May 2, 2007
Amendments to Net Capital Rule 15c3-1 Proposed March 17, 2007
The stated advantage of the amendment is to permit regulators to react more quickly if a firm experiences financial difficulty. This would benefit customers of a troubled broker-dealer as well as its counterparties and, accordingly reduce the systemic risk in the securities market.
It is unclear and unlikely how this amendment would achieve any of the desired results and may conversely impair a firms ability to continue as a going concern.
If the NASD is truly concerned about the customer and the integrity of the markets it would
1) Increase SIPC coverage
2) Eliminate self funded E0
3) Accelerate the 1017 process when a firm experiences a net capital deficiency and needs to immediately expedite an account transfer
While the amendment attempts to more accurately portray the financial picture, it will not improve it and may actually distort the representation.
This proposal does not only effect shifting liabilities, which is significantly discussed in the Notice to Members 03-63 Expense-Sharing Agreements, but capital transactions that actually originate at the holding company level. In this case these liabilities were never the liabilities or obligations of the broker-dealer but capital to be employed in a parent companys operations as it determines in the course of its business.
Net Capital in its essence is a concise metric that measures a firms current liquidity. Liabilities of a parent may often be convoluted and of a long term nature that have no material impact on a firms current operations.
With regard to the cost metrics involved it would require continuous monitoring of the parent company and its subsidiaries. These entities would be required to constantly determine if they had sufficient resources to meet their debt obligations. This would require additional staffing as non broker-dealer related entities that previously reported on a quarterly basis would now be subject to NASD requirements to continuous monitor their financial position.
While the proposal contemplated additional costs related to acquiring a subordinated loan, the result would additionally bring a legally binding obligation to the broker-dealer that it doesnt currently have. The costs would be far greater if a liquidation should occur.
The purpose of an Inc. is to provide separate and distinct ownership between a parent, its principals and an entity. This requirement would blend these parties and may result in tax planning contraventions and other long term costs that would be substantial.
While the ammendment may strive to provide greater transparency the result would be more questions than answers and more firms failing than surviving.
The proposed amendment would effectively bring a non-regulated party (parent or holding company) under the scruitny an purview of the NASD. This is certainly to be an arbitray and unwise expansion of the the NASD's authority.
It must also be considered that any implementation and enforcement of these proposed changes should not be made retroactive. To subject firms to a new set of rules and guidelines, which effectively penalizes small firms that have been in full compliance with the rules and regulations. This would effectively force many financially sound firms out of business immediately, despite there exisitng no new exposure or risk to it existing customers.