Net Capital Deficiency Discovered on a Friday
Ridgeline Securities carries customer accounts and must maintain $250,000 minimum net capital. On Friday, May 16, the controller's draft computation shows net capital of $268,000, but that figure excludes a $95,000 charge for a customer debit created when a deposited check was returned unpaid. The controller calls the item "temporary" and proposes to file the FOCUS report Monday as usual. If the debit is included, net capital falls to $173,000. The CFO asks whether the firm must notify FINRA before the weekend and whether it can keep opening new customer accounts.
1. Should the $95,000 returned-check debit be included in the net capital computation?
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Yes. A returned check creates a customer debit that must be charged against net capital; calling it temporary does not make it excludable. Including it reduces net capital to $173,000. The draft computation of $268,000 is therefore materially overstated and cannot support the FOCUS filing. The controller should re-run the computation, preserve the supporting records, and escalate the corrected figure immediately.
2. What notifications are triggered, and when?
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Two thresholds are implicated. Net capital of $268,000 would already be below 120% of the $250,000 requirement ($300,000), triggering early-warning notice within 24 hours. But the corrected figure of $173,000 is below the minimum requirement, which triggers immediate notice to FINRA under SEA Rule 17a-11 and a written report as required. The firm should not wait until Monday. It should telephone FINRA immediately, follow with the required written notice, and involve counsel.
3. Can the firm continue opening new customer accounts while the deficiency is unresolved?
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No. A firm below its minimum net capital requirement cannot continue business as usual. It should stop opening new customer accounts and suspend securities business except as necessary for an orderly liquidation or as permitted by the rules, after consulting counsel. Filing a FOCUS report that omits the debit would misstate the firm's condition and compound the violation.