NASAA Series 63Regulation of Broker-Dealers and AgentsHard
A small state-registered broker-dealer is unable to meet the minimum net capital requirement set by the state Administrator. Under the Uniform Securities Act, the Administrator may permit the broker-dealer to satisfy its financial responsibility obligations by an alternative means, specifically by:
- AReducing the number of agents registered under the firm until capital requirements no longer apply
- BObtaining a personal financial guarantee from one of its registered agents
- CSubmitting unaudited financial statements on a quarterly rather than annual basis
- DFiling a surety bond in an amount specified by the Administrator in lieu of maintaining the minimum net capital
Show answer & explanationAnswer & explanation
Correct answer: D. Filing a surety bond in an amount specified by the Administrator in lieu of maintaining the minimum net capital
Under the Uniform Securities Act, an Administrator may permit a broker-dealer (or investment adviser) to post a surety bond, in an amount determined by rule or order, as an alternative to meeting minimum net capital or net worth requirements.
Why the other options are wrong
- A. Incorrect — reducing agent headcount does not exempt a BD from net capital rules.
- B. Incorrect — personal guarantees from agents are not a recognized substitute for firm capital requirements.
- C. Incorrect — reporting frequency does not substitute for meeting capital adequacy standards.
Surety Bond Alternative
An Administrator may allow a broker-dealer or investment adviser to satisfy financial responsibility requirements via a surety bond instead of meeting minimum net capital or net worth thresholds.
- Bond amount is set by the Administrator's rule or order
- Provides flexibility for smaller firms
- Does not eliminate other financial reporting obligations
Memory trick: Bond Backs Up the Balance Sheet