IRVINE, Calif. — Small brokerage firms are concerned about possible increases in net capital requirements that the Securities and Exchange Commission has proposed.
IRVINE, Calif. — Small brokerage firms are concerned about possible increases in net capital requirements that the Securities and Exchange Commission has proposed.
“Despite all of the promises and assurances to the contrary ... we are now faced with a proposal for a more restrictive net capital requirement,” Richard Goble, president of the Financial Industry Association in Longwood, Fla., wrote in an e-mail alert to his small-firm supporters.
But John Nester, spokesman at the SEC, said that nothing is changing. “The proposal would codify existing interpretation” that has been in effect since 2003, he said.
And an industry executive agreed.
“There is no net capital increase in the proposal,” said Howard Spindel, a compliance consultant at Integrated Management Solutions in New York. The proposal incorporates into SEC rules prior commission guidance, which NASD has been enforcing, he said.
Under SEC rules, broker-dealers are required to maintain a minimum amount of net capital based on the type of business they do to ensure financial stability. Large firms have excess capital, but small dealers sometimes trip up over the complicated calculations — and are assessed fines for violations.
The proposals are amendments to the SEC’s financial responsibility rules and were released in March. The SEC is asking for comments on the package by May 18.
Meanwhile, in a letter to the SEC this month, the Securities Industry and Financial Markets Association of New York and Washington asked that the comment period be extended by 30 days due to “the complexity of the issues involved, and the significance of the potential impact” on brokerage firms. The letter didn’t specify the trade group’s concerns.
Mr. Nester declined to say whether the comment period would be extended.
SIFMA associate general counsel Jerry Quinn, who wrote the letter, didn’t return a call.
The SEC proposal is a grab bag of changes covering the handling of customer assets and credits, cash sweeps, net capital rules and the use of banks for reserve deposits.
“It looks like most of the changes will have an impact on clearing firms,” said David Bellaire, general counsel at the Financial Services Institute Inc. in Atlanta, which represents independent-contractor firms.
Of concern to small firms is a change in how broker-dealers would account for expenses that are paid by a parent or affiliate. The SEC said that it is concerned that if these liabilities aren’t shown, a
broker-dealer’s capital level may look higher than it actually is.
To avoid a higher capital requirement, a dealer would have to demonstrate that the parent or affiliate had the resources and assets to pay the liabilities.
In its cost analysis for the rule, the SEC said that up to 700 firms could be forced to pony up another $200 million in capital.
The proposal, together with Mr. Goble’s agitating, has some firms worried. It “would force the majority of small firms out of business,” Ted Beer, a principal at Ivy League Financial Services Inc. in Tempe, Ariz., wrote in a comment letter to the SEC.
The issue of higher net capital is touchy. During the recent vote on changing NASD bylaws to effect the merger with the NYSE, rumors surfaced that the new single self-
regulator would raise net capital.
Washington-based NASD denied that that would happen.
Mr. Goble’s concerns about higher capital requirements are wrong, Mr. Spindel said. The guidance from the SEC in 2003, which was incorporated in NASD Notice to Members 03-63, already covered the expense and liability issues, the consultant said.
The SEC cost estimates, which are required under administrative procedures, also are wrong, Mr. Spindel said. He added that the SEC has talked about raising net capital requirements, but he doesn’t think that will happen.
“The SEC is very, very afraid of small brokers running to their Congressmen,” Mr. Spindel said.
