1.1.2.3. Net Capital Requirements
States commonly require investment advisers (IAs) to meet net capital requirements both prior to registration and at all times while their registration remains active. This means that the firm’s net worth (assets minus debts) must not fall below a certain amount.
In calculating this net worth, the adviser must exclude all assets that cannot readily be converted into cash. Thus, personal residences, 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. Advisers with actual custody of client assets have the highest net capital requirements.
The current NASAA recommended net capital requirements are:
• $35,000 for advisers with custody over client assets, except those advisers that only have custody for purposes of deducting their fees or managing a pooled investment
• $10,000 for advisers that do not have custody over client assets, but have discretionary authority over the transactions in their clients’ accounts
Test Note: An adviser is said to have “discretionary authority” when it is 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, s