All types of broker-dealers (“BD”) face a standard requirement, namely the concept of regulatory net capital; however, depending on the type of business involved in BD, the threshold may vary significantly. Generally, BD can be divided into two categories: those that “carry customer accounts” and those that “do not carry customer accounts.” The term “carry customer account” means maintaining accounts for individuals or other brokers or dealers, as well as receiving and holding funds or securities.
Broker-Dealers that “carry customer accounts” are required to maintain net capital of at least $250,000, with the following exceptions:
BD that Introduce Customer Accounts and Receive Securities An introductory broker who presents his account fully disclosed to a clearinghouse will be subject to a base net capital requirement of $ 50,000. In addition, to be eligible, BD must have a written clearing agreement with the clearinghouse that states that the customers are customers of the clearinghouse and not of BD and all account statements directly issued to customers by the clearinghouse.
Prime Broker Capital Requirements
A BD who acts as a prime broker must maintain net capital of not less than $1,500,000.
A BD who acts as an execution broker in a prime broker relationship that self-clear or straightforward prime broker transaction on behalf of an introducing executing broker is required to maintain net capital of $1 million.
BD that carry customer accounts exemption from 15c3-3 Broker-dealers exempt from SEA Rule 15c3-3, which yields that all transactions between the BD and its consumers are carried out through a single bank account appointed as “Special Account for the Exclusive advantage of Customers of Customers Broker-Dealers” features a minimum net capital requirement of $100,000.
BDs that “do not carry customer accounts” are required to minimum regulatory net capital requirements varying from $5,000 to $100,000, as follows:
Dealers Dealers must maintain net capital of at least $100,000. For this section, the term “dealer” includes:
any BD that endorses or writes options (other than on a registered national securities exchange or a provision of a registered national securities association); and
A broker or dealer executes ten or more transactions in one calendar year for their investment account.
This requirement often causes problems for other non-carrying broker-dealers that would otherwise be subject to a lower minimum net capital requirement. In addition, this is often most frequently violated when BD receives securities as compensation for services and sells those securities or when BD establishes a policy to invest excess cash periodically.
BD that Introduce Customer Accounts and Receive Securities A minimum net capital necessity of $50,000 applies to introducing brokers that meet the disclosure requirements as above.
BD is engaged in the sale of redeemable shares and certain other share accounts of registered investment companies Broker-dealers that engage solely in the purchase, sale, and redemption of redeemable shares of registered investment companies or an interest in an insurance company separate account are subject to a minimum net capital requirement of $25,000.
Other brokers or dealers A broker or dealers that do not carry accounts of, or for, customers and does not receive, directly or indirectly, or hold funds or securities for, or owe funds or securities to, customers shall maintain net capital of at least $5,000. It includes broker-dealer acting as investment bankers or receiving commissions in connection with the offering of securities.
Additional Consideration In inclusion to the regulatory net capital requirements outlined in 15c3-1, broker-dealers will also be subject to other net capital thresholds based on their aggregate debt (AI) liabilities. In addition, broker-dealers should also be aware of additional net capital requirements that may be imposed by their particularly designated examining authority and other regulatory bodies to which BD is a member, such as the Commodities Futures Trading Corporation (“CFTC”). The net capital requirement rules are pretty complex, but they can be a sound/valuable tool for managing BD’s financial strength when we understand and apply these rules correctly.
AJSH is registered with PCAOB, USA and assists its clients with providing audit and assurance services for over a decade to various clients in the United States, including broker-dealers. We serve different broker-dealer firms registered in the United States w.r.t their audits under Rule 17a-5 under the Securities Exchange Act of 1934 (FINRA Audit). If you have any questions or wish to know more about BD’s minimum net capital requirement, kindly contact us.
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