Financial Requirements: Net Capital & Surety Bonds
Details broker-dealer net capital under SEC Rule 15c3-1, NSMIA preemption, surety bonding rules, and permissible cash deposits in lieu of bonds.
- NSMIA preempts states from imposing net capital or bonding rules on broker-dealers that exceed SEC requirements.
- Administrators may require surety bonds for BDs and agents with discretionary authority or custody.
- In lieu of a surety bond, registrants may deposit an equivalent amount of cash or marketable securities.
Under NSMIA, state securities Administrators are strictly prohibited from establishing capital, margin, or bonding requirements for registered broker-dealers that exceed the requirements established by the SEC under the Securities Exchange Act of 1934 (such as SEC Rule 15c3-1 Net Capital Rule).
For broker-dealers and agents who have custody of or discretionary authority over customer funds or securities, the state Administrator may require the posting of a surety bond. The purpose of a surety bond is to ensure that funds are available to satisfy civil judgments obtained by defrauded clients.
Under Section 202(e) of the Uniform Securities Act, in lieu of obtaining a surety bond from an insurance company, a registrant may deposit cash or marketable securities in an equivalent amount directly with the state Administrator.
- States cannot enforce a $500k net capital requirement if the SEC requires only $250k; federal law governs broker-dealer capital.
- Personal promissory notes or real estate deeds cannot be deposited in lieu of a surety bond.
The state securities Administrator of Ohio wishes to protect local retail investors by passing a state regulation requiring all broker-dealers operating within Ohio to maintain a minimum net capital of $500,000. Under SEC Rule 15c3-1, the applicable federal net capital requirement for these firms is $250,000. Can the Ohio Administrator enforce this higher $500,000 requirement against registered broker-dealers?