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1

SEC Rule 15c3-1

SEC's primary means of assuring that firms have enough money (capitalization) to deal responsibility with the investing public.

2

Net Worth

= Assets - Liabilities

3

Net Capital

= liquidation value of the firm, only liquid assets are used in determining net capital

= net worth - non-allowable assets and other charges

4

Aggregate Indebtedness

Unsecured liabilities of the firm + customer related liabilities

5

Broker/Dealer Classifications for determining net capital requirement

1- Carrying broker/dealer
2- Introducing broker/dealer
3- Mutual fund broker/dealer
4- Market makers

6

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)

7

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

8

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)

9

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

10

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

11

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

12

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

13

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

14

Alternative Net Capital requirements

$250M or 2% of aggregate debits

15

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

16

Total Available Capital- computation

= Net Worth
+/- Adjustment for net profit or loss
+ Subordinated debt

17

Tentative Net Capital - computation

= Total Available Capital
- non-allowable assets

18

Net Capital- computation

Total Available Capital = net worth + profit - losses + subordinated debt
- non-allowable assets (non-liquid)
- haircuts

19

Haircuts (purpose)

Compensate for market price losses that could occur if the securities had to be liquidated quickly.

20

Net Capital

= Tentative Net Capital - haircuts

21

Net Capital (full calculation)

= Net Worth
+/- Adjustment for net profit or loss
+ Subordinated debt
- non-allowable assets (non-liquid)
- haircuts

review example p.11

22

Review accounting T-Accounts

DR = assets and expense
CR = liabilities, income and equity accounts

23

Allowable Assets (list)

- Cash in bank
- Cash no deposit in special reserve bank account
- Clearing deposits
- Debit balances in customer accounts (A/R from customer)
- Margin account if secure (CMV > Debit balance)- see p. 14
- Good faith deposits (if < 60 days)
- Notes Receivable (if fully secured, pro-rated if not)

24

Fails to Deliver (Allowable assets)

an open contract with a customer in which securities are owed (sold) and monies due (payment).
- corporate securities aged after 4 days (15% haircut)
- municipals- 20 days
- municipal syndicate profits receivable (if owed by manager and > 60 days)

25

Restricted stock, unregistered warrants

Allowable or non-allowable?

Non- allowable b/c they are illiquid

26

Good faith deposits (Allowable?)

(if < 60 days)

27

Notes Receivable (Allowable?)

(if fully secured, pro-rated if not)

28

Non-allowable assets

- exchange memberships
- fixed assets
- intangibles
- corporate syndicate profits receivable
- prepaid expenses
- doubtful A/R collections
- insurance claims > 7 days from date of loss (if validated by outside counsel, then > 20 days)
- free shipments of securities > $5,000
- Mutual fund redemptions

29

US Gov't securities (haircuts)

5%< 3 months
0% TBills =25 years

30

Municipal securities (haircuts)

> long or short position