§ 240.15c3-1 — Net capital requirements for brokers or dealers.

Rule 15c3-1 is the SEC's principal financial-responsibility rule for broker-dealers. It requires every broker or dealer to maintain at all times "net capital" no less than a specified amount computed by the rule. Operating below the required minimum is, by its nature, a continuous violation; a broker-dealer that falls below its minimum net capital requirement must immediately cease conducting a securities business (subject to limited wind-down allowances) and notify the SEC and its designated examining authority.

(a) Minimum net capital requirements.

The rule prescribes minimum requirements that vary with the nature of the broker-dealer's business:

1. **Aggregate indebtedness standard (basic method).** $250,000 for a broker-dealer that carries customer accounts, or a lower amount for firms engaged in more limited activities; the minimum is increased to the extent that aggregate indebtedness exceeds 15 times net capital (the classic "15-to-1" limitation). 2. **Alternative standard.** A broker-dealer that carries customer accounts may elect to compute its minimum net capital requirement under the alternative standard, under which the minimum is the greater of $250,000 or 2% of aggregate debit items (see § 240.15c3-3a, the Customer Reserve Formula). Firms subject to the alternative standard are not subject to the aggregate-indebtedness limitation. 3. **Market makers.** The rule sets specific minimums for market makers (e.g., $100,000 or $2,500 per security for each security in which the broker-dealer makes a market, up to a $1,000,000 ceiling). 4. **Introducing brokers.** $5,000 for a broker-dealer that introduces accounts on a fully disclosed basis to a clearing broker and does not carry customer funds or securities, subject to minimum-equity-capital exceptions. 5. **Prime broker / consolidated supervised entity / ANC firms.** Additional and substitute computations apply.

(b) Definitions.

Net capital.

"Net capital" is the firm's net worth, computed under GAAP, adjusted by specified deductions and add-backs. The principal deductions include:

1. Non-allowable assets (assets not readily convertible into cash): unsecured receivables from non-customers, prepaid expenses, fixed assets, goodwill, and certain other assets. 2. Haircuts on proprietary securities positions, computed under subparagraph (c)(2)(vi). Haircuts vary by security type: 0% for exempt securities and certain short-dated Treasuries; 6% for money-market instruments of specified quality and maturity; 15% for corporate debt of investment grade, with higher haircuts for longer maturities and lower credit quality; 15% for a diversified portfolio of equity securities subject to specific concentration limits; 40% for speculative or non-investment grade debt; and 100% for certain other positions. 3. Undue concentration deductions: additional haircuts apply when the broker-dealer's inventory in a single issuer exceeds 10% of net capital (or other specified thresholds). 4. Commodities position deductions and other specialized items.

Aggregate indebtedness.

"Aggregate indebtedness" means the total money liabilities of a broker-dealer arising in connection with any transaction whatsoever, with specified exclusions for fully secured items such as customer-margin borrowings collateralized by securities and subject to the customer reserve formula.

(c) Capital withdrawals.

A broker-dealer may not permit the withdrawal of equity capital (e.g., distribution to owners, redemption of capital, or repurchase of stock) that would:

1. Reduce net capital to less than 120% of the minimum; 2. Reduce net capital to less than the greater of 25% of the broker-dealer's haircuts on proprietary positions or a specified dollar amount; or 3. Cause aggregate indebtedness to exceed 10 times net capital.

Subordinated loans may not be repaid on an accelerated basis, or prepaid, without the prior written approval of the broker-dealer's designated examining authority. A pre-approved "Required Notice of Intention to Withdraw Subordinated Loan" must be filed with the DEA two business days before any scheduled repayment that would reduce net capital below 120% of the minimum.

(d) Notification triggers.

A broker-dealer must send written notice to the Commission, the DEA (typically FINRA), and (for any carrying broker-dealer) the SIPC, under the following circumstances:

1. If the broker-dealer's net capital declines below the minimum specified in paragraph (a); 2. If the broker-dealer's ratio of aggregate indebtedness to net capital exceeds specified thresholds (notably 12-to-1); 3. If certain other financial events occur (e.g., deficits in the Customer Reserve account, loss of use of books-and-records systems, or significant net capital deficiencies).

Notice must generally be given the same day the triggering event becomes known, through the EDGAR system or, in extremis, by fax and phone.

(e) Early-warning triggers.

A broker-dealer that falls below early-warning levels (e.g., aggregate indebtedness exceeding 12 times net capital under the basic method, or net capital below 5% of aggregate debits under the alternative standard) is subject to prohibitions on capital withdrawals and expansion of the broker-dealer's business pending restoration.