Quick Answer
Financial responsibility is a stack of overlapping floors and triggers. The net capital rule sets liquid-asset minimums by firm type, the customer protection rule segregates customer assets, FOCUS reports and early-warning notices give regulators visibility, Regulation T and FINRA margin govern credit, and SIPC backstops the customer if the firm still fails.
The biggest, most numeric unit on the exam condensed to one sheet: capital, reserves, margin, disclosures, and insurance.
The One-Liners That Win Points
- Net capital (NC) is a liquid-asset floor for wind-down: a firm below minimum must cease securities business until cured. Furniture, prepaid expenses, and goodwill are non-allowable (subtracted in full); securities take haircuts.
- Two computation methods: Basic (aggregate indebtedness cannot exceed 15 times NC) or Alternative (2% of aggregate debit items). Election is filed with the Designated Examining Authority (DEA), which is FINRA for most, not the SEC.
- Customer protection rule has two pillars: possession or control of fully paid and excess margin securities, plus a Special Reserve Bank Account for customer cash.
- Excess margin securities = market value above 140% of the customer's debit balance (the 140% is on the debit, not the market value).
- Free credit balances are general firm liabilities the firm may use in its business, payable on demand, disclosed to the customer at least quarterly.
- Reg T sets initial margin (50%); FINRA margin sets maintenance (25% long, 30% short) and covers instruments Reg T does not.
- Hypothecation rules: no customer-to-firm commingling (absolute, even with consent); customer-to-customer commingling needs each customer's consent; never pledge above the customer's debt; notify the pledgee the securities are customer property.
- SIPC covers the disappearance of customer assets when the firm fails, never market losses.
Numbers to Lock In
| Item | Value |
|---|---|
| NC minimum, carrying / clearing firm | $250,000 |
| NC minimum, introducing firm (receives funds) | $50,000 |
| NC minimum, introducing firm (no funds / securities) | $5,000 |
| NC minimum, prime / executing broker | $1,000,000 |
| NC minimum, market maker | $2,500 per security, generally not below $100,000 |
| NC minimum, mutual fund retailer (subscription-way) | $25,000 |
| FCM that is also a BD | greater of BD requirement or 4% of segregated funds |
| Basic Method ceiling | aggregate indebtedness up to 15 times NC |
| Alternative Method floor | NC at least 2% of aggregate 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 early-warning AI trigger | aggregate indebtedness above 12:1 (1,200%), 24-hour notice |
| Alternative-Method early-warning trigger | NC below 5% of debit items, 24-hour notice |
| Expansion-restriction windows | 15 consecutive business days of condition, 5-day knowledge gate |
| Excess margin securities threshold | market value above 140% of debit balance |
| Reserve computation, default | weekly (Friday close, deposit by Tuesday) |
| Reserve computation, daily trigger | $500 million or more average total credits |
| FOCUS Part II | monthly, within 17 business days |
| FOCUS Part IIA | quarterly, within 17 business days |
| FOCUS Part III (annual audit) | within 60 calendar days of fiscal year-end |
| Auditor-engagement statement | filed by December 10, dated by December 1 |
| Reg T initial margin | 50% of purchase price |
| Reg T payment date | S+2 (T+3 under T+1 settlement) |
| Cash-account freeze for unpaid purchase | 90 days |
| FINRA maintenance margin | 25% long / 30% short |
| Pattern Day Trader minimum equity | $25,000 |
| Day-trading call cure / restriction | 5 business days to meet, then 90-day cash-available restriction |
| Portfolio margin eligibility | equity of $100,000 or more |
| New-issue credit restriction | 30-day prohibition on financing a distributed security |
| Fully-paid securities lending, advance FINRA notice | 30 days |
| Carrying new introducing firm, advance FINRA notice | 10 business days (with CRD number) |
| Short-interest reporting cadence | twice monthly (15th and last business day) |
| Short-interest filing deadline | 6:00 p.m. ET, second business day after settlement date |
| Fidelity bond, NC requirement below $250,000 | greater of 120% of NC requirement or $100,000 |
| Fidelity bond, NC requirement $250,000+ | tabular; per-loss coverage, no aggregate limit |
| Fidelity bond deductible cap | 25% of coverage (excess above 10% deducted from net worth) |
| Fidelity bond recalibration | highest NC requirement in prior 12 months |
| Lost / stolen securities inquiry threshold | more than $10,000 (query the SIC first) |
| SIPC coverage | $500,000 total per separate customer per capacity |
| SIPC cash sub-limit | $250,000 (within the $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. "Below minimum" is a live violation; the 120% and 150% triggers are early warnings.
- The $5,000 floor is only for introducing firms that never receive customer funds or securities. Touching customer funds at any point pushes the floor to $50,000.
- The 150% FINRA trigger applies only to carrying / clearing firms. Pure introducing firms go straight to the SEC's 120% / 100% triggers.
- Expansion restriction needs BOTH the 15-day continuation AND the 5-day knowledge gate. Curtailment is a more aggressive step that forces the firm to shrink, not just freeze.
- The $250,000 cash sub-limit sits inside the $500,000 SIPC total. $300,000 securities plus $300,000 cash = $500,000 covered, $50,000 of cash uncovered.
- Each SIPC capacity gets a fresh $500,000 / $250,000 limit. Individual, joint, and IRA at one firm = three separate coverages.
- Fully-paid securities loaned with customer consent are NOT SIPC-covered; the customer relies only on the firm-posted, daily-marked collateral.
- Fidelity bond deductibles above 10% reduce net capital; small firms must not forget the $100,000 floor beneath the 120%-of-NC test.
- Non-PCAOB-registered auditor = a FOCUS reporting violation even if the audit itself is flawless.
- Short-interest reporting is a reporting rule; the substantive short-sale conduct rules live in Regulation SHO.
One-Breath Recap
Financial responsibility is a system of overlapping floors and triggers. The net capital rule sets liquid-asset minimums by firm type ($250,000 carrying, $50,000 or $5,000 introducing, $1,000,000 prime broker, $100,000 market maker, $25,000 mutual fund retailer) and a ratio (15:1 aggregate indebtedness under the Basic Method, 2% of debits under the Alternative Method). The customer protection rule segregates customer securities under possession or control and customer cash in the Special Reserve Bank Account, computed weekly (or daily above $500 million in average credits). FOCUS reports and the 150 / 120 / 100 early-warning ladder keep regulators informed. Regulation T sets 50% initial margin and the 90-day cash-account freeze; FINRA sets 25% / 30% maintenance and the $25,000 Pattern Day Trader floor. Hypothecation caps pledging at the customer's debt, and SIPC backstops the customer at $500,000 total ($250,000 cash) if the firm fails anyway. Master the dollar figures and this twenty-five-section unit answers itself.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Financial Responsibility and Funding unit for the complete lesson.