The Impact of Pending Lawsuits and Arbitration Claims on Broker Dealer Net Capital Requirements

The "net capital" requirements for broker-dealers are set forth in Rule 15c3-1 and its interpretations.  The "net capital" rule, which is very complex and technical, regulates the financial well-being of securities broker-dealers.   

In short, the "net capital" rule requires securities broker-dealers to maintain a minimum required amount of net worth/net capital (generally, capital in excess of liabilities).   The rule is intended to serve as a "safeguard," in that a certain level of funds/securities must be available to customers, and to make certain that sufficient assets exist to return funds and securities to creditors and customers if the broker-dealer must liquidate. 

Compliance with the rule requires broker-dealers to calculate their net worth based on various accounting principles, formulas and methods, and is guided by the type of business conducted. Pending lawsuits and arbitration claims (i.e., lawsuits and claims that have yet to be decided) are among the many factors impacting the computation of a broker-dealer's net worth.  In this regard, the "net capital" rule provides:

(c)(2) DEFINITIONS; NET CAPITAL (continued)

/0110 Lawsuits as Contingent Liabilities 
A broker-dealer that is the subject of a lawsuit that could have a material impact on its net capital must obtain an opinion of outside counsel regarding the potential effect of such a suit on the firm’s financial condition. Absent such opinion, the item must be considered, at a minimum, a contingent liability, and be included in the calculation of aggregate indebtedness that is required by SEA Rule 15c3-1(c)(1).  (SEC Staff of DMR to NASD, September 1988)

Thus, it is important for a broker-dealer to obtain an independent, third party legal opinion on pending lawsuits and arbitration claims, as they may impact the calculation of net capital under Rule 15c3-1.  Joel Ewusiak provides independent legal opinions to broker-dealers concerning pending lawsuits and arbitration claims, so that broker-dealers may fully comply with the computation of their net capital requirements.   Securities broker-dealers seeking the opinion of outside counsel concerning a pending lawsuit or arbitration claim may contact Joel at or 727.286.3559.