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Simple English definitions for legal terms
net-capital rules
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A quick definition of net-capital rules:
Net-capital rules are basic financial-responsibility standards that securities brokers must follow. These rules require brokers to maintain a minimum level of capitalization and to keep their total debt below a certain level. The Securities and Exchange Commission created these rules to protect investors and ensure that brokers have enough money to cover their obligations.
A more thorough explanation:
Definition: Net-capital rules are basic financial-responsibility standards established by the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934. These rules require securities brokers to maintain a minimum level of capitalization and to keep their aggregate indebtedness below a specified multiple of their net capital.
Example: A securities broker has a net capital of $1 million and a specified multiple of 10. This means that the broker's aggregate indebtedness should not exceed $10 million. If the broker's aggregate indebtedness exceeds this limit, they may be in violation of the net-capital rules.
Explanation: The example illustrates how the net-capital rules work in practice. The SEC requires securities brokers to maintain a certain level of financial stability to ensure that they can meet their obligations to clients. By setting a minimum level of capitalization and limiting aggregate indebtedness, the SEC aims to protect investors from potential losses due to broker insolvency or other financial difficulties.