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)

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
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