Quick Answer
Net capital below the minimum, insolvency, or specified recordkeeping failures require same-day notice. Key 24-hour triggers include capital below 120% of the dollar minimum, indebtedness above 12:1, alternative-method capital below 5% of debit items, and defined material weaknesses. Notify the SEC and examining authority, with an additional recipient for futures commission merchants.
The early-warning notification rule sits on top of the net-capital regime. Net capital tells the firm where the floor is. The notification rule tells the firm when it must alert regulators that the floor is being approached or breached. The rule's design is to give the SEC and DEA visibility into a deteriorating firm before customer assets are at risk, not just after a default.
Same-Day Notification Triggers
A BD must give immediate notice on the same day to both the SEC and the DEA if either of the following occurs:
| Trigger | Threshold |
|---|---|
| Net capital below minimum | Net capital falls below the dollar minimum or ratio floor required by the net-capital rule |
| Insolvency | The firm becomes insolvent (cannot meet obligations as they come due) |
| Books-and-records failure | The firm fails to make or keep current its books and records |
The first two are the most severe triggers. By the time a firm hits them, it is in violation of the net-capital rule (must cease securities business) or in financial distress that may require SIPC intervention.
A records failure can hide the firm's financial condition. The firm must also provide the prescribed corrective-action report within 48 hours of its notice. A corrective-action report is also required for the defined control-weakness trigger; it is not unique to records failures.
What "Same Day" Means
The notice must be filed the same calendar day the firm becomes aware of the trigger event. Not the next business day, not within 24 hours, the same day. Firms typically have written escalation procedures so that the chief compliance officer or financial / operations principal is contacted immediately when the trigger is hit.
Exam Tip: Gotchas
- Net capital BELOW the minimum = SAME-DAY notice. Net capital AT 120% of minimum = 24-HOUR notice. The exam tests this distinction frequently. "Below minimum" is a current violation; "120% trigger" is a warning.
- Insolvency triggers same-day notice independently of the net-capital test. A firm with sufficient regulatory net capital but failing to meet obligations as they come due (a working-capital problem, for instance) still owes the same-day notice.
- The specified records failure requires same-day notice. Discovery of a material weakness in internal control over compliance requires 24-hour notice. Both have prescribed corrective-action follow-ups.
24-Hour Early-Warning Notification Triggers
Within 24 hours of any of the following, the BD must notify the SEC and the DEA:
| Trigger | Threshold |
|---|---|
| Aggregate indebtedness ratio (Basic Method) | AI exceeds 1,200% of net capital (i.e., > 12:1) |
| Alternative Method debit ratio | Net capital falls below 5% of aggregate debit items |
| Either method - 120% trigger | Net capital falls below 120% of the firm's minimum required (dollar or ratio) |
| Material weakness | Discovery under the broker-dealer annual reporting definition |
The 120% Trigger
The 120% trigger is the most common 24-hour event. It catches a firm before it actually breaches the dollar minimum.
Real-world example: A carrying firm with a $250,000 minimum that drops to $299,999 must file a 24-hour early-warning notice, even though it is still above the floor. 120% of $250,000 is $300,000. Any net capital below $300,000 triggers the early warning.
The 120% trigger is the SEC's deliberate buffer: by the time the firm is at 120%, the regulator wants to know, so steps can be taken before the firm slips below 100%.
The 1,200% AI Ratio Trigger
For Basic-Method firms only, the AI / NC ratio cannot exceed 12:1 (1,200%) without triggering a 24-hour notice. This is the early-warning level for the Basic Method's normal 15:1 ceiling (which is itself the same-day rule because crossing 15:1 means net capital is below 6 2/3% of AI).
Material Inadequacy
Discovery of a material weakness in internal control over compliance triggers notice within 24 hours and the prescribed corrective-action report within 48 hours of notice. It need not await the final annual audit report. The notification rule separately retains a material inadequacy trigger for firms subject to the specialized OTC derivatives dealer reporting framework.
Do not confuse this 24-hour trigger with a books-and-records failure. A books-and-records failure is a same-day trigger, covered in the same-day section above.
Exam Tip: Gotchas
- The 120% trigger catches a firm BEFORE it actually breaches the dollar minimum. A firm with a $250,000 minimum that drops to $299,999 must file an early warning, even though it is still above the floor. The early-warning system gives regulators time to act before a deficiency becomes a default.
- The Basic-Method 1,200% AI trigger and the Alternative-Method 5%-of-debits trigger are early-warning levels paired with each method's substantive ceiling. Basic Method ceiling is 6 2/3% of AI (15:1); the 1,200% trigger fires at 12:1, before the ceiling. Alternative Method floor is 2% of debits; the 5% trigger fires above that, before the floor.
Notice Recipients
The early-warning notice goes to both the SEC and the DEA:
- SEC's principal office (Washington, D.C.) and the regional office for the firm's principal place of business
- Designated Examining Authority (FINRA for most BDs; sometimes a registered exchange like NYSE for member firms)
Filing only with the DEA is insufficient. The SEC office route includes its principal and relevant regional offices; the rule also permits the SEC-designated email route. A firm registered as a futures commission merchant must also notify the CFTC.
Exam Tip: Gotchas
- The notice goes to BOTH the SEC and the DEA, simultaneously. A firm that calls FINRA but does not also file with the SEC has a procedural violation independent of the underlying net-capital problem. The exam may probe whether one filing covers both; it does not.
How the SEC Notification Layer Connects to the FINRA Early-Warning Notification
The FINRA early-warning notification (covered in the next section) layers a 150% of minimum notification trigger on top of the SEC's 120% trigger. The full early-warning ladder for a carrying / clearing firm looks like this:
| Level | Source | Notice Type |
|---|---|---|
| 150% of minimum | FINRA early-warning notification | 24-hour notice to FINRA, with possible expansion restriction |
| 120% of minimum | SEC early-warning notification | 24-hour notice to SEC and DEA |
| At or below minimum | SEC early-warning notification | Same-day notice to SEC and DEA |
This three-tier ladder (150 / 120 / 100) is a frequent exam target. Memorizing the order is straightforward; the trick is identifying which rule layer fires at each step and what the consequence is.
Exam Tip: Gotchas
- The three-tier early-warning ladder is a frequent exam target.
- FINRA early-warning notification: 150% of minimum (carrying / clearing firms only)
- SEC early-warning notification: 120% of minimum (24-hour notice)
- SEC capital-deficiency notification: below the required minimum (same-day notice)
- Memorize 150 / 120 / 100 as the three trigger levels.
- The 150% trigger applies to carrying / clearing firms. Pure introducing firms are not subject to the FINRA 150% trigger; they go straight from operating to the SEC's 120% / 100% triggers. The exam may probe this around firm-category scenarios.
What Should You Check on Exam Day?
- Can you distinguish the same-day triggers from the 24-hour warning and material-weakness triggers, and identify the applicable follow-up report?
- Do you know the aggregate-indebtedness ratio that triggers 24-hour notice under the Basic Method: 1,200% (12 to 1)?
- Can you state the three-tier early-warning ladder in order: 150%, 120%, and 100% of the net capital minimum?
- Do you know that early-warning notices go to both the SEC and the Designated Examining Authority, not just one?