Uniform Net Capital Rules Flashcards
SEC Rule 15c3-1
SEC’s primary means of assuring that firms have enough money (capitalization) to deal responsibility with the investing public.
Net Worth
= Assets - Liabilities
Net Capital
= liquidation value of the firm, only liquid assets are used in determining net capital
= net worth - non-allowable assets and other charges
Aggregate Indebtedness
Unsecured liabilities of the firm + customer related liabilities
Broker/Dealer Classifications for determining net capital requirement
1- Carrying broker/dealer
2- Introducing broker/dealer
3- Mutual fund broker/dealer
4- Market makers
Capital Requirements- Carrying Firms
Minimum of the greater of $250M or 6 2/3% of Aggregate Indebtedness
Engaged in general securities business that carry customer accounts (receive and hold funds)
Capital Requirements- Introducing Broker Dealers
Clearing Correspondent B/D- does not carry customer accounts
Introducing B/D- (fully disclosed)- services customers but does not carry accounts, name and address of customer is fully disclosed
Minimum of the greater of $50M or 6 2/3% of Aggregate Indebtedness
However, if Introducing B/D does not receive funds then, minimum of the greater of $5M or 6 2/3% of Aggregate Indebtedness
Introducing Broker Dealers (limitations)
Broker/Dealer that services customers but does not carry customer accounts= Introducing BD.
Carrying BD or Clearing Correspondent handles all confirms, statements, customer checks, etc.
If receiving customer funds: Min capital requirement is $50M or 6 2/3% of AI
If not receiving funds then, $5M or 6 2/3% of AI.
See table p. 5
Funds and securities must be promptly forwarded to clearing B/D
May only participate in best efforts or all-or-none underwritings
If participates in syndicate, capital requirement is $250M or 6 2/3% of Aggregate Indebtedness (assumed to be acting as principal and assuming financial liability)
Capital Requirements- K(2)(i) Exemption
B/D that handle customer cash but not margin accounts and receive but do not hold funds. Do no hold customer funds or securities, do not owe money or securities to customers. Omnibus account- clearing arrangement
Minimum of the greater of $100M or 6 2/3% of Aggregate Indebtedness
Capital Requirements- Mutual Fund Dealers-receive customer funds (direct wire order firms)
Minimum of the greater of $25M or 6 2/3% of Aggregate Indebtedness
Limitations:
- dealer transactions limited to sale, purchase, redemption of inv co shares and variable annuities
- broker transactions limited to sale of inv co shares or units for immediate reinvestment
- customer funds and securities transmitted promptly to fund or annuity sponsor, cannot hold
- can enter into occasional transaction for own account.
Applies only to firms that accept wire orders
Capital Requirements- Mutual Fund Dealers-do not receive customer funds (subscription firms)
Minimum of the greater of $5M or 6 2/3% of Aggregate Indebtedness
Capital Requirements- Dealers
Any firm that effects more than 10 transactions per calendar year. Also, any firm that endorses or writes unlisted options.
Minimum of the greater of $100M or 6 2/3% of Aggregate Indebtedness
Capital Requirements- Market Makers
Registered B/D that regularly post bona fide competitive bid/ask quotes for a security and are willing to effect transactions as those quotes
- $1,000 in net capital for each security with a bid value of less than $5
- $2,500 in capital for security with a bid value of greater than $5
Minimum of $100M
Maximum of the greater of $1,000M or 6 2/3% of Aggregate Indebtedness
Alternative Net Capital requirements
$250M or 2% of aggregate debits
Sole Proprietorship- additional requirements if liabilities > assets not used in B/D business
net difference must be deducted from net worth before performing net capital computation
Total Available Capital- computation
= Net Worth
+/- Adjustment for net profit or loss
+ Subordinated debt
Tentative Net Capital - computation
= Total Available Capital
- non-allowable assets
Net Capital- computation
Total Available Capital = net worth + profit - losses + subordinated debt
- non-allowable assets (non-liquid)
- haircuts