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Broker-Dealer’s Net-Capital Requirements Highlighted by SEC Charges

The SEC filed a complaint last month against the former CEO and a former employee of a broker-dealer for engaging in misleading and deceptive conduct in an effort to fabricate the net capital position of the broker-dealer.

For the protection of customers, registered broker-dealers are subject to the Uniform Net Capital Rule 15c3-1 (the “Net Capital Rule”) under the Securities Exchange Act of 1934, which requires the maintenance of minimum net capital based on the nature of the broker-dealer’s business. As such, broker-dealers are barred from operating without sufficient net capital as defined by the Net Capital Rule.

The SEC complaint alleges that during October and November 2016, the defendants knowingly concealed and falsely represented the broker-dealer’s net capital position by disguising loan proceeds as capital infusions. As a result, the broker-dealer was in non-compliance with the Net Capital Rule but remained in operations until January 2017 under the mask of this misrepresentation made to the third-party financial operations professional, the Company’s counterparties, and FINRA. The SEC now seeks permanent injunctions and civil penalties against the defendants.  

For more information on compliance with the requirements of the Net Capital Rule, contact us:

Victor Peña, CPA, CGMA
Partner
vpena@pkfod.com

Mike Provini, CPA
Partner
mprovini@pkfod.com

Anna de Venoge
Supervisor
adevenoge@pkfod.com

Sources:

SEC Charges Individuals for Assisting Broker-Dealer’s Net-Capital Violations

Securities and Exchange Commission vs. Benjamin Mekawy and Alan D. Seidel