The SEC has proposed eliminating the references to credit ratings for broker-dealers determining required net capital.  Instead, broker-dealers would be required to have policies and procedures designed to "assess the credit and liquidity risks applicable to a security, and based on this process, would have to determine that the investment has only a 'minimal amount of credit risk.'"  Such securities would incur a lower net capital haircut.  Broker-dealers would be required to consider factors including credit spreads, securities-related research, credit risk assessments, default statistics, inclusion on an index, priorities and enhancements, price, yield and volume, and other "asset class-specific factors."  The changes are mandated by the Dodd-Frank Act. 

 

OUR TAKE:  Rather than relying on credit ratings, broker-dealers will have the burden of proving to the SEC that a particular security does not require a 100% haircut for net capital purposes.  The proposal also adds more work to the compliance folks who will have to develop and test relevant policies and procedures.