Regulatory Notification and Business Curtailment

The FINRA early-warning notification is the first rung on the early-warning ladder for carrying / clearing firms. The SEC's early-warning notification regime sets the 120%-of-minimum and 100%-of-minimum triggers. FINRA fires earlier, at 150%, because FINRA wants visibility into a deteriorating clearing firm before the SEC's lower triggers kick in. The framework pairs this earlier notification with two enforcement levers FINRA holds: business-expansion restriction and business-reduction curtailment.

The 150% Notification Trigger

A carrying or clearing member must notify FINRA within 24 hours if its net capital falls below 150% of the dollar minimum net capital requirement under the net-capital rule.

Why 150%

The 150% threshold gives FINRA earlier warning than the SEC's 120% trigger:

• A firm with a $250,000 carrying-firm minimum hits the FINRA early-warning trigger at $375,000 (150% of $250,000)
• The same firm hits the SEC's 24-hour early-warning trigger at $300,000 (120% of $250,000)
• The same firm hits the SEC's same-day early-warning trigger at $250,000 (100% of $250,000)

The earlier visibility gives FINRA time to engage the firm operationally (request a remediation plan, increase examination cadence) before the SEC's regulatory-action triggers fire.

Carrying / Clearing Scope

The FINRA early-warning notification applies to members that carry customer accounts or clear transactions for other members. Pure introducing firms with no customer-asset custody are outside the requirement's scope; they go straight to the SEC's 120% / 100% triggers.

Exam Tip: Gotchas

• The FINRA early-warning trigger is 150%, more restrictive than the SEC's 120% trigger. FINRA wants earlier visibility into deteriorating clearing firms. The exam may try to substitute "120%" or "100%"; the FINRA early-warning trigger is 150%.
• The FINRA early-warning requirement applies to carrying / clearing members. A pure introducing firm is NOT subject to the 150% FINRA trigger; it picks up the SEC's 120% / 100% triggers. The exam tests this by giving an introducing-firm scenario and asking which trigger fires first.

Business Expansion Restriction

A member that carries customer accounts or clears transactions may not expand its business during any period in which the 150% condition (or other specified conditions) continues for more than 15 consecutive business days, provided the condition has been known to FINRA or the member for at least 5 consecutive business days.

The two consecutive-day windows work in tandem:

What "Expand Its Business" Means

The expansion restriction is broad and includes:

• Opening additional offices
• Hiring additional registered representatives
• Adding new products or services
• Increasing the number of customer accounts beyond a baseline
• Increasing transaction volume above a baseline

The firm continues to operate its existing business but cannot grow until the net-capital condition is cured.

Think of it this way: A firm operating with deteriorated net capital is not allowed to take on more risk while it is fragile. The expansion restriction is FINRA's way of saying: fix what you have before you add more. If the firm's net capital is already strained at $375,000, hiring 20 new reps or adding 5,000 new customer accounts would amplify the problem.

Exam Tip: Gotchas

• The expansion restriction requires BOTH the 5-day knowledge gate AND the 15-day continuation. A condition that is known for 4 days and continues for 30 days does not trigger the restriction (the 5-day gate was not met before the clock started). The exam may try to test only the 15-day side; both windows must be satisfied.
• The restriction is on EXPANSION, not on operation. A firm under the expansion restriction continues to serve existing customers, fill existing orders, and conduct existing lines of business. It cannot grow.

Business Reduction (Curtailment)

If net capital falls below specified levels lower than the notification threshold, FINRA may require the member to reduce its business. Curtailment is a more aggressive intervention than expansion restriction, and it can include:

• Limits on number of customer accounts the firm may carry
• Limits on volume of transactions the firm may execute
• Limits on securities held in inventory for proprietary trading
• Limits on capital commitments (underwriting, market making, principal positions)

Curtailment is imposed by FINRA staff in cooperation with the firm's senior management. The goal is to bring the firm's risk profile back in line with its diminished capital base, not to shut it down.

Real-world example: A carrying firm with a $250,000 minimum has its net capital fall to $260,000 (above the 100% floor but well below the 150% trigger and the 120% SEC trigger). FINRA may require the firm to: (1) cease taking new customer accounts, (2) reduce inventory positions by 30%, and (3) limit daily customer trading volume to 50% of recent levels. The firm continues to operate but at a reduced scale matched to its capital.

Exam Tip: Gotchas

• Curtailment is a MORE aggressive intervention than the expansion restriction. Expansion restriction freezes growth at current levels. Curtailment forces the firm to shrink. The two are not the same; they sit at different points on the deterioration ladder.

How the Early-Warning Notification Fits in the Ladder

The full early-warning ladder for a carrying / clearing firm reads top-down:

A firm whose net capital is dropping moves through these levels in order. Each step adds a regulatory consequence. By the time the firm hits the lowest curtailment level, it is already in significant distress.

Exam Tip: Gotchas

• Memorize the 150 / 120 / 100 ladder for net capital, in that descending order. FINRA fires first at 150% of minimum (early-warning notification). SEC fires next at 120% (24-hour notification). SEC fires same-day at 100% (same-day notification). The exam frames this as a "which trigger fires when" question; the order is FINRA → SEC 24-hour → SEC same-day.