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Net Capital

Regulatory Obligations and Related Considerations

Regulatory Obligations

Exchange Act Rule 15c3-1 (Net Capital Rule) requires that member firms must at all times have and maintain net capital at no less than the levels specified pursuant to the rule to protect customers and creditors from monetary losses that can occur when firms fail. Exchange Act Rule 17a-11 requires member firms to notify FINRA and the SEC in the event their net capital falls below the minimum amount required by the Net Capital Rule.

If member firms have an affiliate or parent paying any of their expenses, Notice to Members 03-63 (SEC Issues Guidance on the Recording of Expenses and Liabilities by Broker/Dealers) provides guidance for establishing an expense-sharing agreement that meets the standards set forth in Exchange Act Rule 17a-3;1 firms with office leases should apply the guidance in Regulatory Notice 19-08 (Guidance on FOCUS Reporting for Operating Leases) for reporting lease assets and lease liabilities on their FOCUS reports. Additionally, member firms must align their revenue recognition practices with the requirements of the Financial Accounting Standards Board’s Topic 606 (Revenue from Contracts with Customers) and other applicable accounting standards.

Related Considerations

  • Does your firm have a process to assess the completeness and accuracy of its accounting entries, including for contractual or contingent obligations and their impact on net capital?
  • How does your firm review its net capital treatment of assets and liabilities to confirm that they are correctly classified for net capital purposes?
  • How does your firm confirm that it properly calculated the applicable net capital charges, including operational and financing charges, in its net capital calculation?
  • For firms with expense-sharing agreements, what kind of allocation methodology does your firm use, and what kind of documentation does your firm maintain to substantiate its methodology for allocating specific broker-dealer costs to your firm or an affiliate or parent?
  • How does your firm assess the potential impact to net capital from new, complex or atypical transactions, other business arrangements or events (including contractual obligations, losses or contingencies)? Does your firm involve regulatory reporting staff in the process to assess these types of transactions, other arrangements or events?

FINRA’s Recent Net Capital Examinations

During 2023 examinations focused on financial controls and net capital compliance at some member firms, FINRA observed some minor deficiencies as well as some more material findings, including:

  • Supervision: Lack of supervisory review of various key functions, such as wire movements and financial report preparation;
  • Designation of a Financial and Operations Principal: Not properly designating a qualified financial and operations principal (“FINOP”) per FINRA Rule 1220 (Registration Categories);
  • Inaccurate Books and Records: Misclassification of assets and liabilities, inadequate reconciliations and not adequately accruing liabilities, leading to inaccurate financial reporting and, in some cases, net capital deficiencies;
  • Expense Sharing Agreements: Expense sharing and service level agreements that failed to adequately outline the allocation of expense as required by SEC rules and addressed in NASD Notice to Members 03-63 (SEC Issues Guidance on the Recording of Expenses and Liabilities by Broker/Dealers); and
  • Bank Account Access: Providing persons not associated with the broker-dealer with authority over firm bank accounts, thereby allowing them to perform certain covered functions without proper registration, as defined in FINRA Rule 1220.

Firms should take these findings into consideration when evaluating their internal financial controls. Some of these findings, along with effective practices, are outlined in more detail throughout this section of the Report.

Findings and Effective Practices


  • Incorrect Capital Charges for Underwriting Commitments: Not maintaining an adequate process to assess moment-to-moment net capital and open contractual commitment capital charges on underwriting commitments; not establishing and maintaining WSPs for calculating and applying open contractual commitment charges; failing to maintain an accurate record or log of underwritings in which the firm is involved; and not understanding the firm’s role in the underwriting (i.e., best efforts or firm commitment).
  • Inaccurate Net Capital Deductions: Not maintaining a process to accurately determine allowability and valuation of non-marketable securities (e.g., marketplace blockage); and for certain firms applying “minimal amount of credit risk standard” despite not having an adequate process to conduct an internal credit analysis or an independent creditworthiness analysis of corporate and nonconvertible debt securities.
  • Inadequate WSPs: Not maintaining adequate WSPs for calculating and applying haircuts for non-marketable inventory and conducting internal credit analysis or conducting an independent creditworthiness analysis of the firms’ corporate and nonconvertible debt securities inventory.
  • Inaccurate Recording of Revenue and Expenses: Using cash accounting to record revenue and expenses as of the date the money changes hands, rather than accrual accounting (where firms would record revenue in accordance with Accounting Standards Codification (ASC) 606 or other applicable accounting standards and expenses when incurred or, in the case of contingencies, when estimable and probable, in accordance with ASC 450); and making ledger entries as infrequently as once per month, resulting in firms not having adequate context to determine the proper accrual-based transaction date.

Effective Practices

  • Net Capital Assessment: Performing an assessment of the net capital treatment of assets, to confirm that they were correctly classified for net capital purposes.
  • Moment-to-Moment and Net Capital Compliance for Underwriting Commitments: Establishing and maintaining current WSPs for:
    • ensuring the firm’s role is clear within the agreement as it relates to its role in the underwriting (i.e., best efforts (either in a contingent or a firm commitment offering) or as having a firm commitment);
    • establishing a process to track open contractual commitments in which the firm is involved at all times; and
    • calculating and applying open contractual commitment charges, as well as focusing on the product and proper haircut percentage.
  • Net Capital Deductions: Establishing a process to determine creditworthiness of corporate or nonconvertible securities inventory if applying the “minimal amount of credit risk standard; and maintaining WSPs for calculating and applying net capital deductions and haircuts for non-marketable inventory.

Additional Resources

1 Firms are reminded that any affiliate obligated to pay firm expenses must have the independent financial means to satisfy those obligations.