Net Capital
What the exam tests
Rule 15c3-1 is the core financial test. You must compute net capital, apply the minimum, and check the aggregate indebtedness (AI) ratio.
The computation
Net capital = net worth + qualifying subordinated loans − non-allowable assets − haircuts.
- Non-allowable assets include goodwill, fixed assets, prepaid expenses, and unsecured receivables.
- Haircuts apply to securities positions. Common stock generally carries a 15% haircut; Treasuries carry low or zero haircuts; corporate bonds and preferred stock generally 15%.
- Subordinated loans count only if a proper subordination agreement is in place.
Minimums and ratio
- $250,000 for firms carrying customer accounts.
- $100,000 for introducing firms that do not carry accounts.
- $5,000 for certain limited firms that do not hold customer funds.
- AI ratio: aggregate indebtedness may not exceed 15 times net capital (1500%).
Early warning
Net capital below 120% of the minimum triggers a Rule 17a-11 notice. Below 100%, the firm must notify and cease business.
Traps
Applying haircuts to net worth instead of subtracting them after non-allowable assets; forgetting that subordinated debt is not equity unless properly documented; confusing tentative net capital (before haircuts) with net capital.
Worked example
Net worth $700,000 + subordinated loan $100,000 − non-allowable assets $150,000 − haircuts $200,000 = $450,000 net capital. With a $250,000 minimum, excess is $200,000. If AI is $3,000,000, the ratio is 6.67:1, within 15:1.