| FRIEDMAN BILLINGS RAMSEY GROUP INC ITEM 1A RISK FACTORS Investing in our company involves various risks, including the risk that you might lose your entire investment |
| Our results of operations depend upon many factors including our ability to implement our business strategy, the availability of opportunities to acquire assets and make loans, the level and volatility of interest rates, the cost and availability of short- and long-term credit, financial market conditions, and general economic conditions |
| The following discussion concerns some of the risks associated with our business |
| These risks are interrelated, and you should treat them as a whole |
| The risks described below are not the only risks that may affect us |
| Additional risks and uncertainties not presently known to us or not identified below, may also materially and adversely affect the value of our common stock and our ability to distribute dividends |
| General Risks Related to our Business We may fail to realize the anticipated benefits of our acquisition of First NLC in February 2005, which could have an adverse effect on our earnings and in turn negatively affect the value of our common stock and our ability to make distributions to our shareholders |
| We expect to realize financial and operating benefits including improved returns on invested capital in residential non-conforming mortgage loans originated by First NLC However, we cannot predict with certainty when these benefits will occur, or the extent to which they actually will be achieved, if at all |
| The integration of First NLC will also require substantial attention from management |
| The diversion of management attention and any difficulties associated with integrating First NLC could have a material adverse effect on our operating results and on the value of our common stock |
| We may not be able to manage our growth efficiently, which may adversely affect our results and may, in turn, negatively affect the market price of our common stock and our ability to make distributions to our shareholders |
| Over the last several years, we have experienced significant growth in our business activities, in the number of our employees and in our equity and assets |
| Our growth has required, and our growth will continue to require, increased investment in management and professionals, personnel, financial and management systems and controls and facilities, which could cause our operating margins to decline from historical levels, especially in the absence of revenue growth |
| In addition, as is common in the industry, our broker-dealer and mortgage loan origination subsidiaries will continue to be highly dependent on the effective and reliable operation of communications and information systems and business continuity plans |
| We believe that our anticipated future growth will require implementation of new and enhanced communications and information systems and training of our personnel to operate these systems |
| In addition, the scope of procedures for assuring compliance with applicable laws and regulations and NASD rules has changed as the size and complexity of our business has changed |
| As we continue to grow, we will continue to implement additional formal compliance procedures to 27 ______________________________________________________________________ [51]Table of Contents reflect our growth |
| Any difficulty or significant delay in the implementation or operation of existing or new systems, compliance procedures or the training of personnel could adversely affect the market price of our common stock and our ability to pay dividends |
| The voting power of our principal shareholders and other executive officers, directors and nominees may result in corporate action with which you do not agree and may discourage third party acquisitions of our company and prevent our shareholders from receiving any premium above market price for their shares |
| Eric F Billings has significant influence over our operations through his ownership of our common stock, which, as of March 10, 2006, represents approximately 12dtta2prca of the total voting power of our common stock |
| Billings serves as one of our directors and as our Chief Executive Officer |
| Billings and all of our other executive officers, directors and nominees, as a group, control, as of March 10, 2006, approximately 15dtta5prca of our total voting power |
| Billings and our other officers, directors and nominees have over us may have the effect of discouraging offers to acquire control of our company and may preclude holders of our common stock from receiving any premium above market price for their shares that may be offered in connection with any attempt to acquire control of our company without the approval of Mr |
| The trading prices of our Class A common stock may be adversely affected by factors outside of our control |
| Any negative changes in the public’s perception of the prospects for companies in the REIT, the mortgage-backed securities, the merchant banking, or non-conforming mortgage loan origination industries, or in the investment banking, securities brokerage, asset management, or financial services industries could depress our stock price regardless of our results |
| The following factors could contribute to the volatility of the price of our Class A common stock: • actual or unanticipated variations in our quarterly results; • changes in our level of dividend payments; • new products or services offered by us and our competitors; • changes in our financial estimates by securities analysts; • conditions or trends in the investment or financial services industries in general; • changes in interest rate environments and the mortgage market that cause our borrowing costs to increase, our reported yields on our mortgage-backed securities to decrease or that cause the value of our mortgage-backed securities to decrease; • increased defaults under non-conforming residential mortgage loans originated by First NLC and held in our portfolio; • announcements by us of significant acquisitions, strategic partnerships, investments or joint ventures; • changes in the market valuations of the companies in which we make principal investments; • negative changes in the public’s perception of the prospects of investment or financial services or non-conforming residential mortgage loan originating companies; • changes in the regulatory environment in which our business operates; • general economic conditions such as a recession, or interest rate or currency rate fluctuations; • any obstacles in continuing to qualify as a REIT, including changes in law applicable to REITs; • additions or departures of our key personnel; and • additional sales of our securities |
| 28 ______________________________________________________________________ [52]Table of Contents We may experience significant fluctuations in quarterly operating results due to the volatile nature of the investment banking and securities business and the sensitivity of our principal investing business to changes in interest rates and fluctuations in the stock market and we may therefore fail to meet profitability or dividend expectations, which may, in turn, affect the market price of our Class A common stock and our ability to pay dividends to our stockholders |
| Our revenues and operating results may fluctuate from quarter to quarter and from year to year due to a combination of factors, including: • the number and size of underwriting and merger and acquisition transactions completed by our investment banking group, and the level and timing of fees received from those transactions; • changes in the earnings from our mortgage-backed securities and other principal investments resulting from market volatility, changes in interest rates and volatility in mortgage loan prepayment rates; • changes in the market valuations of the investments of our managed funds and of the companies in which we have made principal investments; • changes in earnings from non-conforming residential mortgage loans originated by First NLC and held in our portfolio resulting from increased borrower defaults; • access to public markets or other exit strategies for companies in which we have made an investment as principal; • the recognition of profits or losses on principal investments or with respect to warrants or other equity-linked securities received in connection with capital-raising activities; • the level of institutional and retail brokerage transactions and the level of commissions received from those transactions; • the timing of recording of asset management fees and special allocations of income, if any; • the level of residential real estate activity and its effect on our mortgage loan originations; • variations in expenditures for personnel, consulting and legal expenses, and expenses of establishing new business units, including technology expenses; and • other variations in expenditures, including marketing and sponsorship |
| Any one of these factors could adversely affect the market price of our common Class A stock and our ability to pay dividends to our stockholders |
| An increase in market interest rates may have an adverse effect on the market price of our common stock |
| One of the factors that investors may consider in deciding whether to buy or sell our common stock is our dividend rate as a percentage of our share price, relative to market interest rates |
| If market interest rates increase, prospective investors may desire a higher dividend rate on our common stock or seek securities paying higher dividends or interest |
| For instance, if interest rates rise without an increase in our dividend rate, the market price of our common stock could decrease because potential investors may require a higher yield on our common stock as market rates on interest-bearing securities, such as bonds, rise |
| We cannot assure you that we will be able to maintain or increase our current dividend rate |
| As a REIT, we must distribute annually at least 90prca of our REIT taxable income to our shareholders, other than any net capital gain and excluding the retained earnings of our taxable REIT subsidiaries |
| We currently anticipate that our taxable REIT subsidiaries will retain most or all of their earnings and profits, which would make these earnings and profits unavailable for distribution to our shareholders |
| As a result, we may need to generate sufficient taxable income outside of our taxable REIT subsidiaries to maintain our current dividend rate |
| There can be no assurance that we will be able to generate sufficient taxable income to maintain this dividend rate or maintain our tax status as a REIT 29 ______________________________________________________________________ [53]Table of Contents Loss of our 1940 Act exemption would adversely affect us and negatively affect the market price of our Class A common stock and the ability to pay dividends to our stockholders |
| We believe that we currently are not, and we intend to continue operating our company so that we will not become, regulated as an investment company under the 1940 Act, because we are “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate |
| ” Specifically, we have invested, and intend to continue investing, at least 55prca of our assets in mortgage loans or mortgage-backed securities that represent the entire ownership in a pool of mortgage loans and at least an additional 25prca of our assets in mortgages, mortgage-backed securities, securities of REITs, and other real estate-related assets |
| If we fail to qualify for this exclusion from regulation under the 1940 Act, we could be required to restructure our activities |
| For example, if the market value of our investments in equity securities were to increase by an amount that resulted in less than 55prca of our assets being invested in mortgage loans or mortgage-backed securities that represent the entire ownership in a pool of mortgage loans, we might have to sell equity securities in order to qualify for exclusion from regulation under the 1940 Act |
| The sale could occur under adverse market conditions |
| Each of our subsidiaries also qualifies for an exemption from regulation as an investment company under the 1940 Act |
| Failure to procure adequate capital and funding would adversely affect our results and may, in turn, negatively affect the market price of our Class A common stock and our ability to pay dividends to our stockholders |
| We depend upon the availability of adequate funding and capital for our operations |
| For example, we invest in mortgage-backed securities funded by short-term borrowings |
| In addition, our broker-dealer and financial services subsidiaries are dependent on the availability of adequate capital to satisfy applicable regulatory capital requirements |
| As a REIT, we are required to distribute annually at least 90prca of our taxable income, other than any net capital gain and excluding taxable REIT subsidiary earnings, to our shareholders and are therefore not able to retain our earnings for new investments |
| However, our taxable REIT subsidiaries are able to retain (and likely will continue to retain) earnings for investment in new capital, subject to the various REIT requirements |
| We have historically satisfied our capital needs from equity contributions, internally generated funds and loans from third parties |
| We cannot assure you that any, or sufficient, funding or capital will continue to be available to us in the future on terms that are acceptable to us |
| In the event that we cannot obtain sufficient funding on acceptable terms, there may be a negative impact on the market price of our Class A common stock and our ability to pay dividends |
| We face intense competition for personnel which could adversely affect our business and in turn negatively affect the market price of our common stock and our ability to pay dividends to our stockholders |
| Our business is dependent on the highly skilled, and often highly specialized, individuals we employ |
| Retention of specialists to manage our mortgage-backed securities portfolio, research analysts, private equity specialists, sales and trading personnel, investment banking personnel, asset management personnel, and technology, lending, management and administrative professionals are particularly important to our prospects |
| Competition for the recruiting and retention of employees may increase elements of our compensation costs |
| We cannot assure you that, in order to support our growth plans, we will be able to recruit and hire a sufficient number of new employees with the desired qualifications in a timely manner |
| We regularly review our compensation policies, including stock incentives |
| Nonetheless, our incentives may be insufficient in light of competition for experienced professionals in the investment industry, particularly if the value of our stock declines or fails to appreciate sufficiently to be a competitive source of a portion of professional compensation |
| Increased compensation costs could adversely affect the amount of cash available for distribution to shareholders and our failure to recruit and retain qualified employees could materially and adversely affect our future operating results |
| 30 ______________________________________________________________________ [54]Table of Contents We are dependent on a small number of key senior professionals and loss of the professionals could adversely affect our results and may, in turn, negatively affect the market price of our Class A common stock and our ability to pay dividends |
| We generally do not currently have employment agreements with our senior officers and other key professionals |
| The loss of professionals, particularly a senior professional with a broad range of contacts in an industry, could materially and adversely affect our operating results |
| Our investment banking strategy is to establish relationships with prospective corporate clients in advance of any transaction, and to maintain these relationships by providing advisory services to corporate clients in equity, debt and merger and acquisition transactions |
| These relationships depend in part upon the individual employees who represent us in our dealings with our clients |
| From time to time, other companies in the investment industry have experienced losses of professionals in all areas of the investment business |
| The level of competition for key personnel includes competition from non-brokerage US and foreign financial services companies, commercial banks, other investment banks and venture capital firms, all of which may target or increase their efforts in some of the same industries that we serve |
| In particular, we face competition for experienced research analysts, sales and trading personnel, and investment bankers of the type on which our business is highly dependent |
| We cannot assure you that losses of key personnel will not occur |
| We are highly dependent on systems and third parties, and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our Class A common stock and our ability to pay dividends |
| Our business is highly dependent on communications and information systems, including systems provided by our clearing brokers, for our mortgage brokers and borrowers and by and for other third parties |
| Any failure or interruption of our systems, the systems of our clearing brokers, mortgage brokers, loan servicers or third-party trading or information systems could cause delays or other problems in our securities trading activities, including mortgage-backed securities trading activities and mortgage loan origination and servicing capabilities, which could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay dividends |
| In addition, our clearing brokers provide elements of our principal disaster recovery system |
| We cannot assure you that we, our clearing brokers or our mortgage brokers will not suffer any systems failure or interruption, including one caused by a hurricane, earthquake, fire, other natural disaster, power or telecommunications failure, act of God, act of war, terrorist attack, pandemic or other emergency situation, or that we or our clearing brokers’ back-up procedures and capabilities in the event of any such failure or interruption will be adequate |
| The occurrence of any failures or interruptions could significantly harm our business |
| We may not be able to keep up with rapid technological change, which may adversely affect the market price of our Class A common stock and our ability to pay dividends |
| There are significant technical and financial risks in the development of new services and products or enhanced versions of existing services and products |
| We cannot assure you that we will be able to: • develop or obtain the necessary technologies; • effectively use new technologies; • adapt our services and products to evolving industry standards; • develop, introduce and market in a profitable manner our services and products; or • enhance or create new services and products |
| If we are unable to develop and introduce enhanced or new services or products quickly enough to respond to market or customer requirements, or if we or our services and products do not achieve market acceptance, our 31 ______________________________________________________________________ [55]Table of Contents business, financial condition and operating results will be materially adversely affected and our cash available for distribution to stockholders may be negatively impacted |
| Indemnification agreements with our directors and officers may increase the costs to us of litigation against our company |
| Our charter documents allow indemnification of our officers, directors and agents to the maximum extent permitted by Virginia law, as may the charter documents of our subsidiaries in their respective jurisdictions of incorporation |
| We have entered into indemnification agreements with these persons |
| In the future we may be the subject of indemnification assertions under these charter documents or agreements by our officers, directors or agents who are or may become defendants in litigation |
| Amounts paid pursuant to these indemnification agreements could adversely affect our financial results and the amount of cash available for distribution to stockholders |
| Risks Related to Investment Banking, Institutional Brokerage, Sales and Trading, Asset Management and Other Fee-Based Financial Services Businesses Operated by us through our Taxable REIT Subsidiaries We may be adversely affected by the general risks of the financial services and investment banking business |
| Through taxable REIT subsidiaries, including FBR & Co |
| (our primary broker-dealer subsidiary), we operate investment banking, trading, brokerage, asset management and other fee-based financial services businesses |
| The financial and investment business is, by its nature, subject to numerous and substantial risks, particularly in volatile or illiquid markets and in markets influenced by sustained periods of low or negative economic growth |
| As a financial services and investment banking firm, we and our operating results may be adversely affected by a number of factors, which include: • the risk of losses resulting from the ownership or underwriting of securities; • the risks of trading securities for our own account (ie, principal activities) and for our customers; • reduced cash inflows from investors into asset management businesses; • the risk of losses from lending, including to small, privately-owned companies; • counterparty failure to meet commitments; • customer default and fraud; • customer complaints; • employee errors, misconduct and fraud (including unauthorized transactions by traders); • failures in connection with the processing of securities transactions; • litigation and arbitration; • the risks of reduced revenues in periods of reduced demand for public offerings or reduced activity in the secondary markets; and • the risk of reduced fees and commissions we receive for selling securities on behalf of our customers (ie, underwriting spreads) |
| Any one of these factors could adversely affect the market price of our Class A common stock and our ability to pay dividends |
| 32 ______________________________________________________________________ [56]Table of Contents We may experience significant losses if the value of our trading and investment accounts deteriorates, which could negatively affect the market price of our Class A common stock and our ability to pay dividends |
| From time to time in connection with underwriting, asset management, trading and other activities, we own large amounts, or have commitments to purchase large amounts, of the securities of companies |
| ” We conduct our securities trading, market-making and investment activities primarily for our own account, which subjects our capital to significant risks |
| We are exposed to risks which include market, credit, leverage, real estate, counterparty and liquidity risks, which could result in losses |
| These activities often involve the purchase, sale or short sale of securities as principal in markets that may be characterized as relatively illiquid or that may be particularly susceptible to rapid fluctuations in liquidity and price |
| These losses could negatively affect the market price of our Class A common stock and our ability to pay dividends |
| We may experience reduced revenues during periods of declining prices or reduced demand for public offerings and merger and acquisition transactions or reduced activity in the secondary markets in sectors on which we have historically focused, which could negatively affect the market price of our Class A common stock and our ability to pay dividends |
| Our revenues are, and our revenues are likely to be, lower during periods of declining prices or inactivity in the markets for securities of companies in the sectors in which we have historically focused |
| These markets have historically experienced significant volatility not only in the number and size of equity offerings and merger and acquisition transactions, but also in the aftermarket trading volume and prices of securities |
| In particular, information technology and biotechnology company stocks, which are an area of focus in our investment banking and brokerage activities, are extremely volatile |
| However, other sectors are also characterized by volatility from time to time |
| A significant amount of our revenues historically resulted from underwritten transactions by companies in our targeted industries, from aftermarket trading for such companies, and from proprietary investments and fees and incentive income received from assets under management |
| Underwriting activities in those targeted industries can decline for a number of reasons, including increased competition for underwriting business or periods of market uncertainty caused by concerns over inflation, rising interest rates or related issues |
| For example, during the second half of 1998, the market for equity offerings deteriorated and the market prices of many of the securities which we had underwritten and made a market in, and securities in which we and our asset management vehicles were invested, were subject to considerable volatility and declines in price |
| These factors led to a significant reduction in underwriting revenues, to significant market making losses for us, and to a significant reduction in the stream of fees received from our asset management vehicles |
| Underwriting and brokerage fees can also be materially adversely affected if a company or industry segment associated with these activities disappoints in quarterly performance relative to analysts’ expectations or by changes in long-term prospects |
| These losses in revenue could negatively affect the market price of our Class A common stock and our ability to pay dividends |
| We may experience reduced investment banking or other revenues due to economic, political and market conditions, which could negatively affect the market price of our Class A common stock and our ability to pay dividends |
| Reductions in public offering, merger and acquisition, portfolio company valuation and securities trading activities, due to any one or more changes in economic, political or market conditions could cause our revenues from investment banking, trading, lending, sales and asset management activities to decline materially |
| Many national and international factors affect the amount and profitability of these activities, including: • economic, political and market conditions; • level and volatility of interest rates and the impact on prepayment speeds of mortgage-backed securities; 33 ______________________________________________________________________ [57]Table of Contents • legislative and regulatory changes; • currency values; • inflation; • flows of funds into and out of mutual funds, pension funds and venture capital funds; and • availability of short-term and long-term funding and capital |
| Fluctuations in revenues and net income also occur due to the overall level of market activity which, among other things, affects the flow of investment dollars and the size, number and timing of investment banking transactions |
| In addition, a downturn in the level of market activity can lead to a decrease in brokerage revenues |
| Therefore, revenues and operating results in any particular period may not be representative of full year results and may vary significantly from year to year and from quarter to quarter |
| We may experience reduced revenues due to declining market volume, price and liquidity, which may negatively affect the market price of our Class A common stock and our ability to pay dividends |
| Our revenues may decrease in the event of a decline in the market volume of securities transactions, prices or liquidity |
| Declines in the volume of securities transactions and in market liquidity generally result in lower revenues from trading activities and commissions |
| Lower price levels of securities may also result in a reduced volume of underwriting transactions, and could cause a reduction in our revenues from investment banking fees, as well as losses from declines in the market value of securities held by us in trading and investment, lending and underwriting positions, reduced asset management fees and incentive income and withdrawals of funds under management |
| Sudden sharp declines in market values of securities can result in illiquid markets, lack of access to lending and the failure of issuers and counterparties to perform their obligations, as well as increases in claims and litigation, including arbitration claims from customers |
| In such markets, we have incurred, and may incur in the future, reduced revenues or losses in our principal trading, market-making, investment banking, lending and asset management activities |
| Such losses could negatively affect the market price of our Class A common stock and our ability to pay dividends |
| We may incur losses associated with underwriting activities, which could adversely affect results and may negatively affect the market price of our Class A common stock and the ability to pay dividends |
| Participation in underwritings involves both economic and regulatory risks |
| As an underwriter, FBR & Co |
| may incur losses if it is unable to resell the securities it is committed to purchase or if it is forced to liquidate its commitment at less than the agreed purchase price |
| In addition, the trend, for competitive and other reasons, toward larger commitments on the part of lead underwriters means that, from time to time, an underwriter may retain significant ownership of individual securities |
| Finally, we have witnessed a general decrease, and expected to continue to see decreases in underwriting spreads as a result of increased underwriting competition |
| These factors, along with our concentration in a limited number of industry sectors, may negatively affect our financial results, the market price of our Class A common stock and our ability to pay dividends |
| We focus on relatively few industries, which may limit our revenues and may adversely affect our operating results and negatively impact the market price of our common stock and our ability to pay dividends |
| is dependent on revenues related to securities issued by companies in specific industry sectors |
| The financial services, real estate, technology, healthcare, energy and diversified industries sectors account for the majority of our investment banking, asset management, institutional trading and research activities |
| Therefore, any downturn in the market for the securities of companies in these industries, or factors affecting such companies, could adversely affect our operating results and financial condition |
| For example, in 1998 and 1999, the specialty finance companies, equity REITs and mortgage REITs on which FBR & Co |
| focused 34 ______________________________________________________________________ [58]Table of Contents experienced a significant downturn which, in turn, adversely affected us |
| The frequency and size of securities offerings can vary significantly from industry to industry due to economic, legislative, regulatory and political factors |
| Underwriting activities in a particular industry can decline for a number of reasons |
| We also derive a significant portion of our revenues from institutional brokerage (sales and trading) transactions related to the securities of companies in these sectors |
| Our revenues from such institutional brokerage transactions may decline when underwriting activities in these industry sectors decline, the volume of trading on The Nasdaq Stock Market or the New York Stock Exchange declines, or when industry sectors or individual companies report results below investors’ expectations |
| The timing of recognition of investment banking revenue from a significant transaction can materially affect our quarterly operating results, which may negatively affect the market price of our common stock and our ability to pay dividends |
| records its revenues from an underwriting transaction only when the underwritten transaction is completed |
| records revenues from merger and acquisition transactions only when it has rendered the services and the client is contractually obligated to pay |
| Generally, most of FBR & Co |
| ’s fee is earned only after the transaction closes |
| Accordingly, the timing of FBR & Co |
| ’s recognition of revenue from a significant transaction can materially affect its quarterly operating results |
| has structured its investment banking operations based on expectations of a high level of demand for underwriting and corporate finance transactions |
| As a result, we have fixed costs associated with those businesses consistent with those expected levels of business |
| Accordingly, those businesses could experience losses if demand for these transactions is lower than expected |
| We have potential conflicts of interest with our executive officers and employees which could result in decisions that are not in your best interests |
| From time to time, our executive officers and employees may invest in private or public companies in which we, or one of our affiliates, is or could potentially be an investor or for which we carry out investment banking assignments, publish research or act as a market maker |
| In addition, we have in the past and will likely in the future organize businesses, such as our hedge, private equity and venture capital funds, in which our employees may acquire minority interests or profit interests |
| There are risks that, as a result of such investment or profit interest, an executive officer or employee may have incentives to take actions that would conflict with our best interests |
| We believe that we have in place compliance procedures and practices designed to monitor the activities of our executive officers and employees in this regard, but we cannot guarantee that these procedures and practices will be effective |
| Our access to confidential information through the broker-dealer business and investment management business may restrict our ability to take action with respect to some investments, which, in turn, may negatively affect the potential return to our stockholders |
| We may obtain confidential information about the companies in which we have invested or may invest |
| If we do possess confidential information about such companies, there may be restrictions on the ability to dispose of, increase the amount of, or otherwise take action with respect to an investment in those companies |
| Our management of investment funds could create a conflict of interest to the extent the fund managers are aware of inside information concerning potential investment targets or to the extent the fund managers wish to invest in companies for which FBR & Co |
| is underwriting securities |
| We believe that we have in place compliance procedures and practices designed to ensure that inside information is not used for making investment decisions on behalf of the funds and to monitor funds invested in our investment banking clients |
| We cannot assure you, however, that these procedures and practices will be effective |
| In addition, this conflict and these procedures and practices may limit the freedom of our fund managers to make potentially profitable investments on behalf of those funds, which could have an adverse effect on our operations |
| These limitations imposed by access to confidential information could therefore negatively affect the potential market price of our Class A common stock and the ability to pay dividends |
| 35 ______________________________________________________________________ [59]Table of Contents Our business is dependent on cash inflows to mutual funds and other pooled investment vehicles, which could result in our experiencing operating losses if cash flows slow, and negatively impact cash available for distribution to shareholders |
| A slowdown or reversal of cash inflows to mutual funds and other pooled investment vehicles could lead to lower underwriting and brokerage revenues for us since mutual funds and other pooled investment vehicles purchase a significant portion of the securities offered in public offerings underwritten by FBR & Co |
| and subsequently traded in the secondary markets |
| Demand for new equity offerings has been driven in part by institutional investors, particularly large mutual funds and hedge funds, seeking to invest on behalf of their investors |
| Our brokerage business is particularly dependent on the institutional market |
| The public may redeem mutual funds as a result of a decline in the market generally or as a result of a decline in mutual fund net asset values |
| To the extent that a decline in cash inflows into mutual funds reduces demand by fund managers for initial public or secondary offerings, FBR and our business and results of operations could be materially adversely affected |
| Moreover, a slowdown in investment activity by mutual funds may have an adverse effect on the securities markets generally |
| Such environments may adversely affect the market price of our Class A common stock and our ability to pay dividends |
| Our investment banking and other financial services businesses face significant competition from larger financial services firms with greater resources which could reduce our market share and harm our financial performance which may, in turn, adversely affect the market price of our Class A common stock and ability to pay dividends |
| We are engaged in, through our broker-dealer subsidiaries and other taxable REIT subsidiaries, the highly competitive financial services, underwriting, securities brokerage, principal investing, asset management and banking businesses |
| We compete directly with large Wall Street securities firms, established venture capital funds, securities subsidiaries of major commercial bank holding companies, major regional firms, smaller “niche” players and those offering competitive services via the Internet |
| To an increasing degree, we also compete for various segments of the financial services business with other institutions, such as commercial banks, savings institutions, mutual fund companies, life insurance companies and financial planning firms |
| Our industry focus also subjects us to direct competition from a number of specialty securities firms, smaller investment banking boutiques and venture capital funds that specialize in providing services to those industry sectors |
| If we are not able to compete successfully in this environment, our business, operating results and financial condition will be adversely affected, which may adversely affect the cash available for distribution to stockholders |
| Competition has increased because of acquisitions of securities firms by commercial banks, as well as internal expansion by commercial banks into the securities business |
| This competition could adversely affect our operating results |
| We face intense competition in the asset management business from a variety of sources, including commercial banks, venture capital funds, private equity funds, mutual funds, hedge funds and other asset managers |
| We compete for investor funds as well as for the opportunity to participate in transactions |
| Many of our competitors have greater personnel and financial resources than we do |
| Larger competitors are able to advertise their products and services on a national or regional basis and may have a greater number and variety of distribution outlets for their products, including retail distribution |
| In addition, some competitors have a much longer history of investment activities than we do and, therefore, may possess a relative advantage with regard to access to business and capital |
| We are subject to extensive government regulation which could adversely affect our results, which may, in turn, affect the market price of our Class A common stock and our ability to make pay dividends |
| Both the securities and mortgage loan origination and acquisition businesses are subject to extensive regulation under federal and state laws in the United States, and, in the case of the securities business, also is 36 ______________________________________________________________________ [60]Table of Contents subject to regulation in the foreign countries in which we will conduct investment banking and securities brokerage and asset management activities |
| Compliance with these laws, rules and regulations can be expensive, and any failure to comply could have a material adverse effect on our operating results |
| Compliance with many of the regulations applicable to us involves a number of risks, particularly in areas where applicable regulations may be subject to interpretation |
| In the event of non-compliance with an applicable regulation, governmental regulators and self-regulatory organizations (“SROs”) such as the NASD may institute administrative or judicial proceedings that may result in: • censure, fines or civil penalties (including treble damages in the case of insider trading violations); • issuance of cease-and-desist orders; • deregistration or suspension of the non-compliant broker-dealer or investment adviser; • suspension or disqualification of the broker-dealer’s officers or employees; • suspension or revocation of licenses and approvals necessary to acquire, fund or originate mortgage loans; or • other adverse consequences |
| The imposition of any penalties or orders on us could have a material adverse effect on our operating results and financial condition |
| The Company is subject to various reviews, examinations, investigations and |