7 Action Items for Broker-Dealers: Net Capital Edition

In its 2022 Report on FINRA’s Examination and Risk Monitoring Program, FINRA continues to focus on net capital computations to ensure firms are meeting minimum net capital requirements designed to protect customers and creditors.  Specific items on their priority list include classification of receivables, liabilities, revenues and expenses, as well as expense sharing agreements, failed to deliver and failed to receive contracts, and capital charges on underwriting commitments.

What should broker-dealers be doing?

  • Firms should perform regular assessments of the net capital treatment of its assets, including CDs, to ensure they are accurately classified as allowable versus non-allowable for net capital purposes.
  • Obtain and verify with banks the withdrawal terms of any assets, in particular CD products, to determine if any withdrawal restrictions exist so the firm can properly report the assets classification on the balance sheet, and determine the appropriate net capital charge.
  • If you have a parent or affiliated entity that pays expenses on behalf of the broker-dealer, ensure that you have developed a written agreement between the entities that takes into consideration all allocated expenses on a fair and reasonable basis, consistently applied as if the broker-dealer is accounted for on a standalone basis.
  • Firms should perform a review of the process over the aging of fails to deliver and fails to receive contracts to determine the accuracy of the aging and, if applicable, accurately calculating any net capital deduction.
  • Ensure that the firm’s books and records for recording revenue and expenses are accounted for using the accrual basis of accounting and not a cash basis accounting methodology.
  • Ensure the firm has developed and maintains an adequate process to determine appropriate moment-to-moment and open contractual commitment capital charges on underwriting commitments.
  • Ensure the firm provides ongoing guidance and training for the Financial and Operational Principal (FINOP) in regard to all aspects of net capital requirements, and especially those mentioned above.

For a deeper dive into net capital best practices and what regulators are looking for, listen to our Oyster Stew podcast “2022 Exam Priorities – Financial Management.” 

Oyster’s FINOP consultants are leading experts in regulatory net capital requirements that can assist in keeping your firm compliant with industry regulations. We can also provide your firm with an outsourced FINOP who understands the industry and your firm but who also has the experience and resources to navigate regulatory nuances and interpretations.

About The Author

Fred is an accomplished financial executive and leader with extensive experience in the full-service broker-dealer, clearing, and registered investment advisory industry. Fred’s experience includes pre- and post-merger and acquisition financial responsibilities, financial statement preparation, net capital computations, regulatory filings, incentive compensation development, commission payout systems and financial/accounting optimization and strategy. Prior to working at Oyster, Fred served as CFO for SA Stone Wealth Management, Inc. (SAS) and Divisional Controller of StoneX Financial, Inc. (SFI)

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