Jefferies Financial Group Inc. (JEF) Risk Factors

Item 1A. Risk Factors

Factors Affecting Our Business

The following factors describe some of the assumptions, risks,

uncertainties and other factors that could adversely affect our

business or that could necessitate unforeseen changes to the

ways we operate our businesses or could otherwise result in

changes that differ materially from our expectations. In addition

to the specific factors mentioned in this report, we may also be

affected by other factors that affect businesses generally, such

as global or regional changes in economic, business or political

conditions, acts of war, terrorism, pandemics, climate change,

and natural disasters.

Credit, Market and Liquidity Risks

Our business is subject to significant credit risk.

In the normal course of our businesses, we are involved in the

execution, settlement and financing of various customer and

principal securities and derivative transactions. These activities

are transacted on a cash, margin or delivery-versus-payment

basis and are subject to the risk of counterparty or customer

nonperformance. Even when transactions are collateralized by

the underlying security or other securities, we still face the risks

associated with changes in the market value of the collateral

through settlement date or during the time when margin is

extended and collateral has not been secured or the counterparty

defaults before collateral or margin can be adjusted. We may

also incur credit risk in our derivative transactions to the extent

such transactions result in uncollateralized credit exposure to our

counterparties.

We seek to control the risk associated with these transactions by

establishing and monitoring credit limits and by monitoring

collateral and transaction levels daily. We may require

counterparties to deposit additional collateral or return collateral

pledged. In certain circumstances, we may, under industry

regulations, purchase the underlying securities in the market and

seek reimbursement for any losses from the counterparty.

However, there can be no assurances that our risk controls will

be successful.

We are exposed to significant market risk and our principal

trading and investments expose us to risk of loss.

Market risk generally represents the risk that values of assets

and liabilities or revenues will be adversely affected by changes

in market conditions. Market risk is inherent in the financial

instruments associated with our operations and activities,

including trading account assets and liabilities, loans, securities,

short-term borrowings, corporate debt and derivatives. Market

conditions that change from time to time, thereby exposing us to

market risk, include fluctuations in interest rates, equity prices,

relative exchange rates, and price deterioration or changes in

value due to changes in market perception or actual credit quality

of an issuer.

In addition, disruptions in the liquidity or transparency of the

financial markets may result in our inability to sell, syndicate or

realize the value of security positions, thereby leading to

increased concentrations. The inability to reduce our positions in

specific securities may not only increase the market and credit

risks associated with such positions, but also increase capital

requirements, which could have an adverse effect on our

business, results of operations, financial condition and liquidity.

A considerable portion of our revenues is derived from trading in

which we act as principal. We may incur trading losses relating to

the purchase, sale or short sale of fixed income, high yield,

international, convertible and equity securities, loans, derivative

contracts and commodities for our own account. In any period,

we may experience losses on our inventory positions as a result

of the level and volatility of equity, fixed income and commodity

prices (including oil prices), lack of trading volume and illiquidity.

From time to time, we may engage in a large block trade in a

single security or maintain large position concentrations in a

single security, securities of a single issuer, securities of issuers

engaged in a specific industry or securities from issuers located

in a particular country or region. In general, because our inventory

is marked to market on a daily basis, any adverse price

movement in these securities could result in a reduction of our

revenues and profits. In addition, we may engage in hedging

transactions that if not successful, could result in losses.

Increased market volatility may also impact our revenues as

transaction activity in our investment banking and capital

markets sales and trading businesses can be negatively

impacted in a volatile market environment.

Refer to Management’s Discussion and Analysis of Financial

Condition and Results of Operations-Risk Management within

Part II, Item 7. of this Annual Report on Form 10-K for additional

discussion.

A credit-rating agency downgrade could significantly impact our

business.

The cost and availability of financing generally are impacted by

(among other things) our credit ratings. If any of our credit

ratings were downgraded, or if rating agencies indicate that a

downgrade may occur, our business, financial position and

results of operations could be adversely affected and

perceptions of our financial strength could be damaged, which

could adversely affect our client relationships. Additionally, we

intend to access the capital markets and issue debt securities

from time to time, and a decrease in our credit ratings or outlook

could adversely affect our liquidity and competitive position,

increase our borrowing costs, decrease demand for our debt

securities and increase the expense and difficulty of financing

our operations. In addition, in connection with certain over-the-

counter derivative contract arrangements and certain other

trading arrangements, we may be required to provide additional

collateral to counterparties, exchanges and clearing

organizations in the event of a credit rating downgrade. Such a

downgrade could also negatively impact the prices of our debt

securities. There can be no assurance that our credit ratings will

not be downgraded.

As a holding company, we are dependent for liquidity from

payments from our subsidiaries, many of which are subject to

restrictions.

As a holding company, we depend on dividends, distributions and

other payments from our subsidiaries to fund payments on our

obligations, including debt obligations. Several of our

subsidiaries, particularly our broker-dealer subsidiaries and swap

dealer subsidiary, are subject to regulations that limit or restrict

dividend payments or reduce the availability of the flow of funds

from those subsidiaries to us. In addition, our broker-dealer

subsidiaries and swap dealer subsidiary are subject to

restrictions on their ability to lend or transact with affiliates and

are required to maintain minimum regulatory capital

requirements. These regulations may hinder our ability to access

funds that we may need to make payments to fulfill obligations.

From time to time, we may invest in securities that are illiquid or

subject to restrictions.

From time to time, we may invest in securities that are subject to

restrictions which prohibit us from selling the securities for a

period of time. Such agreements may limit our ability to generate

liquidity quickly through the disposition of the underlying

investment while the agreement is effective.

Economic Environment Risks

We may incur losses as a result of unforeseen or catastrophic

events, including the emergence of a pandemic, cybersecurity

incidents and events, terrorist attacks, war, trade policies,

military conflict, climate-related incidents or other natural

disasters.

The occurrence of unforeseen or catastrophic events, including

the emergence of a pandemic, such as COVID-19, or other

widespread health emergency (or concerns over the possibility of

such an emergency), cybersecurity incidents and events, terrorist

attacks, war, trade policies, military conflict, could create

economic and financial disruptions, and could lead to operational

difficulties (including travel limitations) that could impair our

ability to manage our businesses. For instance, the spread of

illnesses or pandemics has, and could in the future, cause illness,

quarantines, various shutdowns, reduction in business activity

and financial transactions, labor shortages, supply chain

interruptions and overall economic and financial market

instability. In addition, geopolitical and military conflict and war

between Russia and Ukraine and Hamas and Israel have and

could continue to result in instability and adversely affect the

global economy or specific markets, which could continue to

have an adverse impact or cause volatility in the financial

services industry generally or on our results of operations and

financial conditions. In addition, these geopolitical tensions can

cause an increase in volatility in commodity and energy prices,

creating supply chain issues, and causing instability in financial

markets. Sanctions imposed by the United States and other

countries in response to such conflict could further adversely

impact the financial markets and the global economy, and any

economic countermeasures by the affected countries or others,

could exacerbate market and economic instability. While we do

not have any operations in Russia or any clients with significant

Russian operations and we have minimal market risk related to

securities of companies either domiciled or operating in Russia,

the specific consequences of the conflict in Ukraine on our

business is difficult to predict at this time. Likewise, our

investments and assets in our growing Israeli business could be

negatively affected by consequences from the geopolitical and

military conflict in the region. In addition to inflationary pressures

affecting our operations, we may also experience an increase in

cyberattacks against us and our third-party service providers

from Russia, Hamas or their allies.

Climate change concerns and incidents or other natural disasters

could disrupt our businesses, adversely affect the profitability of

certain of our investments, adversely affect client activity levels,

adversely affect the creditworthiness of our counterparties and

damage our reputation.

Climate change may cause extreme weather events that disrupt

operations at one or more of our or our customer’s or client’s

locations, which may negatively affect our ability to service and

interact with our clients, and also may adversely affect the value

of certain of our investments, including our real estate

investments. Climate change, as well as uncertainties related to

the transition to a lower carbon dependent economy, may also

have a negative impact on the financial condition of our clients,

which may decrease revenues from those clients and increase

the credit risk associated with loans and other credit exposures

to those clients. Additionally, our reputation and client

relationships may be damaged as a result of our involvement, or

our clients’ involvement, in certain industries or projects

associated with causing or exacerbating climate change, as well

as any decisions we make to continue to conduct or change our

activities in response to considerations relating to climate

change.

New regulations or guidance relating to climate change and the

transition to a lower carbon dependent economy, as well as the

perspectives of shareholders, employees and other stakeholders

regarding climate change, may affect whether and on what terms

and conditions we engage in certain activities or offer certain

products, as well as impact our business reputation and efforts

to recruit and retain employees and customers.

Abrupt changes in market and general economic conditions have

in the past adversely affected, and may in the future adversely

affect, our business and profitability and cause volatility in our

results of operations.

Economic and market conditions have had, and will continue to

have, a direct and material impact on our results of operations

and financial condition because performance in the financial

services industry is heavily influenced by the overall strength of

general economic conditions and financial market activity.

Our investment banking revenue, in the form of advisory services

and underwriting, is directly related to general economic

conditions and corresponding financial market activity. When the

outlook for such economic conditions is uncertain or negative,

financial market activity generally tends to decrease, which

reduces our investment banking revenues. Reduced expectations

of U.S. economic growth or a decline in the global economic

outlook could cause financial market activity to decrease and

negatively affect our investment banking revenues.

A sustained and continuing market downturn could lead to or

exacerbate declines in the number of securities transactions

executed for clients and, therefore, to a decline in the revenues

we receive from commissions and spreads. Correspondingly, a

reduction of prices of the securities we hold in inventory or as

investments would lead to reduced revenues.

Revenues from our asset management businesses have been

and may continue to be negatively impacted by declining

securities prices, as well as widely fluctuating securities prices.

Because our asset management businesses hold long and short

positions in equity and debt securities, changes in the prices of

these securities, as well as any decrease in the liquidity of these

securities, may materially and adversely affect our revenues from

asset management.

Similarly, our other investments businesses may suffer from the

above-mentioned impacts of fluctuations in economic and

market conditions, including reductions in business activity and

financial transactions, labor shortages, supply chain interruptions

and overall economic and financial market instability. In addition,

other factors, most of which are outside of our control, can affect

our businesses, including the state of the real estate market, the

state of the Italian telecommunications market, and the state of

international market and economic conditions which impact

trading volume and currency volatility, and changes in regulatory

requirements.

In addition, global economic conditions and global financial

markets remain vulnerable to the potential risks posed by certain

events, which could include, among other things, the level and

volatility of interest rates, the availability and market conditions

of financing, economic growth or its sustainability, unforeseen

changes to gross domestic product, inflation, energy prices,

fluctuations or other changes in both debt and equity capital

markets and currencies, political and financial uncertainty in the

United States and the European Union, foreign trade restrictions,

ongoing concern about Asia’s economies, global supply

disruptions, complications involving terrorism and armed

conflicts around the world (including the conflict between Russia

and Ukraine, and Hamas and Israel, or other challenges to global

trade or travel, such as those that occur due to a pandemic).

More generally, because our business is closely correlated to the

general economic outlook, a significant deterioration in that

outlook or realization of certain events would likely have an

immediate and significant negative impact on our business and

overall results of operations.

Changing financial, economic and political conditions could result

in decreased revenues, losses or other adverse consequences.

Global or regional changes in the financial markets or economic

and political conditions could adversely affect our business in

many ways, including the following:

•A market downturn, potential recession and high inflation, as

well as declines in consumer confidence and an increase in

unemployment rates, could lead to a decline in the volume of

transactions executed for customers and, therefore, to a

decline in the revenues we receive from commissions and

spreads. Any such economic downturn, volatile business

environment, hostile third-party action or continued

unpredictable and unstable market conditions could adversely

affect our general business strategies;

•Unfavorable conditions or changes in general political,

economic or market conditions could reduce the number and

size of transactions in which we provide underwriting, financial

advisory and other services. Our investment banking revenues,

in the form of financial advisory, underwriting or placement

fees, are directly related to the number and size of the

transactions in which we participate and could therefore be

adversely affected by unfavorable financial, economic or

political conditions. In particular, the increasing trend toward

sovereign protectionism and de-globalization has resulted or

could result in decreases in free trade, erosion of traditional

international coalitions, the imposition of sanctions, tariffs or

other trade restrictions, governmental closures and no-

confidence votes, domestic and international strife, and

general market upheaval in response to such events, all of

which could negatively impact our business;

•Adverse changes in the securities markets could lead to a

reduction in revenues from asset management fees and losses

on our own capital invested in managed funds. Even in the

absence of a market downturn, below-market investment

performance by our funds and portfolio managers could

reduce asset management revenues and assets under

management and result in reputational damage that might

make it more difficult to attract new investors;

•Adverse changes in the financial markets could lead to

regulatory restrictions that may limit or halt certain of our

business activities;

•Limitations on the availability of credit can affect our ability to

borrow on a secured or unsecured basis, which may adversely

affect our liquidity and results of operations. Global market and

economic conditions have been particularly disrupted and

volatile in the last several years and may be in the future. Our

cost and availability of funding could be affected by illiquid

credit markets and wider credit spreads;

•New or increased taxes on compensation payments such as

bonuses may adversely affect our profits;

•Should one of our clients or competitors fail, our business

prospects and revenue could be negatively impacted due to

negative market sentiment causing clients to cease doing

business with us and our lenders to cease loaning us money,

which could adversely affect our business, funding and

liquidity;

•Unfavorable economic conditions could have an adverse effect

on the demand for new loans and the servicing of loans

originated by third-parties, which would have an adverse

impact on the operations and profitability of some of our

financial services businesses.

Operational Risks

We may incur losses if our risk management is not effective.

We seek to monitor and control our risk exposure. Our risk

management processes and procedures are designed to limit our

exposure to acceptable levels as we conduct our business. We

apply a comprehensive framework of limits on a variety of key

metrics to constrain the risk profile of our business activities.

These limits reflect our risk tolerances for business activity. Our

framework includes inventory position and exposure limits on a

gross and net basis, scenario analysis and stress tests, Value-at-

Risk, sensitivities, exposure concentrations, aged inventory, the

amount of Level 3 assets, counterparty exposure, leverage, cash

capital and performance analysis. Refer to Management’s

Discussion and Analysis of Financial Condition and Results of

Operations - Risk Management within Part II. Item 7. of this

Annual Report on Form 10-K for additional discussion. While we

employ various risk monitoring and risk mitigation techniques,

those techniques and the judgments that accompany their

application, including risk tolerance determinations, cannot

anticipate every economic and financial outcome or the specifics

and timing of such outcomes. As a result, we may incur losses

notwithstanding our risk management processes and

procedures.

The ability to attract, develop and retain highly skilled and

productive employees is critical to the success of our business.

Our ability to develop and retain our clients depends on the

reputation, judgment, business generation capabilities and skills

of our professionals. To compete effectively, we must attract,

retain and motivate qualified professionals, including successful

investment bankers, sales and trading professionals, research

professionals, portfolio managers and other revenue producing

or specialized personnel, in addition to qualified, successful

personnel in functional, non-revenue producing roles.

Competitive pressures we experience with respect to employees

could have an adverse effect on our business, results of

operations, financial condition and liquidity.

Turnover in the financial services industry is high. The cost of

retaining skilled professionals in the financial services industry

has escalated considerably. Financial industry employers are

increasingly offering guaranteed contracts, upfront payments and

increased compensation. These can be important factors in a

current employee’s decision to leave us as well as in a

prospective employee’s decision to join us. As competition for

skilled professionals in the industry remains intense, we may

have to devote significant resources to attracting and retaining

qualified personnel.

If we were to lose the services of certain of our professionals, we

may not be able to retain valuable relationships and some of our

clients could choose to use the services of a competitor instead

of our services. If we are unable to retain our professionals or

recruit additional professionals, our reputation, business, results

of operations and financial condition will be adversely affected.

Further, new business initiatives and efforts to expand existing

businesses frequently require that we incur compensation and

benefits expense before generating additional revenues.

Moreover, companies in our industry whose employees accept

positions with competitors often claim that those competitors

have engaged in unfair hiring practices. We may be subject to

such claims in the future as we seek to hire qualified personnel

who have worked for our competitors. Some of these claims may

result in material litigation. We could incur substantial costs in

defending against these claims, regardless of their merits. Such

claims could also discourage potential employees who work for

our competitors from joining us.

We face increasing competition in the financial services industry.

We operate in an intensely competitive market with other global

bank holding companies that engage in investment banking and

capital markets activities as one of their lines of business and

that have greater capital and resources than we do. We also

compete against other banks, broker-dealers, asset managers

and boutique firms on both a global and regional basis. There is

also growing pressure to provide services at lower fees to appeal

to clients, which may impact our ability to effectively compete.

Operational risks may disrupt our business, result in regulatory

action against us or limit our growth.

Our businesses are highly dependent on our ability to process

and settle, on a daily basis, a large number of transactions across

numerous and diverse markets in many currencies, and the

transactions we process have become increasingly complex. If

any of our financial, accounting or other data processing systems

do not operate properly, or are disabled, or if there are other

shortcomings or failures in our internal processes, people or

systems, we could suffer an impairment to our liquidity, financial

loss, a disruption of our businesses, liability to clients, regulatory

intervention or reputational damage. These systems may fail to

operate properly or become disabled as a result of events that

are wholly or partially beyond our control, including a disruption

of electrical or communications services or our inability to

occupy one or more of our buildings. The inability of our systems

to accommodate an increasing volume and complexity of

transactions could also constrain our ability to expand our

businesses.

Certain of our financial and other data processing systems rely

on access to and the functionality of operating systems

maintained by third-parties. If the accounting, trading or other

data processing systems on which we are dependent are unable

to meet increasingly demanding standards for processing and

security or, if they fail or have other significant shortcomings, we

could be adversely affected. Such consequences may include our

inability to effect transactions and manage our exposure to risk.

In addition, despite the contingency plans we have in place, our

ability to conduct business may be adversely impacted by a

disruption in the infrastructure that supports our businesses and

the communities in which they are located. This may include a

disruption involving electrical, communications, transportation or

other services used by us or third-parties with which we conduct

business.

Any cyber attack, cybersecurity incident, or other information

security breach of, or vulnerability in, our technology systems, or

those of our clients, partners, counterparties, or other third-party

service providers we rely on, could have operational impacts,

subject us to significant liability and harm our reputation.

Our operations rely heavily on the secure processing, storage and

transmission of financial, personal and other information in our

computer systems and networks. In recent years, there have

been several highly publicized incidents involving financial

services companies and their service providers reporting the

unauthorized disclosure of client or other confidential

information, as well as cyber attacks involving theft,

dissemination and destruction of corporate information or other

assets, which in some cases occurred as a result of failure to

follow procedures by employees or contractors or as a result of

actions by third-parties. Cyber attacks can originate from a

variety of sources, including foreign governments and third-

parties affiliated with them, organized crime or terrorist

organizations, and malicious individuals both outside and inside

a targeted company, including through use of relatively new

artificial intelligence (“AI”) tools or methods that can be used to

create deepfakes for impersonation or to enable attack

campaigns more quickly and effectively. Retaliatory acts by

Russia, Hamas or their allies in response to economic sanctions

or other measures taken by the global community arising from

the Russia-Ukraine and Hamas-Israel conflicts, as well as other

acts by nation states or their allies in the context of other

geopolitical conflicts or tensions, could result in an increased

number and/or severity of cyber attacks. Malicious actors may

also attempt to compromise or induce our employees, clients or

other users of our systems to disclose sensitive information or

provide access to our data, and these types of risks may be

difficult to detect or prevent.

Like other financial services firms, we and our third-party service

providers have been the target of cyber attacks. Although we and

our service providers regularly defend against, respond to and

mitigate the risks of cyberattacks, cybersecurity incidents among

financial services firms and industry generally are on the rise. We

are not aware of any material losses we have incurred relating to

cyber attacks or other information security breaches. The

techniques and malware used in these cyber attacks and

cybersecurity incidents are increasingly sophisticated, change

frequently and are often not recognized until launched because

they are novel. Although we monitor the changing cybersecurity

risk environment and seek to maintain reasonable security

measures, including a suite of authentication and layered

information security controls, no security measures are infallible,

and we cannot guarantee that our safeguards will always work or

that they will detect, mitigate or remediate these risks in a timely

manner. Despite our implementation of reasonable security

measures and endeavoring to modify them as circumstances

warrant, our computer systems, software and networks may be

vulnerable to spam attacks, unauthorized access, distributed

denial of service attacks, ransomware, computer viruses and

other malicious code, impersonation campaigns as well as

human error, natural disaster, power loss, and other events that

could damage our reputation, impact the security and stability of

our operations, and expose us to class action lawsuits and

regulatory investigation, action, and penalties, and significant

liability.

We also rely on numerous third-party service providers to

conduct other aspects of our business operations and we face

similar risks relating to them. While we evaluate the information

security programs and defenses of third-party vendors, we

cannot be certain that our reviews and oversight will identify all

potential information security weaknesses or that our vendors’

information security protocols are or will be sufficient to

withstand or adequately respond to a cyber attack, cybersecurity

incident or other information security breach. In addition, in order

to access our products and services, or trade with us, our

customers and counterparties may use networks, computers and

other devices that are beyond our security control systems and

processes.

Notwithstanding the precautions we take, if a cyber attack,

cybersecurity incident, or other information security breach were

to occur, this could jeopardize the information we confidentially

maintain, or otherwise cause interruptions in our operations or

those of our clients and counterparties, exposing us to liability.

As attempted attacks continue to evolve in scope and

sophistication, we may be required to expend substantial

additional resources to modify or enhance our reasonable

security measures, to investigate and remediate vulnerabilities or

other exposures or to communicate about cyber attacks,

cybersecurity incidents or other information security breaches to

our customers, partners, third-party service providers and

counterparties. Though we have insurance against some cyber

risks and attacks, we may be subject to litigation and financial

losses that exceed our insurance policy limits or are not covered

under any of our current insurance policies. A technological

breakdown could also interfere with our ability to comply with

financial reporting and other regulatory requirements, exposing

us to potential disciplinary action by regulators. Successful cyber

attacks, cybersecurity incidents or other information security

breaches at other large financial institutions or other market

participants, whether or not we are affected, could lead to a

general loss of customer confidence in financial institutions that

could negatively affect us, including harming the market

perception of the effectiveness of our security measures or the

financial system in general, which could result in a loss of

business.

Further, in light of the high volume of transactions we process,

the large number of our clients, partners and counterparties, and

the increasing sophistication of malicious actors that may

employ increasingly sophisticated methods such as new artificial

intelligence tools, a cyber attack, cybersecurity incident, or other

information security breach could occur and persist for an

extended period of time without detection. We expect that any

investigation of a cyber attack, cybersecurity incident, or other

information security breach would take substantial amounts of

time and resources, and that there may be extensive delays

before we obtain full and reliable information. During such time

we would not necessarily know the extent of the harm caused by

the cyber attack, cybersecurity incident, or other information

security breach or how best to remediate it, and certain errors or

actions could be repeated or compounded before they are

discovered and remediated. All of these factors could further

increase the costs and consequences of such a cyber attack or

cybersecurity incident. In providing services to clients, we

manage, utilize and store sensitive or confidential client or

employee data, including personal data. As a result, we are

subject to numerous laws and regulations designed to protect

this information, such as U.S. and non-U.S. federal and state laws

governing privacy and cybersecurity. If any person, including any

of our associates, negligently disregards or intentionally

breaches our established controls with respect to client or

employee data, or otherwise mismanages or misappropriates

such data, we could be subject to significant monetary damages,

regulatory enforcement actions, fines and/or criminal

prosecution. In addition, unauthorized disclosure of sensitive or

confidential client or employee data, whether through system

compromise or failure, employee negligence, fraud or

misappropriation, could damage our reputation and cause us to

lose clients and related revenue. Depending on the

circumstances giving rise to the information security breach, this

liability may not be subject to a contractual limit or an exclusion

of consequential or indirect damages.

The development and use of artificial intelligence presents risks

and challenges that could adversely impact our business,

financial condition, and results of operations.

We, or our third-party service providers, may develop or

incorporate AI technology in certain business operations,

processes, products, or services. The development and use of AI

presents a number of opportunities for us, as well as risks and

challenges. The full extent of current or future risks related to the

development of AI technology is not possible to predict and we

may not be able to anticipate, prevent, mitigate or remediate all of

the potential risks, challenges or impacts of such changes. AI

could significantly disrupt the business models, investment

strategies, operational processes, and markets in which we

operate and subject us to increased competition, which could

have a material adverse effect on our business, financial

condition and results of operations. Some of our competitors

may be more successful than us in the development and

implementation of new technologies, including services and

platforms based on AI, to address investor demands or improve

operations. If we are unable to adequately advance our

capabilities in these areas, or do so at a slower pace than others

in our industry, we may be at a disadvantage. The use of AI may

also include the input of sensitive personal information, trade

secrets, and other protected data by both us and third parties and

could result in the exposure of such information.

In addition, the worldwide legal and regulatory environment

relating to AI is uncertain and rapidly evolving, which could

require changes in our potential use and implementation of AI

technology, limit our ability to integrate AI, and increase our

compliance costs and the risk of non-compliance. For example,

Regulation (EU) 2024/1689 of the European Union and of the

Council (the “EU AI Act”) applies to providers and deployers of AI

systems in all EU Member States, as well as providers and

deployers established or located outside of the EU where AI

system output is used in the EU. If we were classified to be such

a provider or deployer of AI Systems and deemed non-compliant,

we could potentially face significant fines. While most EU AI Act

requirements will come into force on August 3, 2026, the

November 2025 publication of the proposed Digital Omnibus by

the European Commission may extend this timeline. In the United

States, states and local jurisdictions have begun to enact

comprehensive or more limited laws regulating AI. More

legislative activity is expected both in the United States and in

other countries.

While we have an AI governance policy and related procedures

governing the use of AI by our personnel and third-party service

providers, we cannot guarantee that they will follow such policies

when using AI or that such policies will protect us from potential

liability relating to our adoption or use of AI technologies. We

expect our AI policies and procedures to continue to develop as

business needs, AI-related risks, and the U.S. and global

regulatory environment change.

Damage to our reputation could harm our business.

Maintaining our reputation is critical to our attracting and

maintaining customers, investors and employees. If we fail to

deal with, or appear to fail to deal with, various issues that may

give rise to reputational risk, we could significantly harm our

business prospects. These issues include, but are not limited to,

any of the risks discussed in this Item 1A, appropriately dealing

with potential conflicts of interest, legal and regulatory

requirements, ethical issues, money-laundering or other

instances of fraud, cybersecurity and privacy, record keeping,

sales and trading practices, failure to sell securities we have

underwritten at the anticipated price levels, and the proper

identification of the legal, reputational, credit, liquidity and market

risks inherent in our products. A failure to deliver appropriate

standards of service and quality, or a failure or perceived failure

to treat customers and clients fairly, can result in customer

dissatisfaction, litigation and heightened regulatory scrutiny, all

of which can lead to lost revenue, higher operating costs and

harm to our reputation. Further, negative publicity regarding us,

whether or not true, may also result in harm to our prospects. Our

operations in the past have been impacted as some clients either

ceased doing business or temporarily slowed down the level of

business they do, thereby decreasing our revenue. There is no

assurance that we will be able to successfully reverse the

negative impact of allegations and rumors in the future and our

potential failure to do so could have a material adverse effect on

our business, financial condition and liquidity.

Employee misconduct or fraud could harm us by impairing our

ability to attract and retain clients and subject us to significant

legal liability and reputational harm.

There is a risk that our employees could engage in fraud or other

misconduct that adversely affects our business. For example, we

are subject to a number of obligations and standards arising

from our asset management business and our responsibility over

the assets managed by this business. In addition, our financial

advisors may act in a fiduciary capacity, providing financial

planning, investment advice, and discretionary asset

management. Misconduct or fraud by employees, advisors, or

other third-party service providers could cause significant losses.

In addition, our business often requires that we deal with

confidential matters of great significance to our clients. If our

employees were to improperly use or disclose confidential

information provided by our clients, we could be subject to

regulatory sanctions and suffer serious harm to our reputation,

financial position, current client relationships and ability to attract

future clients. Employee misconduct or fraud could include,

among other things, binding us to unauthorized transactions that

present unacceptable risks, engaging in other unauthorized

activities or concealing unsuccessful investments. The violation

of these obligations and standards by any of our employees

would adversely affect our clients and us. It is not always

possible to deter employee misconduct, and the precautions we

take to detect and prevent this activity may not be effective

against certain misconduct, including conduct which is difficult

to detect. The occurrence of significant employee misconduct

could have a material adverse financial effect or cause us

significant reputational harm and/or legal and regulatory liability,

which in turn could seriously harm our business and our

prospects.

We may not be able to insure certain risks economically.

We cannot be certain that we will be able to insure all risks that

we desire to insure economically or that all of our insurers or

reinsurers will be financially viable if we make a claim. If an

uninsured loss or a loss in excess of insured limits should occur,

or if we are required to pay a deductible for an insured loss,

results of operations could be adversely affected.

Future acquisitions and dispositions of our businesses and

investments are possible, changing the components of our assets

and liabilities, and if unsuccessful or unfavorable, could reduce

the value of our securities.

Any future acquisitions or dispositions may result in significant

changes in the composition of our assets and liabilities, as well

as our business mix and prospects. Consequently, our financial

condition, results of operations and the trading price of our

securities may be affected by factors different from those

affecting our financial condition, results of operations and trading

price at the present time.

Our investment in Jefferies Finance may not prove to be

successful and may adversely affect our results of operations or

financial condition.

Many factors, many of which are outside of our control, can

affect Jefferies Finance’s business, including losses on loan

originations; adverse investment banking and capital market

conditions leading to a decline of syndicate loans; inability of

borrowers to repay commitments; adverse changes to a

borrower’s credit worthiness; and other factors that directly and

indirectly affect the results of operations, and consequently may

adversely affect our results of operations or financial condition.

Our investment in Berkadia may not prove to be successful and

may adversely affect our results of operations or financial

condition.

Many factors, many of which are outside of our control, can

affect Berkadia’s business, including losses on loan originations

in excess of reserves; a change in the relationships with U.S.

Government-Sponsored Enterprises or federal agencies; a

significant loss of customers; and other factors that directly and

indirectly affect the results of operations, including the sales and

profitability of Berkadia, and consequently may adversely affect

our results of operations or financial condition.

If Berkadia suffered significant losses and was unable to repay its

commercial paper borrowings, we would be exposed to loss

pursuant to a reimbursement obligation to Berkshire Hathaway.

Berkadia obtains funds generated by commercial paper sales of

an affiliate of Berkadia. All of the proceeds from the commercial

paper sales are used by Berkadia to fund new mortgage loans,

servicer advances, investments and other working capital

requirements. Repayment of the commercial paper is supported

by a $1.5 billion surety policy issued by a Berkshire Hathaway

insurance subsidiary and a Berkshire Hathaway corporate

guaranty, and we have agreed to reimburse Berkshire Hathaway

for one-half of any losses incurred thereunder. If Berkadia suffers

significant losses and is unable to repay its commercial paper

borrowings, we would suffer losses to the extent of our

reimbursement obligation to Berkshire Hathaway.

Legal, Legislation and Regulation Risks

Legislation and regulation may significantly affect our business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act

(the “Dodd-Frank Act”) and the rules and regulations adopted by

the CFTC and the SEC introduced a comprehensive regulatory

regime for swaps and SBS and parties that deal in such

derivatives. One of our subsidiaries is registered as a swap dealer

with the CFTC and is a member of the NFA, is registered as a

security-based swap dealer with the SEC and is registered with

the SEC as an OTC Derivatives Dealer. We have incurred

significant compliance and operational costs as a result of the

swaps and SBS rules adopted by the CFTC and SEC pursuant to

the Dodd-Frank Act, and we expect that the complex regulatory

framework will continue to require significant monitoring and

compliance expenditures. Negative effects could result from an

expansive extraterritorial application of the Dodd-Frank Act and/

or insufficient international coordination with respect to adoption

of rules for derivatives and other financial reforms in other

jurisdictions.

Similar types of swap regulation have been proposed or adopted

in jurisdictions outside the U.S., including in the EU, the U.K. and

Japan. For example, the EU and the U.K. have established

regulatory requirements relating to portfolio reconciliation and

reporting, clearing certain OTC derivatives and margining for

uncleared derivatives activities under the European Market

Infrastructure Regulation (“EMIR”). Further enhancements (driven

by regulation) have been required in 2024 with respect to EMIR

OTC derivative transaction reporting, and affect our European

entities.

The Markets in Financial Instruments Regulation and a revision of

the Market in Financial Instruments Directive in 2018 (collectively

referred to as “MiFID II”) imposes certain restrictions as to the

trading of shares and derivatives including market structure-

related, reporting, investor protection-related and organizational

requirements, requirements on pre- and post-trade transparency,

requirements to use certain venues when trading financial

instruments (which includes shares and certain derivative

instruments), requirements affecting the way investment

managers can obtain research, powers of regulators to impose

position limits and provisions on regulatory sanctions. The

European regulators continue to refine aspects of MiFID with

these changes now being rolled out separately in both the UK and

Europe.

The Investment Firms Regulation (IFR) and the Investment Firms

Directive (IFD), applicable in the EU, and the MIFIDPRU regime,

applicable in the UK, while applying a more appropriate capital

treatment for investments firms such as the UK entity, Jefferies

International Limited, and, its EU subsidiary, Jefferies GmbH,

include a requirement that a certain amount of variable

remuneration for material risk takers be paid in non-cash

instruments and have a deferral element. Consequently, we have

adapted our remuneration structures for those employees

identified as material risk takers.

A key focus of the European regulators over the last couple of

years has been emerging regulation with regards to Operational

Resilience, with regulators expecting investment firms like

Jefferies to be able to assess (on an ongoing basis) their

resilience (measured by impact to Jefferies’ clients and market)

on identified critical business services. This has brought our

management of third party risk, business continuity and the

mitigation of cyber risk more firmly into focus with the regulators.

Significant new legislation and regulation affecting the financial

services industry is regularly proposed and sometimes adopted.

For example, a legislative proposal was approved, to go live in

2027, to shorten the settlement cycle in the EU, UK, and

Switzerland from two days to one (“T+1”) for transactions in

transferable securities executed on trading venues. The U.S. and

Canada underwent this transition to T+1 in May 2024 and we

undertook significant investment and changes to business

practices in our U.S. operations to prepare. These legislative and

regulatory initiatives affect not only us, but also our competitors

and certain of our clients. These changes could have an effect on

our revenue and profitability, limit our ability to pursue certain

business opportunities, impact the value of assets that we hold,

require us to change certain business practices, impose

additional costs on us and otherwise adversely affect our

business. Accordingly, we cannot provide assurance that

legislation and regulation will not eventually have an adverse

effect on our business, results of operations, cash flows and

financial condition. In the U.S., such initiatives frequently arise in

the aftermath of elections that change the party of the president

or the majority party in the House and/or Senate.

Increasing regulatory focus on evolving privacy and security

issues and expanding laws could impact our businesses and

investments and expose us to increased liability.

The EU General Data Protection Regulation (the “EU GDPR” or

“GDPR”) applies in all EU Member States and also applies to

entities established outside of the EU where such entity

processes personal data in relation to: (i) the offering of goods or

services to data subjects in the EEA; or (ii) monitoring the

behavior of data subjects as far as that behavior takes place in

the EEA. Since GDPR became effective in 2018, the global

regulatory landscape has shifted considerably and there has

been a marked increase in privacy and cybersecurity legislation.

Accordingly, we are subject to a broad and evolving array of

privacy and cybersecurity regulations across the jurisdictions

where we operate.

In EMEA, particularly in Switzerland and the Dubai International

Financial Centre, privacy laws are broadly modelled on, or derived

from, the principles and requirements of the GDPR, with local

variations to reflect national legislation and regulatory priorities.

Across the Americas, privacy regulation is expanding; for

instance, Canada has a federal privacy law, with some provinces

also having their own similar laws. Even the Brazilian data privacy

regime largely echoes the GDPR. Conversely, in the US there is no

single federal law equivalent to the GDPR, but privacy is instead

governed by a growing patchwork of both sector-specific privacy

laws, such as the Gramm-Leach-Bliley Act, and state-level data

protection laws, such as the California Consumer Privacy Act. In

APAC, privacy regulation is becoming more stringent and

increasingly aligned with global standards, particularly the GDPR.

Key jurisdictions including Hong Kong, India, Australia, Japan and

Singapore, all have national data protection laws and regulators

in these jurisdictions have introduced comprehensive

requirements around consent, transparency, data subject rights

and breach notification, supported by stronger enforcement

powers and higher penalties. The UK has implemented GDPR as

part of its national law (the “UK GDPR”). The UK GDPR exists

alongside the UK Data Protection Act 2018 and its requirements

are largely aligned with those under the EU GDPR.

The EU GDPR and UK GDPR impose a number of obligations on

organizations to which they apply, including, without limitation:

accountability and transparency requirements; compliance with

the data protection rights of data subjects; and under certain

circumstances, the prompt reporting of certain personal data

breaches to both the relevant data supervisory authority and

impacted individuals. The EU GDPR and UK GDPR also include

restrictions on the transfer of personal data from the EEA to

jurisdictions that are not recognized as having an adequate level

of protection with regards to data protection laws.

The continued expansion and development of privacy legislation

and regulation will determine the level of any additional resources

which we will need to invest to ensure compliance. In the event of

non-compliance with privacy laws and regulations, we could face

significant administrative and monetary sanctions as well as

reputational damage which may have a material adverse effect

on our operations, financial condition, and prospects. In Europe

and the UK alone, the GDPR imposes significant fines for serious

non-compliance of up to the higher of 4% of an organization’s

annual worldwide turnover or €20 million (or £17.5 million under

the UK GDPR). Data subjects also have a right to receive

compensation as a result of infringement of the GDPR for

financial or non-financial losses.

Extensive regulation of our business limits our activities, and, if

we violate these regulations, we may be subject to significant

penalties.

We are subject to extensive laws, rules and regulations in the

countries in which we operate. Firms that engage in providing

financial services must comply with the laws, rules and

regulations imposed by national and state governments and

regulatory and self-regulatory bodies with jurisdiction over such

activities. Such laws, rules and regulations cover many aspects

of providing financial services.

Our regulators supervise our business activities to monitor

compliance with applicable laws, rules and regulations. In

addition, if there are instances in which our regulators question

our compliance with laws, rules, or regulations, they may

investigate the facts and circumstances to determine whether we

have complied. At any moment in time, we may be subject to one

or more such investigations or similar reviews. At this time, all

such investigations and similar reviews are insignificant in scope

and immaterial to us. However, there can be no assurance that, in

the future, the operations of our businesses will not violate such

laws, rules, or regulations, or that such investigations and similar

reviews will not result in significant or material adverse regulatory

requirements, regulatory enforcement actions, fines or other

adverse impact to the operation of our business.

Additionally, violations of laws, rules and regulations could

subject us to one or more of the following events: civil and

criminal liability; sanctions, which could include the revocation of

our subsidiaries’ registrations as investment advisors or broker-

dealers; the revocation of the licenses of our financial advisors;

censures; fines; or a temporary suspension or permanent bar

from conducting business. The occurrence of any of these events

could have a material adverse effect on our business, financial

condition and prospects.

Certain of our subsidiaries are subject to regulatory financial

capital holding requirements that could impact various capital

allocation decisions or limit the operations of our broker-dealers.

In particular, compliance with the financial capital holding

requirement may restrict our broker-dealers’ ability to engage in

capital-intensive activities such as underwriting and trading, and

may also limit their ability to make loans, advances, dividends

and other payments and may restrict our swap dealer’s ability to

execute certain derivative transactions.

Additional legislation, changes in rules, changes in the

interpretation or enforcement of existing laws and rules, conflicts

and inconsistencies among rules and regulations, or the entering

into businesses that subject us to new rules and regulations may

directly affect our business, results of operations and financial

condition. We continue to monitor the impact of new U.S. and

international regulation on our businesses.

Legal liability may harm our business.

Many aspects of our business involve substantial risks of liability,

and in the normal course of business, we have been named as a

defendant or codefendant in lawsuits involving primarily claims

for damages. The risks associated with potential legal liabilities

often may be difficult to assess or quantify and their existence

and magnitude often remain unknown for substantial periods of

time. The expansion of our business, including increases in the

number and size of investment banking transactions and our

expansion into new areas impose greater risks of liability.

Substantial legal liability could have a material adverse financial

effect or cause us significant reputational harm, which in turn

could seriously harm our business and our prospects.

A change in tax laws in key jurisdictions could materially increase

our tax expense.

We are subject to tax in the U.S. and numerous international

jurisdictions. Changes to income tax laws and regulations in any

of the jurisdictions in which we operate, or in the interpretation of

such laws, or the introduction of new taxes, could significantly

increase our effective tax rate and ultimately reduce our cash

flow from operating activities and otherwise have an adverse

effect on our financial condition or results of operations.

If our tax filing positions were to be challenged by federal, state

and local, or foreign tax jurisdictions, we may not be wholly

successful in defending our tax filing positions.

We record reserves for unrecognized tax benefits based on our

assessment of the probability of successfully sustaining tax filing

positions. Management exercises significant judgment when

assessing the probability of successfully sustaining tax filing

positions, and in determining whether a contingent tax liability

should be recorded and, if so, estimating the amount. If our tax

filing positions are successfully challenged, payments could be

required that are in excess of reserved amounts or we may be

required to reduce the carrying amount of our net deferred tax

asset, either of which result could be significant to our financial

condition or results of operations.