Net Capital

Regulatory Obligations

SEA Rule 15c3-1 (Net Capital Rule) requires that firms must at all times 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. SEA Rule 17a-11 requires firms to notify FINRA and the SEC when their net capital falls below the required minimum amount.

To assist firms in complying with SEA Rule 15c3-1, FINRA has published Regulatory Notice 25-12 (FINRA Announces Update of the Interpretations of Financial and Operational Rules), Regulatory Notice 23-21 (FINRA Reminds Member Firms of Net Capital, Recordkeeping and Financial Reporting Requirements in Connection with Revenue Recognition Practices) and Notice to Members 03-63 (SEC Issues Guidance on the Recording of Expenses and Liabilities by Broker/Dealers). Regulatory Notice 23-21 advises firms to ensure that they can demonstrate their proper application of the Financial Accounting Standards Board’s (FASB) Topic 606 (Revenue from Contracts with Customers), which serves as a foundation for compliance with the Net Capital Rule, SEA Rule 17a-3 and SEA Rule 17a-5.

If firms have an affiliate or parent paying any of their expenses, FINRA Notice to Members 03-63 provides guidance for establishing an expense-sharing agreement.

SEC Division of Trading and Markets Publishes FAQ Related to Crypto Assets

  • The SEC’s Division of Trading and Markets published FAQs relating to crypto asset activities and distributed ledger technology and withdrew the 2019 Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities.
  • The FAQs address several financial responsibility rules. In relation to addressing whether a broker-dealer is prohibited by custody and capital requirements from facilitating in-kind creations and redemptions in connection with a spot crypto exchange-traded product (ETP), an FAQ states that the SEC staff will not object if a broker-dealer treats a proprietary position in bitcoin or ether as being readily marketable for purposes of determining whether the 20 percent haircut  applicable to commodities under Appendix B of Rule 15c3-1 applies.

Findings

  • Improper Recording and Accrual of Revenues and Expenses:
    • Not recording transactions in a timely manner, or maintaining financial records on an accrual basis resulting in the firm’s noncompliance with SEA Rule 17a-3.
    • Not keeping accurate books and records (e.g., FOCUS filings, general ledgers) and not correctly classifying or accruing expenses and related liabilities, thereby leading to inaccurate net capital computations.
  • Inadequate Processes or Supervision Concerning Net Capital Deductions: Not maintaining a process or WSPs to accurately compute capital charges of nonmarketable securities (e.g., failing to compute marketplace blockage properly); and for certain firms, applying the lower haircuts only afforded to securities with a “minimal amount of credit risk” despite not having an adequate process to assess the creditworthiness of the security.  
  • Inadequate Supervision of Net Capital Compliance: Not having a reasonable process to determine when the firm has a net capital deficiency and should take appropriate regulatory action such as file timely notification of its net capital deficiencies and begin the process of suspending business operations.
  • Late or Inadequate Filings: Failing to timely file required notices of net capital deficiencies with FINRA and the SEC.
  • Inadequate Processes or Supervision Concerning Capital Charges for Underwriting Commitments: Not maintaining an adequate process to assess moment-to-moment net capital and open contractual commitments (OCC) capital charges on underwriting commitments; not establishing and maintaining WSPs for calculating and applying OCC charges; not maintaining an accurate record or log of underwritings in which the firm is involved; not understanding the firm’s role in the underwriting (i.e., best efforts or firm commitment); and not properly documenting that the commitment has been fully sold before discontinuing the OCC charges.
  • Insufficient Capital for Underwriting Participation: Acting in the capacity as the lead underwriter without maintaining sufficient minimum net capital to participate in such underwriting capacity and cover the required OCC charges.
  • Inaccurate OCC Charges: Failing to accurately capture OCC charges on firm commitment offerings (e.g., only capturing charges for the day of the pricing date or the settlement date, not capturing charges on unsold portion of underwriting from pricing date through settlement date, applying an incorrect haircut percentage as the open contractual commitment deduction).

Effective Practices

  • Net Capital Assessment: Performing an ongoing assessment of the net capital treatment of assets to confirm that they were correctly classified as allowable for net capital purposes.
  • Revenue Recognition Documentation: Documenting and consistently applying clear policies and analyses that demonstrate how the firm’s revenue recognition practices comply with ASC 606 requirements.
  • New or Complex Transaction Considerations: Including input from the firm’s regulatory reporting staff and FINOPs (including outsourced FINOPs) as a firm looks to enter into a new or complex transaction that may lead to significant downstream impacts to the firm’s Net Capital.
  • Moment-to-Moment and Net Capital Compliance for Underwriting Commitments:
    • Establishing control processes and maintaining current WSPs for:
      • ensuring the firm’s role in a particular underwriting is clear within the agreement (i.e., best efforts or firm commitment offering);
      • establishing a process to track open contractual commitments in which the firm is currently involved;
      • calculating and applying OCC charges, as well as focusing on the product and proper haircut percentage and undue concentration charges; and
      • maintaining appropriate records to evidence the firm’s open contractual commitment has been extinguished and that the firm no longer is required to take an OCC charge.

Annual Financial Reporting Reminders and Updates for Member Firms

SEA Rule 17a-5(d) Annual Reports:

  • Oath or affirmations must be administered by authorized persons per SEA Rule 17a-5(e)(2)(ii).
  • Compliance reports (SEA Rule 17a-5(d)(3)) or exemption reports (SEA Rule 17a-5(d)(4)) must be executed by the person making the oath or affirmation.
  • FASB Update 2023-07 (November 2023): All broker-dealers filing reports with SEC are "public business entities" and must apply segment disclosure guidance. Compliance date: Fiscal years that began after Dec. 31, 2023.
  • Annual reports must include all required U.S. GAAP footnote disclosures (e.g., ASC 606 revenue recognition, going concern, loss contingency).
  • SEA Rule 17a-5(f)(3) applies when engaging or changing independent public accountants.

Resources: 

Electronic Submission of Materials Under the SEA:

SEC Adopts Rule Amendments for the Electronic Submission of Annual Reports and Amendments Regarding FOCUS Reports

  • Annual Reports under SEA Rules 17a-5(d) must be submitted to SEC via EDGAR in PDF format for reports due on or after June 30, 2025. (Note: there are no changes to the FINRA Annual Audit Report submission process.)
  • Part III of Form X-17A-5 (Annual Reports Oath or Affirmation) no longer requires notarization.
  • Signatories may use manual or electronic signatures. See SEA Rule 17a-5(p) for electronic signature requirements.

XBRL Implementation Timeline:

  • Firms with ≥$250,000 minimum fixed dollar net capital requirement (as of Dec. 31, 2025): XBRL format required for reports due on or after June 30, 2027
  • Firms with <$250,000 minimum fixed dollar net capital requirement (as of Dec. 31, 2025): XBRL format required for reports due on or after June 30, 2029

FOCUS Report:

  • FOCUS Part II and IIA require signature from only one principal executive officer or principal financial officer. FINOPs need not be officers to perform their role, but only officers may sign the cover page of the FOCUS report (FINOPs who are also officers may sign in their officer capacity).
  • Effective March 1, 2026, the customer and proprietary accounts of broker-dealers (PAB) reserve requirement calculations will reflect SEC amendments to require daily reserve computations and Central Clearing of U.S. Treasury Securities.
  • Effective March 1, 2027, the FOCUS Part II and IIA will reflect SEC amendments as adopted in the Electronic Submission of Certain Materials Under the Securities Exchange Act of 1934; Amendments Regarding the FOCUS Report.

FINRA issued Information Notice 11/14/25 to highlight key changes and compliance dates that affect member firms.

Additional Resources

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