The Securities and Exchange Commission made a key change yesterday in rules designed to protect against business failures by brokerage firms, reducing from 4 percent of customer debt to 2 percent the amount of funds a firm must have on hand to satisfy customer claims. The agency asserted that the higher figure is tying up more capital than warranted. The revision makes an estimated $500 million available for a wider range of investments than permitted before.
The change, adopted without dissent, affects roughly 275 firms that account for approximately 94 percent of the net capital held by the industry. It amends the net capital rule adopted in 1975 in the wake of widespread failures of broker-dealer firms and a majority of paperwork and capital problems in the securities industry.
Since then, circumstances have changed considerably, SEC officials said. "This is a balanced adjustment to a very complicated mechanism that was put in place six years ago when the industry was very different from the one that enters the 1980s," said Douglas Scarff, director of the division of market regulation.
The net capital requirement before the change set off early warning signals when the fund dropped below 7 percent of customer debt. At that point, both the SEC and the exchange or the National Association of Securities Dealers imposed certain restrictions on the firm aimed at restoring it to a healthier status. When the fund dropped to 4 percent, the firm was out of business.
Now the early warning sounds when the fund drops to 5 percent, and liquidation occurs at 2 percent.
"The important question is, is the amount of the cushion the appropriate amount in light of the volatility of the industry?" said Commissioner John R. Evans. "It is also in the public interest to provide an additional $500 million to $600 million that can be used in" brokerage firms' business, he said. "It's a weighing."
The funds set aside to meet the net capital requirement may be used only for certain low-risk investments that are highly liquid.
The change in the net capital percentage takes effect immediately. Other changes proposed by the commission are expected to take effect May 1.
Commissioner Barbara Thomas, while supporting the changes, said that she fears that the SEC's action yesterday and other recent actions might be perceived by the public as "evidence that the commission is being co-opted by the industry."