N.Y. General Business Law § 352-k: Broker dealer minimum capital requirements

§ 352-k. Broker dealer minimum capital requirements. 1. Every

broker-dealer registered or required to be registered in this state

shall have and maintain a net capital of not less than five thousand

dollars. The term net capital shall be deemed to mean the net worth of a

broker or dealer (that is, the excess of total assets over total

liabilities), adjusted by

(a) adding unrealized profits (or deducting unrealized losses) in the

accounts of the broker or dealer and, if such broker or dealer is a

partnership, adding equities (or deducting deficits) in accounts of

partners, as hereinafter defined;

(b) deducting fixed assets and assets which cannot be readily

converted into cash (less any indebtedness secured thereby) including,

among other things, real estate; furniture and fixtures; exchange

memberships; prepaid rent, insurance and expenses; good will;

organization expenses; all unsecured advances and loans; customers'

unsecured notes and accounts; and deficits in customers' accounts,

except in bona fide cash accounts within the meaning of section 4(c) of

regulation T of the board of governors of the federal reserve system;

(c) deducting the percentages specified below of the market value of

all securities, long and short (except exempted securities) in the

capital, proprietary and other accounts of the broker or dealer,

including securities loaned to the broker or dealer pursuant to a

satisfactory subordination agreement, as hereinafter defined, and if

such broker or dealer is a partnership, in the accounts of partners, as

hereinafter defined:

(1) in the case of non-convertible debt securities having a fixed

interest rate and a fixed maturity date which are not in default, if the

market value is not more than five per cent below the face value, the

deduction shall be five per cent of such market value; if the market

value is more than five per cent but not more than thirty per cent below

the face value, the deduction shall be a percentage of market value,

equal to the percentage by which the market value is below the face

value; and if the market value is thirty per cent or more below the face

value, such deduction shall be thirty per cent;

(2) in the case of cumulative, non-convertible preferred stock ranking

prior to all other classes of stock of the same issuer, which is not in

arrears as to dividends, the deduction shall be twenty per cent;

(3) on all other securities, the deduction shall be thirty per cent;

provided, however, that such deduction need not be made in the case of

(1) a security which is convertible into or exchangeable for other

securities within a period of thirty days, subject to no conditions

other than the payment of money, and the other securities into which

such security is convertible, or for which it is exchangeable, are short

in the accounts of such broker or dealer or partner, or (2) a security

which has been called for redemption and which is redeemable within

ninety days.

(d) deducting thirty per cent of the market value of all "long" and

all "short" future commodity contracts (other than those contracts

representing spreads or straddles in the same commodity and those

contracts offsetting or hedging any "spot" commodity positions) carried

in the capital, proprietary or other accounts of the broker or dealer

and, if such broker or dealer is a partnership, in the accounts of

partners as hereinafter defined;

(e) deducting, in the case of a broker or dealer who has open

contractual commitments, the respective percentages specified in

subparagraph (c) above of the value (which shall be the market value

whenever there is a market) of each net long and each net short position

contemplated by any existing contractual commitment in the capital,

proprietary and other accounts of the broker or dealer and, if such

broker or dealer is a partnership, in accounts of partners, as

hereinafter defined; provided, however, that this deduction shall not

apply to exempted securities, and that the deduction with respect to any

individual commitment shall be reduced by the unrealized profit, in an

amount not greater than the percentage deduction provided for in

subparagraph (c), (or increased by the unrealized loss) in such

commitment; and that in no event shall an unrealized profit on any

closed transactions operate to increase net capital;

(f) excluding liabilities of the broker or dealer which are

subordinated to the claims of general creditors pursuant to a

satisfactory subordination agreement as herein defined; and

(g) deducting, in the case of a broker or dealer who is a sole

proprietor, the excess of (1) liabilities which have not been incurred

in the course of business as a broker or dealer over (2) assets not used

in the business.

(h) For the purposes of this section only the term "exempted

securities" shall mean:

(1) obligations issued or guaranteed by the United States, a state,

territory or any political subdivision thereof, or of any

instrumentality, authority, commission, or agency, of the United States,

a state, territory, or any political subdivision thereof, and

(2) any note, draft, bill of exchange, or banker's acceptance which

arises out of a current transaction or the proceeds of which have been

or are to be used for current transactions, and which has a maturity at

the time of issuance of not more than nine months, exclusive of days of

grace, or any renewal thereof, the maturity of which is likewise

limited, and which is such as is sold in the open market in the usual

course of business of broker-dealers.

(i) the term "accounts of partners", where the broker or dealer is a

partnership, shall mean accounts of partners who have agreed in writing

that the equity in such accounts maintained with such partnership shall

be included as partnership property;

(j) the term "contractual commitments" shall include underwriting,

when-issued, when-distributed and delayed delivery contracts,

endorsement of puts and calls, commitments in foreign currencies, and

spot (cash) commodities contracts, but shall not include uncleared

regular way purchases and sales of securities and contracts in

commodities futures; a series of contracts of purchase or sale of the

same security conditioned, if at all, only upon issuance may be treated

as an individual commitment;

(k) the term "satisfactory subordination agreement" shall mean a

written agreement between the broker or dealer and a lender, which

agreement is binding and enforceable in accordance with its terms upon

the lender, his creditors, heirs, executors, administrators, and

assigns, and which agreement satisfies all of the following conditions:

(1) it effectively subordinates any right of the lender to demand or

receive payment or return of the cash or securities loaned to the claims

of all present and future general creditors of the broker or dealer;

(2) it is not subject to cancellation at the will of either party and

is for a term of not less than one year;

(3) it provides that it shall not be terminated, rescinded or modified

by mutual consent or otherwise, if the effect thereof would be to make

the agreement inconsistent with the conditions of this rule, or to

reduce the net capital of the broker or dealer below the amount required

by this section;

(4) it provides that no default in the payment of interest or in the

performance of any other covenant or condition by the broker or dealer

shall have the effect of accelerating the maturity of the indebtedness;

(5) it provides that any notes or other written instruments evidencing

the indebtedness shall bear on their face an appropriate legend stating

that such notes or instruments are issued subject to the provisions of a

subordination agreement which shall be adequately referred to and

incorporated by reference;

(6) it provides that any securities or other property loaned to the

broker or dealer pursuant to its provisions may be used and dealt with

by the broker or dealer as part of his capital and shall be subject to

the risks of the business;

(7) the term "customer" shall mean every person except the broker or

dealer; provided, however, that partners who maintain "accounts of

partners" as herein defined shall not be deemed to be customers insofar

as such accounts are concerned.

2. Every broker-dealer shall file, as required by the

attorney-general, a financial statement setting forth its assets,

liabilities and net worth as computed in subdivision one above.

3. The provisions of this section shall not be applicable to issuers

of their own securities who are deemed to be broker-dealers solely for

such reason or to banks, private banks, trust companies or other

organizations engaged in a banking business and in the conduct of such

banking business are subject to examination, supervision and control of

the banking authorities of any state or of the United States or any

insular possession thereof.

4. Upon a showing by the attorney-general that a broker-dealer has

failed to maintain a net capital as hereinbefore prescribed, the supreme

court after a hearing may issue an injunction in the form and manner

provided for in subdivision one of section three hundred fifty-three of

this article in the case of one who actually has or is engaged in any

fraudulent practice, for such period of time during which such

broker-dealer shall not have and maintain such minimum net capital. The

failure, without reasonable cause therefor, of a broker-dealer to file

financial statements as may be required by the attorney-general, shall

be prima facie proof that such broker-dealer has failed to maintain the

minimum net capital required hereunder and an injunction may issue from

the supreme court as hereinbefore set forth without any further showing

by the attorney-general.

5. The attorney-general may from time to time in the public interest

make, amend and rescind such rules, regulations and forms as are

necessary to carry out the provisions of this section, including rules,

regulations and forms governing financial statements and filings

thereof. For the purpose of such rules, regulations and forms, the

attorney-general may classify securities, persons and matters within his

jurisdiction and may prescribe different forms and requirements for

different classes.

6. Any false statement of a material fact contained in any such

financial statement, in any certificate attached thereto or any papers

submitted in connection therewith shall constitute a violation of this

section within the meaning of section three hundred fifty-nine-g of this

article.