Chapter 16 study notes Flashcards
BD Net Equity Calculation
Book Equity + Year to Date Results
- Satisfactory Subordinated Loans = Total Capital
Total Capital - Non-Allowable Assets = Tentative Net Capital
Tenative Capital - Haircuts (Reductions on Securities Positions) = Net Capital
Net Capital
Carrying firm
250K
Net Capital
Carrying firm that does not hold customer assets or securities
100K
Net Capital
Prime Broker
1.5 Million
Net Capital
Block positioner Or BD executinf for a Prime Brokerage Agreement
1 Million
Net Capital
Firm Commitment Underwriter
100 K
Net Capital
Market Maker
100K or
2,500 pre stock above 5 and 1,000 for stock below 5
cap is 1 mill
Net Capital
Introducing firm
5K
Net Capital
Introducing firm that receives and forwards assets ans securities
50K
Net CApital
Mutual Fund Firm
5K
Net Capital
M&A and DPP firm
5K
aggregate indebtedness
In general, aggregate indebtedness
includes liabilities that are not secured by a specific asset of the broker-dealer.
Liabilities that are
secured by a broker-dealer’s assets are usually excluded from AI.
broker-dealer’s AI/NC ratio is calculated from
calculated from a trial balance. The trial balance is a listing of all
accounts in a firm’s general ledger, divided into two groups—debits and credits. From the trial
balance, the broker-dealer can construct its income statement, balance sheet, and other financial
statements, as well as its net capital. The trial balance must be prepared monthly.
AI to Net Capital Ratio
1/15 of its aggregate indebtedness.
First-Year Requirement 1/8
Net CApital under
Alternative Net Capital Requirement
Under this approach, a broker-dealer is required to maintain net capital of $250,000 or 2% of the
aggregate debit items, whichever is greater.
Summary of Net Capital Requirements
- Net capital of at least 1/15 of AI (1/8 of AI in the first year of operation)
- The minimum dollar requirement, depending on the type of business
- The market-maker requirement, depending on the number of stocks in which markets are
made
common stock haircut
15%
TOC Stock Haircut with less then 3 mm
40$
Undue Concentration Deduction
if any long or short position is more than 10%
The undue concentration
rule requires an additional deduction on the amount in excess of the 10% threshold. If the security
falls under the general rule for haircuts, the percentage applied is 15%
Haircut
Secured demand note agreement
However, securities normally subject to a 15% haircut (such as
common stock) are subject to a deduction of 30% when used to back a secured demand note.
broker-dealer’s equity must be
at least 30% of its debt-equity total.
A broker-dealer’s debtequity
total is
equal to its net worth plus the amount of its satisfactory subordination agreements.
Focus REports
Carrying and non carryin file focus report 2 quarterly within 17 days of quarter end.
Carrying firms file focus report 1 monthly within 10 business days of month end.
Annual Report
Filing
The annual report must be filed no later than 60 days after the date of the financial statements
Statements to Customers
Broker-dealers that hold client funds or securities are considered to have customers. Audited annual statements must be sent to customers within 105 days after the brokerdealer
files the annual report with the SEC.
Net Capital
Violation
If a broker-dealer has a ratio of aggregate
indebtedness to net capital exceeding 12 to 1, or if the dollar amount of net capital is less than 120%
of its minimum net capital requirement, it must notify the SEC and its DEA within 24 hours.
Non-Current Books and Records
If a broker-dealer fails to maintain books and records as required
by SEC rules, it must give notice to the SEC and its DEA that day. The broker-dealer must file a
report within 48 hours detailing the steps that are being taken to correct the situation. This report
must be transmitted by overnight delivery.
Material Inadequacies
If a broker-dealer discovers, or is notified by an independent public accountant,
of the existence of any material inadequacy in the broker-dealer’s accounting system, internal
accounting controls, or procedures for safeguarding securities, the chief financial officer of the
broker-dealer must send telegraphic or facsimile notice to the SEC within 24 hours and must file a
report within 48 hours stating what steps are being taken to correct the situation. The broker-dealer’s
designated examining authority must also be notified.
Tests for
Members Experiencing Financial and/or Operational Difficulties
Reduction in excess net capital by 25% in the preceding two months or 30% or morethe preceding 3 months
The broker-dealer is not in compliance with Customer Protection rules or cannot show that it is.
The broker-dealer is unable to clear and settle transactions in a timely manner.
Books and records have not been maintained under SEC regulations.
The broker-dealer is not in compliance with net capital requirements or cannot show that it is.
The firm has experienced a substantial change in the manner in which it processes its business,
which may increase the potential risk of loss to customers
Special REserve Calculation Time Frames
Computations must be made weekly, as of the close of the last business day of the week
BD’s are allowed to make the computation monthly. If they deposit equal to at least 105% of the amount otherwise required. This method is only available to
broker- dealers whose ratio of aggregate indebtedness to net capital does not exceed 8 to 1 and that do not carry customer free credits exceeding $1,000,000.
Making Inquiries of the SIC
Exemptions
- Is received from the issuer or issuer’s agent
- Is received from another reporting institution or Federal Reserve Bank
- Is registered in the name of the (existing) customer or that person’s nominee
- Was previously sold to the customer by the firm, as verified by the firm’s internal records
- Is received as part of a transaction that has an aggregate face value of $10,000 or less in the case
of bonds, or market value of $10,000 or less in the case of stocks
If stock that is delivered by a customer is registered in street name rather than the customer’s name,
inquiry is required. If stock is delivered by a party who is not currently a customer of the brokerdealer,
inquiry is required.
Disclosure of Financial Condition
Member firms are required to send balance sheets to
customers every six months and (upon request) make available to customers a copy of the firm’s
most recent balance sheet. A customer is defined as any person having funds or securities in the
possession of the member firm.
