| SIEBERT FINANCIAL CORP Item 1A RISK FACTORS Securities market volatility and other securities industry risk could adversely affect our business Our principal business activities include discount retail broker-dealer operations, as well as investment banking, institutional sales and other related business lines |
| Like other businesses operating in the securities industry, our business is directly affected by volatile trading markets, fluctuations in the volume of market activity, economic and political conditions, upward and downward trends in business and finance at large, legislation and regulation affecting the national and international business and financial communities, currency values, inflation, market conditions, the availability and cost of short-term or long-term funding and capital, the credit capacity or perceived credit worthiness of the securities industry in the marketplace and the level and volatility of interest rates |
| We also face risks relating to trading losses, losses resulting from the ownership or underwriting of securities, counterparty failure to meet commitments, customer fraud, employee fraud, issuer fraud, errors and misconduct, failures in connection with the processing of securities transactions and litigation |
| The varied risks associated with our business and the securities industry in general could adversely affect our commission and other revenues |
| A reduction in our revenues or a loss resulting from our underwriting or ownership of securities or sales or trading of securities could have a material adverse effect on our business, results of operations and financial condition |
| In addition, as a result of these risks, our revenues and operating results may be subject to significant fluctuations from quarter to quarter and from year to year |
| Lower price levels in the securities markets may reduce our profitability adversely affecting the price of our common stock |
| Lower price levels of securities may result in (i) reduced volumes of securities, options and futures transactions, with a consequent reduction in our commission revenues, and (ii) losses from declines in the market value of securities we held in investment and underwriting positions |
| In periods of low volume, our levels of profitability are further adversely affected because certain of our expenses remain relatively fixed |
| Sudden sharp declines in market values of securities and the failure of issuers and counterparties to perform their obligations can result in illiquid markets which, in turn, may result in our having difficulty selling securities |
| Such negative market conditions, if prolonged, may also lower our revenues from investment banking and other activities |
| A reduction in our revenues from investment banking or other activities could have a material adverse affect on our business, results of operations and financial condition |
| There is intense competition in the discount brokerage industry |
| Siebert encounters significant competition from full-commission, online and other discount brokerage firms, as well as from financial institutions, mutual fund sponsors and other organizations many of which are significantly larger and better capitalized than Siebert |
| Siebert equity investee, SBS, a municipal bond underwriter, also encounters significant competition from firms engaged in the municipal finance business |
| The ______________________________________________________________________ general financial success of the securities industry over the past several years and the price wars encountered and lower commission rates in the discount brokerage business in general have strengthened our existing competitors |
| Siebert believes that such changes in the industry will continue to strengthen existing competitors and attract additional competitors such as banks, insurance companies, providers of online financial and information services, and others as they expand their product lines |
| Many of these competitors are larger, more diversified, have greater capital resources, and offer a wider range of services and financial products than Siebert |
| Siebert competes with a wide variety of vendors of financial services for the same customers |
| Siebert may not be able to compete effectively with current or future competitors |
| During 2005, competition continued to intensify both among all classes of brokerage firms and within the discount brokerage business as well as from consolidation in the discount brokerage industry |
| Some competitors in the discount brokerage business offer services which we do not, including financial advice and investment management |
| In the last two years, some competitors have continued to offer lower flat rate execution fees that are difficult for any conventional discount firm to meet |
| Industry-wide changes in trading practices are expected to cause continuing pressure on fees earned by discount brokers for the sale of order flow |
| Many of the flat fee brokers impose charges for services such as mailing, transfers and handling exchanges which Siebert does not and also direct their execution to captive market makers |
| Continued or increased competition from ultra low cost, flat fee brokers and broader service offerings from other discount brokers could limit our growth or lead to a decline in Siebert’s customer base which would adversely affect our business, results of operations and financial condition |
| We are subject to extensive government regulation |
| We are also subject to regulation by self–regulatory organizations and other regulatory bodies in the Untied States, such as the SEC, the NYSE, the NASD and the Municipal Securities Rulemaking Board (the “MSRB”) |
| We are registered as a broker-dealer in 50 states, the District of Columbia and Puerto Rico |
| The regulations to which we are subject as a broker-dealer cover all aspects of the securities business including: training of personnel, sales methods, trading practices, uses and safe keeping of customers’ funds and securities, capital structure, record keeping, fee arrangements, disclosure and the conduct of directors, officers and employees |
| Failure to comply with any of these laws, rules or regulations, which may be subject to the uncertainties of interpretation, could result in civil penalties, fines, suspension or expulsion and have a material adverse effect on our business, results of operations and financial condition |
| Siebert, as a registered broker-dealer and NASD member organization, is required by Federal law to belong to the Securities Investor Protection Corporation (“SIPC”) which provides, in the event of the liquidation of a broker-dealer, protection for securities held in customer accounts held by the firm of up to dlra500cmam000 per customer, subject to a limitation of dlra100cmam000 on claims for cash balances |
| SIPC is funded through assessments on registered broker-dealers |
| In addition, Siebert, through its clearing agent, has purchased from private insurers additional account protection in the event of liquidation up to the net asset value, as defined, of each account |
| Stocks, bonds, mutual funds and money market funds are included at net asset value for ______________________________________________________________________ purposes of SIPC protection and the additional protection |
| Neither SIPC protection nor the additional protection insures against fluctuations in the market value of securities |
| Siebert is also authorized by the MSRB to effect transactions in municipal securities on behalf of its customers and has obtained certain additional registrations with the SEC and state regulatory agencies necessary to permit it to engage in certain other activities incidental to its brokerage business |
| Margin lending arranged by Siebert is subject to the margin rules of the Board of Governors of the Federal Reserve System and the NYSE Under such rules, broker-dealers are limited in the amount they may lend in connection with certain purchases and short sales of securities and are also required to impose certain maintenance requirements on the amount of securities and cash held in margin accounts |
| In addition, those rules and rules of the Chicago Board Options Exchange govern the amount of margin customers must provide and maintain in writing uncovered options |
| The laws, rules and regulations, as well as governmental policies and accounting principles, governing our business and the financial services and banking industries generally have changed significantly over recent years and are expected to continue to do so |
| We cannot predict which changes in laws, rules, regulations, governmental policies or accounting principles will be adopted |
| Any changes in the laws, rules, regulations, governmental policies or accounting principles relating to our business could materially and adversely affect our business, results of operations and financial condition |
| We are subject to net capital requirements |
| The SEC, the NYSE and various other securities and commodities exchanges and other regulatory bodies in the United States have rules with respect to net capital requirements which affect us |
| These rules have the effect of requiring that at least a substantial portion of a broker-dealer’s assets be kept in cash of highly liquid investments |
| Our compliance with the net capital requirements could limit operations that require intensive use of capital, such as underwriting or trading activities |
| These rules could also restrict our ability to withdraw our capital, even in circumstances where we have more than the minimum amount of required capital, which, in turn, could limit our ability to implement growth strategies |
| In addition, a change in such rules, or the imposition of new rules, affecting the scope, coverage, calculation or amount to such net capital requirements, or a significant operating loss or any unusually large charge against net capital, could have similar adverse effects |
| Our customers may fail to pay us |
| A principal credit risk to which we are exposed on a regular basis is that our customers may fail to pay for their purchases or fail to maintain the minimum required collateral for amounts borrowed against securities positions maintained by them |
| We have established policies with respect to maximum purchase commitments for new customers or customers with inadequate collateral to support a requested purchase |
| However, our managers have some flexibility in the allowance of certain transactions |
| When transactions occur outside normal guidelines, these accounts are monitored until their payment obligation is completed |
| If the ______________________________________________________________________ customer does not meet the commitment, we take steps to close out the position in an attempt to minimize losses |
| We have personnel specifically responsible for monitoring all customer positions for the maintenance of required collateral |
| These personnel also monitor accounts that may be concentrated in one or more securities whereby a significant decline in the value of a particular security could reduce the value of the account’s collateral below the account’s loan obligation |
| While we have not had significant credit losses in the last five years, we cannot assure you that the policies and procedures we have established will be adequate to prevent a significant credit loss |
| We face risks relating to our investment banking activities |
| Certain risks are involved in the underwriting of securities |
| Investment banking underwriting syndicates agree to purchase securities at a discount from the public offering price |
| If the securities must be sold below the syndicate cost, an underwriter is exposed to losses on the securities that it has committed to purchase |
| In the last several years, investment banking firms increasingly have underwritten corporate and municipal offerings with fewer syndicate participants or, in some cases, without an underwriting syndicate |
| In these cases, the underwriter assumes a larger part or all of the risk of an underwriting transaction |
| Under Federal securities laws, other laws and court decisions, an underwriter is exposed to substantial potential liability for material misstatements or omissions of fact in the prospectus used to describe the securities being offered |
| While municipal securities are exempt from the registration requirements of the Securities Act, underwriters of municipal securities are exposed to substantial potential liability for material misstatements or omissions of fact in the offering documents prepared for these offerings |
| An increase in volume on our systems or other events could cause them to malfunction |
| We presently receive and process up to 65prca of our trade orders electronically |
| This method of trading is heavily dependent on the integrity of the electronic systems supporting it |
| While we have never experienced a significant failure of our trading systems, heavy stress placed ______________________________________________________________________ on our systems during peak trading times could cause our systems to operate at unacceptably low speeds or fail altogether |
| Any significant degradation or failure of our systems or the systems of third parties involved in the trading process (eg, online and Internet service providers, record keeping and data processing functions performed by third parties, and third party software), even for a short time, could cause customers to suffer delays in trading |
| These delays could cause substantial losses for customers and could subject us to claims from these customers for losses |
| We cannot assure you that our network structure will operate appropriately in the event of a subsystem, component or software failure |
| In addition, we cannot assure you that we will be able to prevent an extended systems failure in the event of a power or telecommunications failure, an earthquake, terrorist attack, fire or any act of God |
| Any systems failure that causes interruptions in our operations could have a material adverse effect on our business, financial condition and operating results |
| We rely on information processing and communications systems to process and record our transactions |
| Our operations rely heavily on information processing and communications systems |
| Our system for processing securities transactions is highly automated |
| Registered representatives equipped with online computer terminals can access customer account information, obtain securities prices and related information and enter and confirm orders online |
| To support our customer service delivery systems, as well as other applications such as clearing functions, account administration, record keeping and direct customer access to investment information, we maintain a computer network in New York City |
| Through our clearing agent, our computers are also linked to the major registered US securities exchanges, the National Securities Clearing Corporation and the Depository Trust Company |
| Failure of the information processing or communications systems for a significant period of time could limit our ability to process a large volume of transactions accurately and rapidly |
| This could cause us to be unable to satisfy our obligations to customers and other securities firms, and could result in regulatory violations |
| External events, such as an earthquake, terrorist attack or power failure, loss of external information feeds, such as security price information, as well as internal malfunctions such as those that could occur during the implementation of system modifications, could render part or all of these systems inoperative |
| We may not be able to keep up pace with continuing changes in technology |
| Our market is characterized by rapidly changing technology |
| To be successful, we must adapt to this rapidly changing environment by continually improving the performance, features and reliability of our services |
| We could incur substantial costs if we need to modify our services or infrastructure or adapt our technology to respond to these changes |
| A delay or failure to address technological advances and developments or an increase in costs resulting from these changes could have a material and adverse effect on our business, financial condition and results of operations |
| We depend on our ability to attract and retain key personnel |
| ______________________________________________________________________ Our continued success is principally dependent on our founder, Muriel F Siebert, Chairwoman, Chief Executive Officer and President and our senior management |
| In addition, the continued success of the SBS may be dependent on the services of Napoleon Brandford III and Suzanne Shank |
| The loss of the services of any of these individuals could significantly harm our business, financial condition and operating results |
| Our principal shareholder may control many key decisions |
| Muriel Siebert currently owns approximately 90prca of our outstanding common stock |
| Siebert will have the power to elect the entire Board of Directors and, except as otherwise provided by law or our Certificate of Incorporation or by-laws, to approve any action requiring shareholder approval without a shareholders meeting |
| There may be no public market for our common stock |
| Only approximately 2cmam200cmam000 shares, or approximately 10prca of our shares outstanding, are currently held by the public |
| Although our common stock is traded in The Nasdaq National Market, their can be no assurance that an active public market will continue |