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47 Bus. Law. 863 (1991-1992)
The New Capital Rule

handle is hein.journals/busl47 and id is 881 raw text is: The Net Capital Rule
By Michael P. Jamroz*
A broker-dealer conducting a general securities business that is required to
register with the Securities and Exchange Commission (Commission) under
section 15(b) of the Securities Exchange Act of 1934 (Exchange Act)1 must
comply with the Commission's net capital rule (Net Capital Rule or Rule).2
The Net Capital Rule prescribes a test that ensures that registered broker-
dealers have adequate liquid assets to meet their obligations to their investors
and creditors. This Article outlines the basic structure of the Rule, describing its
fundamental sections and underlying policy considerations. It also examines
innovations in the securities industry that will impact the future application of
the Rule.
The primary purpose of the Net Capital Rule is to protect the customers and
creditors of registered broker-dealers from monetary losses and delays that can
occur when a registered broker-dealer fails.3 The Rule generally requires that
the registered broker-dealer maintain sufficient liquid assets to enable it to
liquidate without the need for a formal proceeding if it falls below the minimum
*Mr. Jamroz, a member of the Virginia bar, is a branch chief in the Division of Market Regulation
of the U.S. Securities and Exchange Commission. The views of Mr. Jamroz are his own and do not
reflect the views of the Commission or his colleagues on the staff of the Commission. The
Commission, as a matter of policy, disclaims responsibility for any private publication by any of its
employees. Mr. Jamroz would like to thank the following persons for their assistance in preparation
of this Article: Michael A. Macchiaroli, Assistant Director, Division of Market Regulation,
Securities and Exchange Commission and Steven O'Malley, Vice President, Chicago Board Options
Exchange, Inc.
1. 15 U.S.C. § 78o(b) (1988 & Supp. 11 1990).
2. Exchange Act Rule 15c3-1, 17 C.F.R. § 240.15c3-1 (1991). Broker-dealers that limit their
activities to transactions in government securities may register with the Commission under § 15C of
the Exchange Act. 15 U.S.C. § 78o-5 (1988). Those broker-dealers must comply with the capital
adequacy rules promulgated by the Department of the Treasury rather than the Commission's Net
Capital Rule. See Capital Requirements for Registered Government Securities Brokers and Deal-
ers, 17 C.F.R. § 402.2 (1991); see also 15 U.S.C. § 78o(c)(3) (1988).
3. The Net Capital Rule also serves other purposes. For example, the Net Capital Rule has a
limiting effect on those brokerage firms that would otherwise incur unanticipated risks. Since all
securities firms covered by the Rule must make basic measurements of risk, the Rule causes firms to
make some determination of the extent of their exposure to risk.

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