Prime Brokerage Compliance: What the 1994 Letter Requires of the Prime Broker, in Order

Updated October 2026. First published April 2025. This version replaces a product overview with what the 1994 letter requires of the prime broker.

Most of what's written about prime brokerage paperwork, ours included, looks at it from the executing broker's desk: the F1SA it needs on file, and the Letter of Free Funds it sends when the F1SA isn't there. The SEC staff letter behind the arrangement, dated January 25, 1994, puts most of its 16 numbered conditions on the prime broker. It's still the basis for U.S. prime brokerage, and our regulation page on the letter has the background.

This post lists the prime broker's obligations in the order it meets them: before the first trade, on every trade, every day the account is open, and when the relationship ends. Condition numbers are the letter's own.

Before the First Trade

1. Notice to its examiner. A broker-dealer that plans to be a prime broker must first tell its designated examining authority (condition 1).
2. Net capital of at least $1,500,000 (condition 2). An executing broker that clears prime brokerage trades, or a firm that clears them for executing brokers, needs $1,000,000 (condition 3).
3. A contract with each executing broker, signed before any prime brokerage activity (condition 5A). The industry uses the SIA Form 150 for it. The letter requires the contract to record the executing broker's responsibility to know its customers, get the new account documents, run its own credit checks, locate shares for short sales, and process disaffirmed trades. It must also say that the prime broker will notify the executing brokers when it stops acting for a customer.
4. A contract with each customer, signed by the customer and consistent with the letter (condition 5B). The executing broker needs its own.
5. A separate record of every customer using the arrangement and the executing brokers each one uses, kept in an easily accessible place and produced to SEC or SRO staff on request (condition 6).
6. A written notice about confirmations, where it applies. If the customer has told an executing broker to send its trade confirmations in care of the prime broker, the prime broker must tell the customer in writing that those confirmations are available promptly on request, at no charge (condition 11).

The customer also has to meet the net equity minimum before the prime broker settles anything for it. That's covered below, because it's a daily test.

On Every Trade

The customer trades with the executing broker on trade date. SEC Rule 15c6-2 requires broker-dealers to have written agreements or procedures to finish allocation, confirmation, and affirmation by the end of that day. The DTCC cutoffs and the NSCC reversal windows are in our post on prime broker allocations under T+1. The letter's own deadlines start the next morning.

In 1994, a T+1 disaffirm deadline came well before settlement; the letter notes that a cash account customer then had seven business days to pay. Under T+1 settlement, the deadline falls on settlement date.

The deadline has three exceptions. If a problem at the clearing agency, such as a technical failure, a natural disaster, or a power blackout, delays a timely confirmation until after 12:00 noon Eastern on T+1, the prime broker has until close of business on the day after it receives the confirmation. For an "as of" correction, footnote 28 gives it until close of business the same day if the confirmation arrives before noon, and the next business day if it arrives after. A confirmation received on a day the major markets are closed can be DK'd until close of business on the next day they're open.

The trade notification can leave out three items if the customer doesn't supply them: the executing broker's capacity, an average price designation, and, for a principal trade, the reported trade price and its difference from the customer's net price.

Condition 15 is where the prime broker's own books take over. If the customer's account at the prime broker is a cash account and securities are sold before they're paid for in full, the prime broker applies the 90-day freeze. A disaffirmed trade goes the other way: it stays a customer transaction on the executing broker's books, and the executing broker sends the customer a new confirmation (conditions 9B and 13B). What a missing F1SA costs the executing broker follows that side.

Every Day: The Net Equity Floor

Condition 4 sets the minimum net equity the customer keeps with the prime broker, in cash or securities with a ready market:

• $500,000 for most customers.
• $100,000 for an account managed by an investment adviser registered under section 203 of the Investment Advisers Act.
• $100,000 for an account under a binding written cross-guarantee from another customer of the prime broker. The guarantor needs $500,000 of its own plus $400,000 for each account it guarantees, so guaranteeing two accounts takes $1.3 million.

When market moves push the customer's equity below the minimum, the customer has until 12:00 noon on the fifth business day after that date to restore it. If it doesn't, the prime broker must notify every broker-dealer it has a prime broker contract with for that customer, directly or through a registered clearing agency, by close of business that fifth day, that it has stopped being the customer's prime broker. It must then DK any prime brokerage trade the customer starts on the day after that notice.

The letter doesn't say how often to measure. The five days run from the day equity fell below the minimum, though, so a prime broker that measures weekly can find most of the customer's cure period already gone. We'd measure daily.

When the Relationship Ends

When a prime broker stops acting for a customer for any reason, the executing brokers have to hear about it. The contract with each executing broker must say the prime broker will notify them, individually or through a clearing agency (condition 5A). The same applies firm-wide: a prime broker whose net capital drops below $1,500,000 must immediately notify every party it does prime brokerage with (condition 2).

Condition 16 runs in every direction. No broker-dealer may engage in prime brokerage with another broker-dealer or a customer it actually knows, or has reason to know, isn't complying with the letter. For a prime broker, that would include carrying on with a self-clearing executing broker it knows has fallen below the $1,000,000 net capital floor in condition 3.

The Records an Examiner Can Ask For

The letter names three sets of records the prime broker keeps in an easily accessible place and produces to SEC or SRO staff on request:

• its contracts with each executing broker and each customer, with the other written agreements it needs to settle prime brokerage trades (condition 5)
• the list of customers using the arrangement and the executing brokers each one uses (condition 6)
• every trade it disaffirmed in the previous three years, with the executing broker and customer for each (condition 9)

The first set is the one that tends to live in email. Prime Broker Integrated Network (PBIN) keeps the SIA-150 agreements a prime broker signs with its executing brokers on one network both sides use, with each agreement's status visible to both and alerts for expirations and pending counterparty actions. It keeps PBIN records for the life of the agreement plus six years. When an account isn't documented as prime brokerage, the executing broker falls back to Letters of Free Funds, which Freefunds Verified Direct (FVD) sends and tracks.

This post is for informational purposes only and does not constitute legal advice. For guidance on specific regulatory obligations, consult your counsel or compliance advisor.