A - Min Net Capital Dollar Requirements

Net Capital

"Liquid" Net Worth

Min Net Cap - Prime Broker

$1.5m (Must notify FINRA)

Min Net Cap - Fully Disclosed BD that Effects More Than 10 Trades/yr. *for it's own acct* (Excl transactions in MM instruments).

$100k

Min Net Capital for BD which writes OTC Options Contracts

$100k

Min Net Capital for Dealer who: 1 - Carries customer *ACCOUNTS*, but 2 - DOESN'T HOLD customer *funds* or *securities*

$100k

Min Net Capital for Introducing BD to Participate in a *Firm Commitment Underwriting*:

$100k

Min Net Cap - Municipal Securities *Broker's* Broker

$150k

Min Cap Requirement - Qualified Block Positioner

$1m

Min Net Cap - *Executing Broker* in PB Relationship

$1m

Min Net Capital - Clearing (or "General Securities") BD

$250k

Min Cap Requirement - Firms engaged in the sale of redeemable shares of investment companies that take *wire orders*

$25k (because they advance redemption proceeds to customers, b/f they even receive the money)

Min NC for Introducing BD that *receives customer funds* in in Best Efforts/"all-or-none" *underwriting*:

$50k

Min Net Cap for introducing firm that receives and promptly transmits *securities* (Payable to 3rd Party)

$50k

Min Net Capital - Fully Disclosed BD

$50k

Min Cap Requirement - Firms engaged in the sale of redeemable shares of investment companies that only take *subscription orders*

$5k

Min Cap Requirement - Introduces accounts on a fully disclosed basis to another firm and does NOT receive customer *funds* or *securities*

$5k

Min Cap Requirement - Mergers and acquisitions firms

$5k

Min Net Capital - Firms That Don't Receive Cust Funds or Securities

$5k

Min cap requirement for introducing firm that receives and promptly transmits *checks* (Payable to 3rd Party)

$5k

Conditions under which FINRA considers a firm to be approaching financial difficulty

(a) NC of less than *150%* of the min required (for more than *15 consecutive business days*); (b) Ratio of AI to NC exceeds *10:1* (for *15 consecutive business days*); (c) A reduction in excess net capital of *25%* in the preceding two months or *30%* or more in the three-month period immediately preceding such a computation; (d) A substantial change in the manner in which it processes its business which, in the view of FINRA, increases the potential risk of loss to customers; (e) Other BD's books/records not maintained in accordance w/ provis's of SEC Rules 17a-3 & 17a-4; (f) Inability to clear/settle transactions promptly.

Actions taken on FINRA members who are considered to be approaching financial/operational difficulty

(a) may be prohibited from expanding their business; or (b) may be required to reduce their level of business activity.

Min Net Capital - Market Maker (Larger than 1-2 man firms)

*$100k +* 1 - $1,000 for each security bid < $5 2 - 2,500 for each security bid > $5 *Max $1m*, but $1.2m (or extra extra 20%) avoids "early warning"

AI/NC ratio at which FINRA considers a firm to be approaching *financial difficulty*:

*10:1* for *15-consecutive business days*

NC% which FINRA considers a firm to be approaching *financial difficulty*:

*150%* of required minimum for more than *15-consecutive business days*

Amount of excess capital reduction at which FINRA considers a firm to be approaching *financial difficulty*:

*25%* in the preceding two months or, *30%* in preceding three months

Prime Broker Services -

1 - *Executing* transactions for the hedge fund, 2 - *Clearing* services for trades executed through other BDs used by the hedge fund. 3 - Cash management, 4 - Leveraged trade execution, 5 - Research.

$5k Introducing BD -

1 - *does not receive customer funds* (may accept checks made *payable to the issuer*, and must promptly forward such checks to the issuer. 2 - does not receive customer securities 3 - new issues: may engage in a best-efforts or all-or-none underwriting only. 4 - occasional trades for their own accts (no more than ten per calendar year).

$50k Fully Disclosed BD - Trades

1 - Can effect "occasional" (10) trades of own acct.; 2 - Can effect "occasional" (10) trades (BUT NOT CLEAR) on national exchange *of another broker*; 3 - May accept orders to *purch or redeem investment company (mutual funds/variable annuities) shares*. CHECKS MUST BE MADE OUT TO INVESTMENT CO., and "promptly" forwarded.

Clearing ("General Securities") BD -

1 - Carries customer accounts (Excl Officers and Partners) 2 - Receives funds/securities from customers

A clearing agreement should specify the responsibilities of each party with regard to all the following actions:

1 - Opening/Approving/Monitoring customer accts 2 - Extension of credit 3 - Safeguarding customer funds

Payment process of mutual fund firms that only accept *Subscription* orders -

1 - Purchaser fills out an application (the subscription) reflecting his intent to purchase. 2 - The firm forwards the customer's check to the fund distributor (customer *checks made out to DISTRIBUTOR*).

A BD is identified as a *carrying firm* under SEC Rule 15c3-1 may conduct the following activities:

1 - act in a principal capacity in *underwriting contracts*; 2 - may conduct *clearing* activities, and 3 - may engage in *market-making* activities.

A BD that *clears and carries* customer accounts is required to send *IMMEDIATE* notice to the SEC and its examining authority under the following circumstances:

1 - ratio of AI to NC exceeds 1,500% (15:1) 2 - NC falls below the min requirement 3 - BD's subordinated loans more than 70% of its debt and equity for a period exceeding 90 days

Max# of trades an introducing BD can make for their own accounts per year:

10

Early Warning% for Min Net Capital -

120%

AI/NC Ratio to which the BD must file an Early Warning Notice with its examining authority and the SEC *within 24 hours*

12:1

Amount of time a BD has to file an early warning notice:

24-hours

Min Liquidating Long Equity Position for Exception to Market Maker Rule:

25%

Min Liquidating Short Equity Position for Exception to Market Maker Rule:

30%

Trigger for Early Warning Notice Under Alternate Method of Calculating Min Net Cap

5% of Aggregate Debits

Qualified Block Positioner

A BD enaged in purchasing/selling SHORT a block of stock with *MV of $200k+* in a *single transaction*.

Dealer -

A firm executing 10 or more transactions in it's investment account over the course of a year.

Conditions for Exception to Market Maker Rule

Aimed at Smaller 1-2 Man Firms: 1 - Only deals with BD; 2 - Only effects its trades through a market maker acct cleared and carried by another BD; 3 - Doesn't carry customer accounts; 4 - Doesn't effect transactions in OTC options; 5 - Must AT ALL TIMES maintain min liquidating equity of securities positions at least equal to: (a) *25%* of mkt value of *long* positions (b) *30%* of mkt value of short positions

Minimum Capital Requirement -

BD must maintain the larger of: 1 - Minimum dollar amount, or 2 - 1/15 of AI Requirement. (1/8 in first year) 3 - Market-maker requirement ($1,000/$2,500)

Required Action for Falling Into Early Warning

File a notice with the SEC and its examining authority *within 24 hours*.

Clearing ("General Securities") BD Participation

Firm *commitment* underwritings or best efforts as (1) Syndicate, or (2) Seller

Standard Clearing Agreement

Introducing BD sends ALL trades to the CLEARING BD to: 1 - *EXECUTE all trades*; 2 - Settle all trades 3 - Maintain Custody 4 - Provide Financing

"Give up" Clearing Agreement

Introducing dealer sends trades through *different EXECUTING BROKERS* to whom the name of the Clearing Broker is "Given up" The Clearing Broker will: 1 - Settle all *Trades* 2 - Maintain *Custody* 3 - Provide *Financing*

Min Net Capital - Alternative method:

Larger of: (a) *$250k*, or (b) *2%* of aggregate debit items

$5k Fully Discl/Limited Purpose BD Underwriting Participation

May only *participate* in Best Efforts/"all-or-none" underwriting (*cust funds in escrow* and not at risk) as: 1 - Syndicate Member 2 - Selling Group Member

$50k Fully Disclosed BD Underwriting Participation

May only *participate* in Best Efforts/"all-or-none" underwriting as: 1 - syndicate member 2 - selling group member

Fully Disclosed BD (Funds and Securities)

Receive, but do not hold customer funds/ securities. Funds must be forwarded "promptly" (Same day) to the clearing firm.

Appropriate course of action if a member firm is notified that it's AI greater than allowable, and it does not agree with this finding.

Required to promptly notify the SEC and FINRA of the claimed deficiency, stating its reasons for disagreement.

Amount of time that introducing BD has to "promptly" forward funds to the clearing firm:

Same day

Difference between Standard Clearing Agreement and "Give up" Clearing Agreement:

Standard Clearing Agreement: Introducing BD sends ALL trades directly to the CLEARING BD to execute all trades. "Give up" Clearing Agreement: Executing dealer sends trades through *different executing brokers*

Alternate Net Capital Requirement -

This requirement based on *aggregate debit* items, computed under rule 15c3-3

Municipal Securities BD -

a - May only transact business in muni (*NOT GOV'T*) securities, and b - it may not maintain a proprietary account.