Quick Answer
Capital, custody, reporting and margin rules protect customer assets. Overlapping requirements aim to prevent failures and loss. When a firm fails, SIPC advances can reach $500,000 per capacity, including $250,000 for cash; returned property can add to recovery.
The most numeric unit on the exam, on one sheet.
The One-Liners That Win Points
- Net capital (NC): liquid-asset floor; below minimum, a firm must cease securities business. Furniture, prepaid expenses, and goodwill are non-allowable; securities take haircuts.
- Two computation methods (Basic or Alternative) are elected with Designated Examining Authority (DEA), FINRA, not SEC.
- Customer protection rule: possession or control of fully paid and excess margin securities, plus Special Reserve Bank Account for net customer credits.
- Excess margin securities: 140% test applies to debit balance, not market value.
- Free credit balances: firm liabilities, usable only for reserve-formula debit purposes, payable on demand, disclosed to customers at least quarterly.
- Reg T governs initial margin; FINRA margin governs maintenance and covers instruments Reg T does not.
- Hypothecation: no customer-to-firm commingling, even with consent; customer-to-customer needs consent; never pledge beyond customers' aggregate debit balances; notify pledgee of customer-property status.
- SIPC covers disappearance of customer assets when a firm fails, never market losses.
Numbers to Lock In
| Item | Value |
|---|---|
| NC minimum, carrying/clearing | $250,000 |
| Introducing (receives funds) | $50,000 |
| Introducing (no funds/securities) | $5,000 |
| Prime broker | $1,500,000 |
| Executing broker (self-clears, prime-broker) | $1,000,000 |
| Market maker | $2,500 per security, floor $100,000 |
| Mutual fund retailer (not subscription-way) | $25,000 |
| FCM also a BD | greater of BD requirement or 4% segregated funds |
| Basic Method ceiling | aggregate indebtedness up to 15x NC |
| Alternative Method floor | NC ≥2% debit items |
| Subordinated loan minimum term | 1 year (DEA pre-approval required) |
| Early-warning ladder | 150% (FINRA)/120% (SEC 24-hour)/100% (SEC same-day) |
| Basic-Method trigger | aggregate indebtedness >12:1 (1,200%), 24-hour notice |
| Alternative-Method trigger | NC <5% debit items, 24-hour notice |
| Expansion-restriction windows | 15 consecutive business days, 5-day knowledge gate |
| Excess margin threshold | market value >140% debit balance |
| Reserve, default | weekly (last business day of week; deposit 2nd business day after) |
| Reserve, daily trigger | $500 million+ average total credits |
| FOCUS Part I | monthly, within 10 business days |
| FOCUS Part II | quarterly, within 17 business days |
| FOCUS Part IIA | quarterly, within 17 business days |
| FOCUS Part III (annual) | 60 calendar days after fiscal year-end |
| Auditor-engagement statement | filed December 10, dated December 1 |
| Reg T initial margin | 50% purchase price |
| Payment date | S+2 (T+3 under T+1 settlement) |
| Cash-account freeze, unpaid purchase | 90 days |
| FINRA maintenance margin | 25% long/30% short |
| Intraday-margin-deficit trigger (replaces PDT) | deficit above lesser of 5% equity or $1,000 |
| Cure/restriction | 5 business days to cure; 90-day restriction on new shorts or debit balances |
| Portfolio margin eligibility | equity $100,000+ |
| New-issue credit restriction | 30-day prohibition, financing distributed securities |
| Fully-paid lending, advance notice | 30 days |
| Carrying new introducing firm, advance notice | 10 business days (CRD number) |
| Short-interest cadence | twice monthly (15th, last business day) |
| Filing deadline | 6:00 p.m. ET, second business day after settlement |
| Fidelity bond, NC requirement below $250,000 | greater of 120% NC requirement or $100,000 |
| NC requirement $250,000+ | tabular coverage amount; per-loss / no aggregate limit applies to every tier |
| Deductible cap | 25% coverage (excess over 10% cuts net worth) |
| Recalibration | highest NC requirement, prior 12 months |
| Lost/stolen inquiry threshold | >$10,000 (query SIC first) |
| SIPC advances | $500,000 per separate customer capacity |
| SIPC cash sub-limit | $250,000 (within $500,000, not on top) |
| Nonresident-records production | within 14 days of written SEC demand |
| Equity settlement cycle | T+1 |
Top Gotchas
- Below minimum = same-day notice; 120% of minimum = 24-hour notice.
- The $5,000 floor is for introducing firms that never receive customer funds or securities.
- The 150% FINRA trigger applies to carrying/clearing firms; introducing firms use the SEC's 120%/100% triggers.
- Expansion restriction needs BOTH 15-day continuation AND the 5-day knowledge gate; curtailment is more aggressive, forcing shrinkage.
- Qualifying joint accounts are one customer per owner combination. Each co-owner needs authority over the entire account; same-owner qualifying accounts aggregate.
- Valid written express trusts can qualify separately. Trusts existing primarily to obtain or increase SIPC protection cannot.
- Fully paid securities lending may lack SIPA protection; required disclosure warns collateral may be the customer's only recourse.
- Fidelity bond deductibles above 10% reduce net capital.
- Non-PCAOB-registered auditor = FOCUS reporting violation, even with flawless audit.
- Short-interest reporting is a reporting rule; short-sale conduct rules live in Regulation SHO.
One-Breath Recap
Financial responsibility stacks overlapping floors and triggers. Net capital sets liquid-asset minimums ($250,000 carrying, $50,000 or $5,000 introducing, $1,500,000 prime broker, $1,000,000 executing broker, $100,000 market maker, $25,000 mutual fund retailer) and ratio (15:1 Basic, 2% debits Alternative). The customer protection rule segregates customer securities via possession or control and holds net customer credits in Special Reserve Bank Account, weekly (daily at $500 million+ average credits). FOCUS and 150/120/100 ladder inform regulators. Reg T sets 50% initial margin and 90-day cash freeze; FINRA sets 25%/30% maintenance; repealed Pattern Day Trader rule is now intraday-margin-deficit. Hypothecation caps pledging at customers' aggregate debit balances; SIPC advance limits are separate from returned-property recovery.
Need more than the recap? Read the full Financial Responsibility and Funding unit.