Quick Answer
Net capital measures a broker-dealer's regulatory financial resources under the Net Capital Rule, while the reserve formula calculation determines a customer-reserve amount from customer-related credits and debits. Both use financial records for regulatory purposes, but they are separate calculations addressing different aspects of broker-dealer financial responsibility.
Financial records support more than reporting. They also supply the information needed for two distinct regulatory financial calculations.
Which Net-Capital Standard and Minimum Apply?
- Net capital is a regulatory measure of a broker-dealer's financial resources.
- The Net Capital Rule requires a broker-dealer to meet its applicable net-capital requirements.
- The firm's financial records support the net-capital calculation and related regulatory reporting.
- Under the aggregate-indebtedness standard, aggregate indebtedness generally may not exceed 1,500% of net capital, or 800% for 12 months after commencing business as a broker or dealer.
- Under the alternative standard, the firm maintains the greater of $250,000 or 2% of aggregate debit items
| Firm activity or conditions | Minimum net capital |
|---|---|
| Carries accounts and receives or holds customer or broker-dealer funds or securities, excluding the specified customer-protection-rule exempt broker or dealer | $250,000 |
| Specified customer-protection-rule exempt broker or dealer, or a dealer | $100,000 |
| Fully disclosed introducing firm that receives but does not hold securities | $50,000 |
| Specified registered investment-company or insurance separate-account activity | $25,000 |
| Does not directly or indirectly receive funds or securities for customers; does not hold funds or securities for customers; does not owe funds or securities to customers; does not carry customer accounts; and does not engage in listed activities | $5,000 |
Exam Tip: Gotchas
- The applicable requirement is the greatest one that applies. Do not choose a lower activity minimum when the firm's business triggers a higher requirement.
- 1,500% and 800% are maximum indebtedness ratios. They are not minimum net-capital percentages.
What Does the Reserve Formula Calculate?
- The reserve formula calculation evaluates customer-related credits and debits for regulatory financial purposes.
- It determines the customer-reserve amount associated with the firm's handling of customer funds and securities.
- The formula compares total credits with total debits.
- If total credits exceed total debits, the firm must maintain at least the net credit excess in the special reserve account for customers.
| Calculation | Focus and result |
|---|---|
| Net capital | The broker-dealer's regulatory financial resources |
| Reserve formula calculation | Compares total credits with total debits; any net credit excess must be maintained in the special reserve account for customers |
Financial records → net-capital calculation and reserve-formula calculation → separate measures of financial responsibility
Exam Tip: Gotchas
- Net capital and the reserve formula are separate calculations. Both are regulatory financial calculations, but each addresses a different aspect of broker-dealer financial responsibility.
- The firm must maintain at least the net credit excess in the special reserve account for customers. The reserve formula finds this amount by comparing total credits with total debits.
What Should You Check on Exam Day?
- Identify whether the firm uses the aggregate-indebtedness or alternative standard.
- Match the firm's activities to the applicable net-capital minimum.
- Compare total credits with total debits under the reserve formula.
- If total credits exceed total debits, maintain at least the net credit excess in the special reserve account for customers.
- Keep the firm's net-capital measure separate from the customer-reserve amount.