Recordkeeping Rules - Registration and Regulation of Brokers and Dealers


Minimum Net Capital Requirements
SEC Rule 15c3-1 requires broker-dealers to maintain the following minimum net capital requirements in order to offer sufficient protection for the firm's customers:

  • $250,000 for broker-dealers who conduct general securities business and carry customer funds and securities

  • $50,000 for broker-dealers who introduce accounts to another broker-dealer on a fully disclosed basis, receive but do not hold customer securities for delivery to the clearing broker-dealer and do not carry customer accounts

  • $25,000 for broker-dealers that only handle mutual fund transactions and do not hold customer funds or securities

  • $5,000 for broker-dealers who do not directly or indirectly receive securities from customers (known as introducing brokers)

Definitions
Aggregate indebtedness (general understanding) - In addition to the applicable net capital requirement as shown above, broker-dealers must maintain sufficient net capital to cover all liabilities not secured by their own assets.

A first-year broker-dealer must not have aggregate indebtedness in excess of eight times its net capital.

A broker-dealer with more than one year of operation has a net capital requirement of one-fifteenth of its aggregate indebtedness.


Net capital (general understanding, including adjustments to net worth for illiquid assets) - Net capital includes the broker-dealer's net worth (capital stock plus retained earnings) adjusted by items such as unrealized profits or losses, illiquid assets and tax liabilities.

Haircuts (general understanding of effect on capital of proprietary positions) - Some items are included in net worth at a reduced value, known as a haircut. Stocks owned by the broker-dealer have a haircut of 15% of market value.

SEC Rule 15c3-3 - Customer Protection Rule
The Customer Protection Rule requires that broker-dealers establish a reserve account for the protection of customers, called the "Special Reserve Bank Account for the Exclusive Benefit of Customers". They are also required to maintain possession or control of all securities belonging to their customers. Exemptions under this rule include:

  • Broker-dealers that deal solely with investment company shares
  • Broker-dealers that do not maintain margin accounts or hold customer securities or cash (introducing brokers)

Privacy of Consumer Financial Information
In 2000, the SEC adopted Regulation S-P, created under Section 504 of the Gramm-Leach-Bliley Act. This legislation required the SEC (and other federal organizations) to adopt rules implementing notice requirements and restrictions on a financial institution's ability to disclose nonpublic personal information about consumers. As a result, broker-dealers must provide their customers with a notice of privacy policies and practices, and must not disclose nonpublic personal information about a consumer to nonaffiliated third parties unless the institution provides certain information to the consumer and the consumer has not elected to opt out of the disclosure.

Regulation S-P spells out requirements for delivery of initial and annual notices about the broker-dealer's privacy policies and practices, and about the opportunity and methods for customers to opt out of the sharing of their nonpublic personal information with nonaffiliated third parties. The rule requires these disclosures to be clear and conspicuous and to accurately reflect the broker-dealer's privacy policies and practices.

Certain exceptions apply, including one that permits broker-dealers, mutual funds and registered investment advisers to disclose information to nonaffiliated third parties in circumstances such as maintaining or servicing a customer's account, or complying with federal, state or local laws. For example, sharing information may be made without consent if doing so necessary to allow a third party to perform services such as processing and servicing transactions.

SEC Section 17
Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares 10-20 Year Treasury Bond

    Learn about the iShares 1-20 Year Treasury Bond ETF and its holdings, and understand why investors may be better served to look at other bond funds.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares Global Telecom

    Learn about the iShares Global Telecom exchange-traded fund, which invests in U.S. and foreign telecommunication companies with high dividend yields.
  3. Chart Advisor

    Gold Struggles to Climb Higher and May Fall Soon

    Traders will be watching the price of gold over the coming weeks. We'll take a look at how a couple major moving averages are suggesting that the next move could be lower.
  4. Economics

    Is a Recession Coming?

    In the space of a week, the VIX Index, a measure of market volatility, spiked from 13, suggesting extreme complacency, to over 50, evidencing total panic.
  5. Technical Indicators

    Use Market Volume Data to Determine a Bottom

    Market bottoms often carve out classic volume patterns that let observant traders make fast and accurate calls.
  6. Forex Strategies

    These Are The Best Hours To Trade the Euro

    Six popular currency pairs and numerous secondary crosses offer euro traders a wide variety of short- and long-term opportunities.
  7. Professionals

    Tips on Building a Resume for a Private Equity Job

    Trying to land a job in the coveted private equity sector? Ensure your resume meets the stringent PE job requirements with these important tips.
  8. Savings

    Best Places to Exchange Currency in Chicago

    Whether you're leaving the Windy City or arriving with a stack of foreign cash, these are your best bets for currency exchange.
  9. Mutual Funds & ETFs

    ETF Analysis: United States Brent Oil Fund

    Learn more about the United States Brent Oil exchange-traded fund, the characteristics of the fund and the suitability and recommendations of it.
  10. Mutual Funds & ETFs

    ETF Analysis: ProShares Ultra Bloomberg Crude Oil

    Find out more about the ProShares Ultra Bloomberg Crude Oil ETF, the characteristics of UCO and the suitability and recommendations of UCO for investors.
RELATED TERMS
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s ...
  2. Theta

    A measure of the rate of decline in the value of an option due ...
  3. Record Date

    The cut-off date established by a company in order to determine ...
  4. Supply

    A fundamental economic concept that describes the total amount ...
  5. Purchasing Power

    The value of a currency expressed in terms of the amount of goods ...
  6. Investment Banker

    Someone working at an institution raising capital for companies, ...
RELATED FAQS
  1. Can my IRA be garnished for child support?

    Though some states protect IRA savings from garnishment of any kind, most states lift this exemption in cases where the account ... Read Full Answer >>
  2. Why is my 401(k) not FDIC-Insured?

    401(k) plans are not FDIC-insured because they are typically composed of investments rather than deposits. The Federal Deposit ... Read Full Answer >>
  3. Can I use my IRA savings to start my own savings?

    While there is no legal reason why you cannot withdraw funds from your IRA to start a traditional savings account, it is ... Read Full Answer >>
  4. Can creditors garnish my IRA?

    Depending on the state where you live, your IRA may be garnished by a number of creditors. Unlike 401(k) plans or other qualified ... Read Full Answer >>
  5. Is Japan an emerging market economy?

    Japan is not an emerging market economy. Emerging market economies are characterized by low per capita incomes, poor infrastructure ... Read Full Answer >>
  6. How does an IRA grow over time?

    Individual retirement account, or IRA, growth depends on many factors, including what types of investments are included in ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!