I do not recall that this question was dealt with in my Money and Banking course. From an SEC PDF: SEC Financial Responsibility Rules

SEC amended the net capital rule (Rule 15c3-1) in 1975 to establish uniform net capital standards for brokers and dealers' registered with SEC under Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act). With few exceptions, all broker-dealers registered with SEC must comply with this liquidity standard.' The primary purpose of this rule is to ensure that registered broker-dealers maintain at all times sufficient liquid assets to (1) promptly satisfy their liabilities-the claims of customers, creditors, and other broker-dealers; and (2) to provide a cushion of liquid assets in excess of liabilities to cover potential market, credit, and other risks if they should be required to liquidate. The rule achieves its purpose by prescribing a liquidity test that requires a broker-dealer to maintain the greater of a specified minimum dollar amount or specified percentage of net capital in relation to either aggregate indebtedness (generally all liabilities of the broker-dealer) or customer-related receivables (money owed to the broker-dealer by customers) as computed by the reserve requirements of Rule 15c3-3. The net capital rule thus enhances investor/customer& confidence in the financial integrity of broker-dealers and the securities market. The net capital rule applies only to the registered broker-dealer and does not apply to the broker-dealer's holding company or unregulated subsidiaries or affiliates.'

To me it is difficult to see which of the SEC and Federal Reserve is worst at prudential regulation.


"It is not necessary to have hope in order to persevere."

Mr. Market has once again decided This Time It's Different©

But if it's not broker credit, then what's the trick this time? What new story they tell investors to convince them that This Time It's Different? What's the biggest latest "financial innovation"?

_{*Lunatic*, n.
One whose delusions are out of fashion.}

From the chapter The Twilight of Illusion in The Great Crash:

(Sorry about the readability, there still seems to be a 600px limit on image height...)