Uniform Securities Agent State Law (Series 63) Practice Exam

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What does 'net capital' refer to in the context of broker/dealers?

Loan capital used for investment purposes
Liquid capital maintained for customer protection
Capital received from selling investment products
All assets owned by the broker/dealer

The correct answer is: Liquid capital maintained for customer protection

The term 'net capital' refers specifically to the liquid capital that broker-dealers are required to maintain to ensure they can meet their financial obligations and provide protection to their customers. This amount is crucial for maintaining solvency and for the security of customers' funds and securities. In the regulatory context, net capital requirements are established to ensure that broker-dealers have sufficient liquid assets to cover liabilities, thus helping to prevent financial instability in the securities markets. When a broker-dealer maintains adequate net capital, it helps instill confidence among investors, knowing that the firm has enough resources to operate effectively and handle customer transactions. This concept is distinct from other definitions related to capital, such as loan capital for investments, proceeds from selling investment products, or a broad definition encompassing all assets owned by the broker-dealer. Each of those aspects represents different financial considerations and does not relate to the specific regulatory requirement for liquid assets that ensures customer protection in the event of insolvency or financial distress.