Net Capital Requirements
States commonly require investment advisers to meet net capital requirements both prior to and during registration. This means that their net worth (assets minus liabilities) must not fall below a certain amount. Note that for the exam, an investment adviser’s net worth and net capital are considered to be the same thing. A net capital requirement is also sometimes referred to as a bonding requirement, because firms may take out a surety bond to protect them if their net capital falls below the required level.
When calculating net worth, the adviser must exclude all assets that cannot readily be converted into cash. Thus, prepaid expenses, personal residence, automobiles, and any intangible assets, such as patents or trademarks, should not be counted as assets.
The amount of net capital IAs are required to have depends on the nature of their practice, with advisers having actual custody of their client assets being required to demonstrate the most net capital.
The current NASAA-recommended net capital requirements are:
- • $35,000 for advisers with custody over client assets, except those advisers who only have custody for purposes of deducting their fees or managing a pooled investment
- • $10,000 for advisers with discretionary authority over the transactions in their clients’ accounts but who do not have custody over client assets
Note: “Discretionary authority” is when an adviser has been granted permission to make trades in an account without receiving prior approval from the customer for each trade. A third-party trading agreement is different from a discretionary authority, since a third-party agreement grants someone else besides the adviser or agent permission to initiate trades in the account.
- • Any adviser who requires prepayment of client fees more than six months in advance and for more than $500 per customer must also maintain a positive net worth (hypothetica