When a broker-dealer fails, customers ask one question: are my cash and securities still there? Every financial responsibility rule exists so the answer is yes.
The Securities Exchange Act of 1934 (Exchange Act) addresses that risk in Exchange Act Section 15(c)(3). That section directs the Securities and Exchange Commission (SEC) to write rules safeguarding the financial responsibility of brokers and dealers. The net capital rule keeps enough liquid assets to absorb losses and wind down in an orderly way. The customer protection rule walls off customer property from the firm's creditors.
As a principal, you supervise compliance with financial responsibility requirements and the firm's funding and cash management. Funding means equity, subordinated loans and bank borrowing. Cash management means forecasting daily payment needs so no shortfall tempts anyone toward customer money. You review capital and reserve computations, escalate owner withdrawals and new loans, and see that required notices go out on time.
Net capital is net worth minus assets the firm cannot quickly turn into cash and minus haircuts, the percentage deductions on securities the firm owns.
Common mistakes
- Citing Rule 15c3-2. Free credit balances now sit in Rule 15c3-3(j).
- Testing for a pattern day trader. See the June 4, 2026 intraday margin change.
- Curtailing on day one. Rule 4120's expansion and reduction limits apply only after more than 15 consecutive business days.
Bottom line
- Net capital minimums are $250,000 for carrying firms, $100,000 for dealers and $50,000 for introducing firms that receive but do not hold securities.
- AI may not exceed 1,500% of net capital (800% in year one) unless the firm elects the alternative standard.
- Rule 4120 requires FINRA notice below 150%. After more than 15 consecutive business days, it bars expansion, and below 125% it forces reduction.
- Rule 17a-11 requires 24-hour notice below 120% or above 1,200% AI and same-day notice below the minimum.
Exam shortcut
When a stem gives a capital percentage, place it on the 150/125/120/100 ladder and pick the action at the lowest rung crossed. Rule 4120 binds only carrying and clearing firms, so a stem about an introducing firm points to Rule 17a-11. For an owner withdrawal, check the $500,000 30-day total before the 30% and 20% tests.
The full lesson (about 4,250 words, 28 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- B9
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