail customer credit balances represents client cash held in brokerage
accounts
•
Retail customer money market fund value represents all retail customers accounts
invested in money market funds
•
Retail customer accounts represents the number of retail customers
Client Account Metrics - Institutional Customers
As of
September 30, 2022 December 31, 2021
Institutional customer net worth (in billions) $ - $ 0.5
•
Institutional customer net worth represents the total value of securities and
cash in the institutional customer accounts after deducting margin debits and
short positions
Client Activity Metrics - Retail Customers
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Total retail trades 84,077 94,705 285,418 348,608
•
Total retail trades represents retail trades that generate commissions
Statements of Operations and Financial Condition
Statements of Operations for the Three Months Ended September 30, 2022 and 2021
Revenue
Commissions and fees for the three months ended September 30, 2022 were
$1,750,000 and decreased by $2,269,000 from the corresponding period in the
prior year, primarily due to the loss of institutional customers in RISE as well
as market conditions during the third quarter of 2022.
Interest, marketing and distribution fees for the three months ended September
30, 2022 were $5,204,000 and increased by $1,769,000 from the corresponding
period in the prior year, primarily due to an increase in margin interest,
12b-1fees, as well as interest on U.S. treasuries and cash deposits within MSCO
of an aggregate of $3.2 million, partially offset by the loss of interest income
from institutional customers in RISE of $1.4 million.
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Principal transactions and proprietary trading for the three months ended
September 30, 2022 were $953,000 and decreased by $2,971,000 from the
corresponding period in the prior year, primarily due to the factors discussed
below.
The decrease in realized and unrealized gain on primarily riskless principal
transactions was primarily due to market conditions.The increase in unrealized
loss on our portfolio of U.S. government securities was due to the following.
From January to September 2022, Siebert invested approximately $145 million
notional value in 1-year treasury bills and 2-year treasury notes in order to
enhance its yield on its excess 15c3-3 deposits. During 2022 there was an
increase in U.S. government securities yields, which created an unrealized loss
of approximately $1.4 million on our government securities portfolio for the
three months ended September 30, 2022. We intend to hold these securities to
maturity and as such, the aggregate unrealized loss of $4.2 million on the
portfolio as of September 30, 2022 will be returned over the duration of the
government securities, at a point no later than the maturity of the securities,
the latest maturity being August 2024. If the value of our portfolio of
government securities declines further, we will incur further unrealized losses;
however, we anticipate this loss to be temporary as we intend to hold these
securities to maturity. The portfolio of U.S. government securities represents
less than half of the total value of our cash and securities segregated for
regulatory purposes, and we believe that the level invested reduces the risk of
having to liquidate the securities prior to maturity.
Below is a summary of the change in the principal transactions and proprietary
trading line item as well as a maturity schedule of our portfolio of U.S.
government securities for the periods presented.
Three Months Ended September 30,
(Year over Year
2022 2021 Decrease)
Principal transactions and proprietary trading
Realized and unrealized gain on primarily
riskless principal transactions $ 2,339,000 $ 3,931,000 $ (1,592,000 )
Unrealized loss on portfolio of U.S.
government securities (1,386,000 ) (7,000 ) (1,379,000 )
Total Principal transactions and proprietary
trading $ 953,000 $ 3,924,000 $ (2,971,000 )
As of
September 30, December 31,
2022 2021
Market value of U.S. government securities
Maturing 03/23/2023, 3.750% Discount Rate $ 24,566,000 $ -
Maturing 05/18/2023, 2.700% Discount Rate 9,781,000 -
Maturing 08/31/2023, 1.375% Coupon Rate 9,742,000 -
Maturing 12/31/2023, 0.750% Coupon Rate 62,248,000 -
Maturing 01/31/2024, 0.875% Coupon Rate 23,892,000 -
Maturing 05/31/2024, 2.500% Coupon Rate 9,714,000 -
Maturing 08/15/2024, 0.375% Coupon Rate 2,792,000 2,966,000
Total Market value of investment in U.S. government securities $ 142,735,000 $ 2,966,000
Market making for the three months ended September 30, 2022 was $723,000 and
decreased by $791,000 from the corresponding period in the prior year, primarily
due to market conditions.
Stock borrow / stock loan for the three months ended September 30, 2022 was
$4,183,000 and increased by $718,000 from the corresponding period in the prior
year, primarily due to the growth of the business, expansion of our stock locate
revenues, and additional securities lending and locate counterparty
relationships.
Advisory fees for the three months ended September 30, 2022 were $437,000 and
decreased by $4,000 from the corresponding period in the prior year.
Other income for the three months ended September 30, 2022 was $1,086,000 and
increased by $833,000 from the corresponding period in the prior year, primarily
due to an increase in income from consulting services and termination payment
from a technology partner.
Operating Expenses
Employee compensation and benefits for the three months ended September 30, 2022
were $7,290,000 and decreased by $2,004,000 from the corresponding period in the
prior year, primarily due to a decrease in commissions payouts from RISE related
to the loss of our institutional customers and a decrease in fixed income
commissions and market making payouts, partially offset by an increase in
executive compensation.
Clearing fees, including execution costs for the three months ended September
30, 2022 were $398,000 and decreased by $588,000 from the corresponding period
in the prior year, primarily due to a decrease in our institutional clearing
costs as well as the recognition of our business development credit from our
agreement with NFS.
Technology and communications expenses for the three months ended September 30,
2022 were $1,214,000 and increased by $18,000 from the corresponding period in
the prior year primarily due to an increase in software license costs partially
offset by the decrease in technology costs associated with RISE.
Other general and administrative expenses for the three months ended September
30, 2022 were $1,072,000 and increased by $145,000 from the corresponding period
in the prior year, primarily due to an increase in travel and entertainment as
well as insurance costs.
Data processing expenses for the three months ended September 30, 2022 were
$932,000 and increased by $145,000 from the corresponding period in the prior
year, primarily due to an increase in service contracts.
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Rent and occupancy expenses for the three months ended September 30, 2022 were
$562,000 and increased by $121,000 from the corresponding period in the prior
year, primarily due to an increase in short term rent and lease termination
costs.
Professional fees for the three months ended September 30, 2022 were $874,000
and increased by $115,000 from the corresponding period in the prior year,
primarily due to an increase in legal and consulting fees related to certain
transactions.
Depreciation and amortization expenses for the three months ended September 30,
2022 were $240,000 and decreased by $114,000 from the corresponding period in
the prior year, primarily due to the completion of useful lives of assets within
STCH and write-offs of intangible assets related to RISE occurring in the third
quarter of 2021.
Referral fees for the three months ended September 30, 2022 were $0 and
decreased by $374,000 from the corresponding period in the prior year, primarily
due to the loss of our institutional clients.
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Loss on impairment for the three months ended September 30, 2022 was $0 and
decreased by $699,000 from the corresponding period in the prior year, primarily
due to the impairment of our RISE customer relationships intangible asset due to
the termination of our clearing arrangement with GSCO occurring in the third
quarter of 2021.
Interest expense for the three months ended September 30, 2022 was $108,000 and
increased by $22,000 from the corresponding period in the prior year, primarily
due to the interest from the mortgage with East West Bank in 2022, partially
offset by a decrease in interest from notes payable - related party.
Advertising and promotion expense for the three months ended September 30, 2022
was $58,000 and increased by $45,000 from the corresponding period in the prior
year, primarily due to an increase in promotional costs for various marketing
initiatives.
Earnings of (Loss from) Equity Method Investments in Related Parties
The loss from equity method investments in related parties for the three months
ended September 30, 2022 was $148,000 and increased by $148,000 from the
corresponding period in the prior year, primarily due to our proportional loss
from our investment in Tigress.
Provision For (Benefit From) Income Taxes
The provision for income taxes for the three months ended September 30, 2022 was
$473,000 and increased from the provision for income taxes by $208,000 from the
corresponding period in the prior year. The change from the corresponding period
in the prior year is primarily due higher pre-tax earnings. Refer to Note 15 -
Income Taxes for additional detail.
Net Loss Attributable To Noncontrolling Interests
As further discussed in Note 1 - Organization and Basis of Presentation, we
consolidate RISE's financial results into our financial statements and reflect
the portion of RISE not held by Siebert as a noncontrolling interests in our
financial statements. The net loss attributable to noncontrolling interests for
the three months ended September 30, 2022 was $85,000 and increased by $85,000
from the corresponding period in the prior year.
Statements of Operations for the Nine Months Ended September 30, 2022 and 2021
Revenue
Commissions and fees for the nine months ended September 30, 2022 were
$5,943,000 and decreased by $9,409,000 from the corresponding period in the
prior year, primarily due to the loss of institutional customers in RISE as well
as market conditions during 2022.
Interest, marketing and distribution fees for the nine months ended September
30, 2022 were $10,717,000 and increased by $200,000 from the corresponding
period in the prior year, primarily due to an increase in margin interest,
12b-1fees, as well as interest on U.S. treasuries and cash deposits within MSCO
of an aggregate of $4.4 million, partially offset by the loss of interest income
from institutional customers in RISE of $4.2 million.
Principal transactions and proprietary trading for the nine months ended
September 30, 2022 were $1,767,000 and decreased by $10,512,000 from the
corresponding period in the prior year, primarily due to the factors discussed
below.
The decrease in realized and unrealized gain on primarily riskless principal
transactions was primarily due to market conditions. The increase in unrealized
loss on our portfolio of U.S. government securities was due to the following.
From January to September 2022, Siebert invested approximately $145 million in
1-year treasury bills and 2-year treasury notes in order to enhance its yield on
its excess 15c3-3 deposits. During 2022, there was an increase in U.S.
government securities yields, which created an unrealized loss of approximately
$4.2 million on our government securities portfolio for the nine months ended
September 30, 2022. We intend to hold these securities to maturity and as such,
the aggregate unrealized loss of approximately $4.2 million on the portfolio as
of September 30, 2022 will be returned over the duration of the government
securities, at a point no later than the maturity of the securities, the latest
maturity being August 2024. If the value of our portfolio of government
securities declines further, we will incur further unrealized losses; however,
we anticipate this loss to be temporary as we intend to hold these securities to
maturity. The portfolio of U.S. government securities represents less than half
of the total value of our cash and securities segregated for regulatory
purposes, and we believe that the level invested reduces the risk of having to
liquidate the securities prior to maturity.
Below is a summary of the change in the principal transactions and proprietary
trading line item for the periods presented.
Nine Months Ended September 30,
(Year over Year
2022 2021 Decrease)
Principal transactions and proprietary trading
Realized and unrealized gain on primarily
riskless principal transactions $ 5,956,000 $ 12,300,000 $ (6,344,000)
Unrealized loss on portfolio of U.S. government
securities (4,189,000) (21,000) (4,168,000)
Total Principal transactions and proprietary
trading $ 1,767,000 $ 12,279,000 $ (10,512,000)
Market making for the nine months ended September 30, 2022 was $2,022,000 and
decreased by $2,864,000 from the corresponding period in the prior year,
primarily due to market conditions.
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Stock borrow / stock loan for the nine months ended September 30, 2022 was
$11,909,000 and increased by $4,357,000 from the corresponding period in the
prior year, primarily due to the growth of the business, expansion of our stock
locate revenues, and additional securities lending and locate counterparty
relationships.
Advisory fees for the nine months ended September 30, 2022 were $1,420,000 and
increased by $220,000 from the corresponding period in the prior year, primarily
due to overall expansion of the advisory business line.
Other income for the nine months ended September 30, 2022 was $2,589,000 and
increased by $1,607,000 from the corresponding period in the prior year,
primarily due to an increase in income from consulting services and termination
payment from a technology partner.
Operating Expenses
Employee compensation and benefits for the nine months ended September 30, 2022
were $21,752,000 and decreased by $5,453,000 from the corresponding period in
the prior year, primarily due to a decrease in commissions payouts from RISE
related to the loss of our institutional customers and a decrease in payouts
related to fixed income, market making, and commission revenue, partially offset
by an increase in payouts related to stock borrow / stock loan as well as an
increase in executive compensation.
Clearing fees, including execution costs for the nine months ended September 30,
2022 were $1,267,000 and decreased by $2,861,000 from the corresponding period
in the prior year, primarily due to a decrease in our institutional clearing
costs as well as the recognition of our business development credit from our
agreement with NFS.
Technology and communications expenses for the nine months ended September 30,
2022 were $3,374,000 and decreased by $163,000 from the corresponding period in
the prior year, primarily due to a decrease in technology costs related to RISE,
partially offset by an increase in other technology expenses.
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Other general and administrative expenses for the nine months ended September
30, 2022 were $2,939,000 and increased by $54,000 from the corresponding period
in the prior year, primarily due to an increase in travel and entertainment as
well as insurance costs, partially offset by a legal settlement occurring in
2021.
Data processing expenses for the nine months ended September 30, 2022 were
$2,135,000 and decreased by $144,000 from the corresponding period in the prior
year, primarily due to a decrease in development charges.
Rent and occupancy expenses for the nine months ended September 30, 2022 were
$1,491,000 and increased by $10,000 from the corresponding period in the prior
year.
Professional fees for the nine months ended September 30, 2022 were $2,602,000
and increased by $651,000 from the corresponding period in the prior year,
primarily due to an increase in legal and consulting fees related to certain
transactions.
Depreciation and amortization expenses for the nine months ended September 30,
2022 were $760,000 and decreased by $360,000 from the corresponding period in
the prior year, primarily due to the completion of useful lives of assets within
STCH and write-offs of intangible assets related to RISE occurring in 2021.
Referral fees for the nine months ended September 30, 2022 were $0 and decreased
by $1,134,000 from the corresponding period in the prior year, primarily due to
the loss of our institutional clients.
Loss on impairment for the nine months ended September 30, 2022 was $0 and
decreased by $699,000 from the corresponding period in the prior year, primarily
due to the impairment of our RISE customer relationships intangible asset due to
the termination of our clearing arrangement with GSCO occurring in the third
quarter of 2021.
Interest expense for the nine months ended September 30, 2022 was $335,000 and
increased by $57,000 from the corresponding period in the prior year, primarily
due to the interest from the mortgage with East West Bank in 2022.
Advertising and promotion expense for the nine months ended September 30, 2022
was $230,000 and increased by $217,000 from the corresponding period in the
prior year, primarily due to an increase in promotional costs for various
marketing initiatives.
Earnings of (Loss from) Equity Method Investments in Related Parties
The earnings of equity method investments in related parties for the nine months
ended September 30, 2022 was $67,000 and increased by $67,000 from the
corresponding period in the prior year, primarily due to our proportional income
from our investments in Tigress and Hedge Connection.
Provision For (Benefit From) Income Taxes
The benefit from income taxes for the nine months ended September 30, 2022 was
$836,000 and decreased from the provision for income taxes by $2,320,000 from
the corresponding period in the prior year. The change from the corresponding
period in the prior year is primarily due to the reversal of the uncertain tax
position related to the 2018 amended tax return coupled with lower pre-tax
earnings. Refer to Note 15 - Income Taxes for additional detail.
Net Loss Attributable to Noncontrolling Interests
As further discussed in Note 1 - Organization and Basis of Presentation, we
consolidate RISE's financial results into our financial statements and reflect
the portion of RISE not held by Siebert as a noncontrolling interests in our
financial statements. The net loss attributable to noncontrolling interests for
the nine months ended September 30, 2022 was $405,000, and increased by $405,000
from the corresponding period in the prior year.
Statements of Financial Condition as of September 30, 2022 and December 31, 2021
Assets
Assets as of September 30, 2022 were $1,025,147,000 and decreased by
$379,088,000 from December 31, 2021, primarily due to a decrease in securities
borrowed, receivables from customers, and cash and securities segregated for
regulatory purposes.
Liabilities
Liabilities as of September 30, 2022 were $970,901,000 and decreased by
$382,828,000 from December 31, 2021, primarily due to a decrease in securities
loaned and payables to customers.
Liquidity and Capital Resources
Overview
The indicators of our liquidity are cash and cash equivalents. Our cash and cash
equivalents are unrestricted and are used to fund our working capital needs. Our
cash and cash equivalents as of September 30, 2022 and December 31, 2021 were
$4.5 million and $3.8 million, respectively. We believe that our operating cash
flows, cash and cash equivalents, borrowing capacity, and overall access to
capital markets are sufficient to fund our operating, investing and financing
requirements for the foreseeable future.
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Sources of Liquidity and Planned Obligations
As of September 30, 2022, we had a variety of debt instruments and sources of
borrowing capability. As of September 30, 2022, the debt instruments and their
outstanding obligations were as follows: $4.4 million mortgage with East West
Bank, $2.9 million line of credit with East West Bank, and $3.3 million in notes
payable to related parties. We have an available line of credit for short term
overnight demand borrowing of up to $25 million with BMO Harris.
The ability to borrow an additional $5.0 million available on our line of credit
with East West Bank expired on July 22, 2022; however, we do not believe this
will impact our ability to fund our operations. As of September 30, 2022, we
were in compliance with all of our covenants related to our debt agreements.
As of September 30, 2022, the aggregate future payment obligations related to
these debt instruments were $6.5 million through 2026 and $4.0 million
thereafter. The remaining balance of our lease payments for operating leases
with initial terms of greater than one year was $0.3 million during 2022, and
$2.4 million thereafter.
On December 30, 2021, we purchased the Miami office building and are building
out this space to be one of our primary operating centers. The total estimated
cost for the build out is $1.5 million, with $338,000 financed through a
commitment with East West Bank and the remainder being cash.
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At the Market Offering
On May 27, 2022, we entered into a Capital on DemandTM Sales Agreement with
JonesTrading as agent, pursuant to which we may offer and sell, from time to
time through JonesTrading, shares of our common stock having an aggregate
offering amount of up to $9.6 million under our shelf registration statement on
Form S-3. For the nine months ended September 30, 2022, we did not sell any
shares pursuant to this Sales Agreement. Refer to Note 18 - Commitments,
Contingencies, and Other for additional detail.
Net Capital, Reserve Accounts, Segregation of Funds, and Other Regulatory
Requirements
MSCO is subject to the Uniform Net Capital Rules of the SEC (Rule 15c3-1) and
the Customer Protection Rule (15c3-3) of the Exchange Act and maintains capital
and segregated cash reserves in excess of regulatory requirements. Requirements
under these regulations may vary; however, MSCO has adequate reserves and
contingency funding plans in place to sufficiently meet any regulatory
requirements. In addition to net capital requirements, as a self-clearing
broker-dealer, MSCO is subject to cash deposit and collateral requirements with
clearing houses, such as the DTCC and OCC, which may fluctuate significantly
from time to time based upon the nature and size of clients' trading activity
and market volatility. RISE, as a member of FINRA, is subject to the SEC Uniform
Net Capital Rule 15c3-1 and the corresponding regulatory capital requirements.
For the three and nine months ended September 30, 2022 and 2021, MSCO and RISE
met all of their respective liquidity and regulatory capital requirements. Refer
to Note 16 - Capital Requirements for additional detail on our capital
requirements.
Off-Balance Sheet Arrangements
We enter into various transactions to meet the needs of customers, conduct
trading activities, and manage market risks and are, therefore, subject to
varying degrees of market and credit risk. In the normal course of business, our
customer activities involve the execution, settlement, and financing of various
customer securities transactions. These activities may expose us to off-balance
sheet risk in the event the customer or other broker is unable to fulfill its
contracted obligations and we are forced to purchase or sell the financial
instrument underlying the contract at a loss. There were no material losses for
unsettled customer transactions for the three and nine months ended September
30, 2022 and 2021. Refer to Note 17 - Financial Instruments with Off-Balance
Sheet Risk for additional detail.
Uncertain Tax Positions
We account for uncertain tax positions in accordance with the authoritative
guidance issued under ASC 740-10, which addresses the determination of whether
tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements. We may recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities based on the
technical merits of the position. The tax benefits recognized in the financial
statements from such position should be measured based on the largest benefit
that has a greater than fifty percent likelihood of being realized upon ultimate
settlement. ASC 740-10 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods and disclosure
requirements.
We recognize interest and penalties related to unrecognized tax benefits on the
provision for income taxes line on the statements of operations. Accrued
interest and penalties would be included on the related tax liability line on
the statements of financial condition.
As of September 30, 2022, and December 31, 2021, we recorded an uncertain tax
position of $1,583,000 and $2,418,000, respectively, related to various tax
matters. During the nine months ended September 30, 2022, we reversed our
uncertain tax position related to the 2018 amended tax return due to the
expiration of the statute of limitations.
Related Party Disclosures
During the course of business, we enter into various agreements and transactions
with related parties. Refer to Note 19 - Related Party Disclosures for
additional detail.
Fair Value Measurements
We have securities that are valued using the fair value framework under ASC 820
within our assets and liabilities as of September 30, 2022 and December 31,
2021. Refer to Note 5 - Fair Value Measurements for additional detail.
Impairment
We have concluded as of September 30, 2022, there has been no impairment to the
carrying value of Siebert's goodwill and tangible assets, and there are no
intangible assets. Refer to Note 10 - Goodwill and Intangible Assets, Net for
additional information.
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Segment
We concluded as of September 30, 2022, Siebert is comprised of a single
operating segment based on the factors related to management's decision-making
framework as well as management evaluating performance and allocating resources
based on assessments of Siebert from a consolidated perspective.
Critical Accounting Policies
Certain of our accounting policies that involve a higher degree of judgment and
complexity are discussed in Part I, Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations in our 2021 Form 10-K
as well as in the below section. As of September 30, 2022, there have been no
changes to our critical accounting policies or estimates other than the below.
Variable Interest Entities
We evaluate whether an entity is a VIE and determine if the primary beneficiary
status is appropriate on a quarterly basis. We consolidate a VIE for which we
are the primary beneficiary. When assessing the determination of the primary
beneficiary, we consider all relevant facts and circumstances, including factors
such as the power to direct the activities of the VIE that most significantly
impact its economic performance, the obligation to absorb the losses and/or the
right to receive the expected returns of the VIE. Through this evaluation, as of
September 30, 2022, we determined that RISE is a VIE and we are the primary
beneficiary, primarily due to Siebert's power to direct the activities of RISE
that most significantly impact its economic performance. Additionally, Siebert
may be obligated to fund RISE's operations at an amount that is disproportional
to its ownership percentage.
New Accounting Standards
We did not adopt any new accounting standards during the three and nine months
ended September 30, 2022. In addition, we evaluated other recently issued
accounting standards and do not believe that any of these standards will have a
material impact on our financial statements and related disclosures as of
September 30, 2022.
Regulatory Matters
We are party to certain claims, suits and complaints arising in the ordinary
course of business. As of September 30, 2022, we had one pending regulatory
matter related to operations of StockCross prior to our acquisition of
StockCross on January 1, 2020. Refer to Note 18 - Commitments, Contingencies,
and Other for additional detail.
Subsequent Events
On October 18, 2022, Siebert entered into a Reorganization Agreement with
Tigress and RISE entered into a Termination Agreement with Hedge Connection. As
of the date of this Report, we are assessing the financial impact of these
transactions which may result in a material one-time charge to our financial
statements. Refer to Note 20 - Subsequent Events for additional detail.
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