The Net Capital Rule is one of the key financial responsibility rules designed to protect customers and creditors from monetary losses that can occur if a broker or dealer fails. The Rule is complicated and very detailed. Firms need robust procedures and controls to ensure ongoing compliance.
Every year, FINRA publishes a report on their Examination and Risk Monitoring Program. Every year, FINRA includes a section on Net Capital, and every year, FINRA notes areas where they have found deficiencies. Every year, FINRA includes as a best practice a net capital assessment. The 2023 Report includes the following: “Net Capital Assessment: Performing an assessment of net capital treatment of assets, to confirm that they were correctly classified for net capital purposes.”
So, if firms know the Net Capital Rule and work hard to comply, why is FINRA still finding issues and recommending a net capital assessment?
Factors Affecting Net Capital Rule Fails
In the environment in which brokers and dealers operate there is constant change. Some of those changes include the following:
- New rules
- New interpretations of existing rules
- New people performing net capital computations
- New people performing underlying tasks creating data used in the computations
- New technologies
- New systems or processes
- New products or services offered
Hidden Net Capital Dangers: Out-of-Sight Changes
Any one or all of these may have an impact on the net capital computation. The risk of error can usually be managed. The biggest risk, however, is that a change will occur out-of-sight, the risk of unintended consequences. If a change occurs somewhere in the firm and the Financial and Operational Principal (FinOp) staff are involved, the impacts on net capital are usually known and addressed during the change process. But, too often, a well-intentioned person will improve a process without fully understanding the downstream impact on the data used for the net capital computation. When that happens, there may be an error no one realizes exists. In the best case, the firm’s internal controls catch the issue, and it is remediated. In the worst case, FINRA finds it during a routine exam.
FINOP Tools
FINRA (and Oyster Consulting) recommend a periodic net capital assessment. This is the best way to ensure a FINRA member firm is compliant with the Net Capital Rule, and to find and remediate any issues before a regulatory body or external auditor finds them for you.
Oyster Consulting has performed net capital assessments for brokers and dealers, and is ready to help your firm, too. Our outsourced, series 27 licensed FINOPs have decades of experience supervising finance teams, performing regulatory calculations and filing the reports. They will share their expertise, prepare net capital computations, FOCUS Reports, SIPC’s semi-annual reports, and provide support to your firm’s senior management.
Jeff Harpel
Jeff Harpel has over 30 years of expertise in accounting, finance, and auditing in the securities industry. Jeff’s FINOP and operations experience includes a comprehensive understanding of securities financial and operations requirements, dealing with regulatory examiners and a thorough command of internal controls, financial systems, and merger conversion activities.
