72 Geo. L. J. 1 (1983-1984)
Broker-Dealers' Financial Responsibility under the Uniform Net Capital Rule--A Case for Liquidity

handle is hein.journals/glj72 and id is 9 raw text is: Broker-Dealers' Financial Responsibility under
the Uniform Net Capital Rule-A Case for
Recent operational and regulatory reforms, the high cost of capital, and
the ever-increasing diversity of investment mechanisms have called into
question the Securities and Exchange Commission's use of a liquidity
standard to ensure the continuing viability of broker-dealers. In their
article Mr. Molinari and Mr. Kibler examine the liquidity concept un-
derlying the uniform net capital rule andfind that the Commission's reli-
ance on a liquidity standard is well-founded         The authors initially
discuss the development of net capital requirements and the responsive-
ness of net capital rules to the changes taking place in the securities
industry. The authors next analyze the liquidity concept in light of sev-
eral developing investment mechanisms and conclude that the continued
emphasis on liquidity is proper given the increasing leverage permitted
by these mechanisms. Mr. Molinari and Mr. Kiblerfinally discuss al-
ternatives to the liquidity standard The authors conclude that, at least
for the present, the un/form net capital rule's continued emphasis on
liquidity is the superior method of ensuring thefinancial stability of bro-
ker-dealers and the protection of investors.
Since its inception in 1975, the uniform net capital rule' has been the main-
stay of the financial responsibility program of the Securities and Exchange
Commission (the Commission).2 The rule is premised on concepts of liquid-
* The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any
publications by any of its employees. The views expressed herein are those of the authors and do not
necessarily reflect the views of the Commission.
** Staff attorney, Division of Corporation Finance, Office of Disclosure Policy, Securities and Ex-
change Commission, Washington, D.C. Formerly Staff attorney, Division of Market Regulation, Of-
fices of Chief Counsel and Financial Responsibility. B.S. (Economics) 1977, University of Santa Clara;
J.D. 1980, University of San Francisco School of Law; LL.M. (Taxation), expected June 1984, Ge-
orgetown University Law Center. Member, California and District of Columbia Bars.
*** Partner with the accounting firm of Touche Ross & Company, Washington, D.C. Formerly
Assistant Director in the Division of Market Regulation, Office of Financial Responsibility, Securities
and Exchange Commission, Washington, D.C. B.S. (Business Administration) 1972, American Univer-
sity; J.D. 1983, George Mason University School of Law. C.P.A.; Member, Virginia Bar.
We would like to thank George Beliakow, Egon Guttman, Colette Kimbrough, Mike Macchiaroli,
and Alexander Shtofman for their assistance and helpful comments. In addition, Harry Melamed's
suggestions regarding several conceptual ideas discussed in the article are deeply appreciated. Finally,
we would also like to express our gratitude to Barbara Smith for her diligent preparation of several
drafts of this article.
1. 17 C.F.R. § 240.15c3-1 (1983).
2. Section 3(a)(40) of the Securities Exchange Act of 1934, 15 U.S.C. § 78c(a)(40) (Supp. V 1981),
defines the term financial responsibility rules of the Commission. These rules include the uniform
net capital rule, 17 C.F.R. § 240.15c3-1 (1983), the customer protection rule, 17 C.F.R. § 240.15c3-3
(1983), the financial reporting rule (FOCUS), 17 C.F.R. § 240.17a-5 (1983), the hypothecation rules, 17
C.F.R. §§ 240.8c-1, .15c2-1 (1983), the initial margin requirements of the Board of Governors of the
Federal Reserve System (the Federal Reserve Board), 12 C.F.R. § 220.3(b) (1983), and the mainte-

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