CH 18 Flashcards
Identify two situations that may indicate a firm is experiencing operational difficulty.
Failure to maintain books and records on a timely basis or the inability to clear and settle its transactions promptly.
BDs must review their fidelity bond coverage __________.
BDs must review their fidelity bond coverage annually.
If a securities count is done by a person responsible for care and handling of securities, who supervises the count?
A person who is NOT responsible for the care and handling of securities.
A first-year BD must report a net capital violation if its AI to NC ratio exceeds _____.
A first-year BD must report a net capital violation if its AI to NC ratio exceeds 8:1.
If a securities count was completed on May 1, how soon may the next count be conducted?
Not before July 1 (60 days), or later than September 1 (120 days).
BDs who do not clear or carry accounts would file __________________ on a quarterly basis.
BDs who do not clear or carry accounts would file Focus Report Part IIA on a quarterly basis.
What events will cause a BD’s net capital requirement to change?
A change in the complexity of business activities (non-carrying to carrying or carrying to prime broker) or change in AI.
On what is a haircut on a security position based?
Liquidity. The less liquid the security, the greater the reduction in value used for computing a BD’s net capital.
If a BD has $100,000 worth of Regulation D stock, at what value may it be carried for net capital purposes?
$0. Regulation D stock (restricted stock) is deducted in full for calculating net capital.
A net capital violation has occurs when a firm’s AI to NC ratio exceeds ____(established firm) or ____(first year firm).
A net capital violation has occurs when a firm’s AI to NC ratio exceeds 15:1 (established firm) or 8:1 (first year firm).
If making a market in securities priced at or below $5, the capital requirement per issue is $______.
If making a market in securities priced at or below $5, the capital requirement per issue is $1,000.
A BD posts a __________ bond to cover the costs of fraud or securities lost in transit or transfer.
A BD posts a fidelity bond to cover the costs of fraud or securities lost in transit or transfer.
When are BDs required to provide clients with information regarding their free credit balances?
Whenever account statements are provided to clients (at least quarterly).
Why would an investment companies/variable contracts firm have a $25,000 net capital requirement?
Because it receives client funds (on a wire basis).
When is FOCUS Report Part II (for carrying BDs) and FOCUS Report Part IIA (for introducing BDs) required to be filed?
Within 17 business days of the end of the quarter.
What is the net capital requirement for a dealer effecting more than ten trades in a calendar year for its own account?
$100,000.
If a BD receives bearer bonds from an unknown source, what should the firm do?
Make an inquiry of the Securities Information Center.
A carrying BD must file Focus Report Part I __________.
A carrying BD must file Focus Report Part I monthly.
What limitations are placed on an introducing BD with a $5,000 minimum net capital requirement?
It must introduce client accounts to another BD and may NOT hold client funds or securities.
Under the Customer Protection Rule, which securities must be segregated from all other BD assets?
All fully-paid and excess margin securities belong to customers.
Firm-commitment underwriters and dealers must satisfy a minimum net capital requirement of $_________.
Firm-commitment underwriters and dealers must satisfy a minimum net capital requirement of $100,000.
If a firm’s net capital requirement is $250,000 and its actual net capital is $280,000, is any notification required?
Yes. Early warning notification is required if net capital is below 120% of the requirement (250,000 x 120% = $300,000).
Upon making changes to its fidelity bond, the BD must notify its DEA ________.
Upon making changes to its fidelity bond, the BD must notify its DEA promptly.
How frequently do BDs conduct physical counts of securities in their possession?
Quarterly.
What types of records are maintained for the life of the BD?
Documents that create the BD, such as partnership agreements and corporate charters.
All documents are to be maintained readily accessible for the first ___ years.
All documents are to be maintained readily accessible for the first 2 years.
Copies of confirmations must be maintained for ___ years.
Copies of confirmations must be maintained for three years.
In the Net Capital rule, liabilities that are not secured by BD assets are referred to as _________________.
In the Net Capital rule, liabilities that are not secured by BD assets are referred to as Aggregate Indebtedness (AI).
If a firm’s net capital is below 120% of its minimum, or its AI to NC ratio exceeds 12:1, when is notification required?
Within 24 hours of discovery.
If a firm’s net capital requirement is $250,000, a net capital violation occurs if its net capital falls below $_______ .
If a firm’s net capital requirement is $250,000, a net capital violation occurs if its net capital falls below $250,000.
How often must a BD determine the status of its clients’ fully paid and excess margin securities?
On a daily basis.
A BD is in violation of net capital standards when its net capital is below _____% of its required minimum.
A BD is in violation of net capital standards when its net capital is below 100% of its required minimum.
For their customers with free credit balances, BDs must provide notification at least ___________.
For their customers with free credit balances, BDs must provide notification at least quarterly.
An RR discovers securities are lost/missing, when must she report this fact to the SIC and transfer agent?
Within one business day following a two-day search.
A transfer agent, the Securities Information Center (SIC), and FBI are notified together for what probable reason?
Stolen or counterfeit securities have been discovered.
According to a BD’s annual audited statement, its Statement of Financial Condition may be found in what two locations?
At the SEC and the BD’s office.
According to FINRA, when are member firms required to provide clients with a statement of financial condition?
Upon request.
A subordinated loan which may be included in the BD’s net capital computation is a ___________________________.
A subordinated loan which may be included in the BD’s net capital computation is a Satisfactory Subordinated Loan.
What is the net capital requirement for a BD that makes a market in 500 stocks priced at more than $5?
$1,000,000. Although 500 stocks times $2,500 = $1,250,000, the maximum net capital for market makers is $1,000,000.
If a securities count is done by a person NOT responsible for care and handling of securities, who supervises the count?
A person whose responsibilities include the care and handling of securities.
If a firm discovers it is in violation of capital requirements, when must notification be made?
Immediately on the day of the deficiency.
When is FOCUS Report Part I required to be filed by a carrying BD and an introducing BD?
For carrying BDs, within 10 business days of month end; for introducing BDs, the report is not required.
The minimum net capital requirement for a market maker is $_________.
The minimum net capital requirement for a market maker is $100,000 (amount is based on the number of issues involved).
What is the purpose of a fidelity bond?
To protect an employer from loss in the event that its employees cause damages through dishonest or negligent action.
Who is not considered a customer of a broker-dealer?
Officers, directors, or partners of the BD, other BDs’ proprietary accounts, and subordinated lenders.
Within what period must any required adjustment be made to a firm’s fidelity bond?
Within 60 days of the anniversary of posting the bond.
List some records that must be maintained for three years.
Trade tickets, confirms, trial balances, retail communication, correspondence, and employee records.
What types of items may be held in the Special Reserve Account?
Only cash and securities that are guaranteed or issued by the U.S. Government.
What is the net capital requirement for a BD that does not receive or hold customer funds or securities?
$5,000.
Who is NOT considered a customer of a BD?
Other BDs, officers, directors, general partners, or subordinated lenders of a BD.
If securities are missing and criminal activity is suspected, to whom and when must a firm report?
The firm must report to the FBI, the issuer’s transfer agent, and the SIC within 1 business day of discovery.
If a security is recovered after having been reported as lost/missing, when must the SIC be notified?
Within one business day of recovery.
A subordinated loan may be included in a BD’s equity capital if the loan has a minimum life of ______ year(s).
A subordinated loan may be included in a BD’s equity capital if the loan has a minimum life of one year.
After an account is closed, for how long are customer account records maintained?
For 6 years after the account is closed.
True or False: An officer or director of a BD is considered a customer.
FALSE.
Define satisfactory subordinated loan.
A loan made to a BD whereby the lender agrees to subordinate its claim to all other claims on the BD.
If an auditor for a member firm finds a deficiency, when must the BD notify the regulators?
A procedural deficiency is reported within 24 hours of discovery, and a corrective action plan is sent within 48 hours.
Limited market securities are subject to a haircut of ____.
Limited market securities are subject to a haircut of 40%.
True or False: The BD’s balance sheet must indicate both its required net capital and actual net capital.
TRUE.
If a BD’s equity is below ____% of its debt-equity total, a violation will occur if not corrected within ____ days.
If a BD’s equity is below 30% of its debt-equity total, a violation will occur if not corrected within 90 days.
BDs are required to monitor the status of all fully paid and excess margin securities on a _______ basis.
BDs are required to monitor the status of all fully paid and excess margin securities on a daily basis.
True or False: Assets in the Special Reserve Account are NOT included in a BD’s aggregate indebtedness.
TRUE.
The SEC must be notified ____ days prior to the effective date of a satisfactory subordinated loan.
The SEC must be notified 10 days prior to the effective date of a satisfactory subordinated loan.
True or False: A BD’s net capital requirement may be higher depending on its type of business.
TRUE.
From whom may a firm acquire securities and not be required to inquire of the SIC?
From the issuer or its agent, another BD, the FRB, or an existing client (if registered in her name).
True or False: Customer cash is included in a firm’s aggregate indebtedness.
TRUE.
If a BD makes a market in 300 stocks priced above $5.00, what is its net capital requirement?
$750,000.
An established BD must report a net capital violation if its AI to NC ratio exceeds ______.
An established BD must report a net capital violation if its AI to NC ratio exceeds 15:1.
A carrying BD in business for less than one year has a net capital requirement of $_________ or _____ of its A.I.
A carrying BD in its first year of business has a net capital requirement of $250,000 or 1/8 of its A.I.
True or False: A BD’s Special Reserve Account may include speculative equities of both domestic and foreign companies.
False. The account contains only cash and qualifying U.S. government securities.
The Special Reserve Bank account must be evaluated by a carrying firm on a _______ basis.
The Special Reserve Bank account must be evaluated by a carrying firm on a weekly basis.
When must clients of a BD receive the firm’s most recent balance sheet?
On request.
Firms may arrange temporary subordinated loans for underwriting purposes no more than ___ times per year.
Firms may arrange temporary subordinated loans for underwriting purposes no more than 3 times per year.
A carrying BD must file FOCUS Report Part II within ____ business days of the end of the quarter.
A carrying BD must file FOCUS Report Part II within 17 business days of the end of the quarter.
Customer confirmations must be maintained for ______ years.
Customer confirmations must be maintained for three years.
What is the net capital requirement for an executing broker in a prime broker relationship?
$1,000,000.
What are the three different methods used to determine a BD’s required net capital?
The greater of: minimum amount (based on firm type), amount based on market making, or amount based on AI-to-NC ratio.
When a net capital deficiency report is filed with the SEC and the firm’s SRO, which offices receive it?
The SEC’s Washington, D.C. office, the SEC’s regional office, and the SRO’s local office.
True or False: A BD’s Special Reserve Bank Account may be commingled with other BD accounts.
False. It must be kept separate from all other BD accounts since it is exclusively for the benefit of its clients.
A ____% reduction in excess net capital in the preceding two months is a sign of financial difficulty.
A 25% reduction in excess net capital in the preceding two months is a sign of financial difficulty.
FINRA must be notified ____ days prior to the effective date of a satisfactory subordinated loan.
FINRA must be notified 30 days prior to the effective date of a satisfactory subordinated loan.
An ___________________ charge is applied to any position whose value exceeds 10% of the firm’s tentative net capital.
An undue concentration charge is applied to any position whose value exceeds 10% of the firm’s tentative net capital.
What does a 25% reduction in excess net capital in the preceding two months indicate?
A sign of financial difficulty.
How many days prior must FINRA be notified for a satisfactory subordinated loan?
30 days.
What charge is applied to any position whose value exceeds 10% of the firm’s tentative net capital?
An undue concentration charge.
What haircut is applied to assets not readily convertible into cash?
100%.
For how many years must a record of all customers’ securities positions be maintained?
Six years.
Define aggregate indebtedness.
Liabilities of a BD that are NOT secured by its assets.
When is a BD required to report operational difficulties?
Within 24 hours.
What does a 30% reduction in excess net capital in the preceding three months indicate?
A sign of financial difficulty.
What is the minimum maturity for a satisfactory subordinated loan?
1 year.
True or False: BD records may only be maintained in physical form.
False. Documents may be maintained in any format, but if an electronic media is used, the SRO must be notified.
In the debt-equity ratio, what percentage may debt not exceed for more than 90 days?
70%.
What is the net capital requirement for a block positioner?
$1 million.
List two records that must be maintained by a BD for six years.
Blotters and ledgers.
How often must a carrying BD file Focus Report Part II?
Quarterly.
Define customer free credit balance.
Customer proceeds resulting from sales, dividends, or interest payments that have not been withdrawn or invested.
What is the net capital requirement for an introducing broker who receives and forwards customer assets?
$50,000.
How often is a trial balance used to calculate net capital prepared?
Monthly.
What will make a BD’s net capital increase?
Profits, satisfactory subordinated loans, and liquidating securities for cash.
What net capital must carrying BDs using the alternative method maintain?
$250,000 or 2% of their aggregate debit items.
What is a BD that does not hold a customer’s cash or securities known as?
A non-carrying firm.
For underwriting purposes, how many temporary subordinated loans is a BD allowed over 12 months?
Three.
When must an introducing BD file FOCUS Report Part IIA?
Within 17 business days of the end of the quarter.
When must a required deposit in a BD’s Special Reserve Bank Account be made?
Within two business days after the calculation.
When must a BD notify authorities if securities are discovered missing?
Within 10 business days.
True or False: A self-clearing BD’s minimum net capital requirement is $250,000.
TRUE.
What is the maximum maturity of a temporary subordinated loan for underwriting purposes?
45 days.
What is a loan made to a BD which will be repaid after all other obligations known as?
A subordinated loan.
True or False: Form U5 is retained for six years following termination of employment.
False, Form U5 is retained for three years.
To avoid an undue concentration charge, what percentage should a BD not exceed of its tentative net capital?
10%.
True or False: A fidelity bond covers a BD against errors or omissions and bankruptcy.
False. A fidelity bond covers a BD against the fraudulent or negligent actions of its employees.
What advance notice is required to begin using a form of electronic storage (other than CD-ROM)?
90-days.
When is a net capital adjustment required for short securities differences?
After seven business days.
What is considered a good control location other than a BD’s vault?
An SEC-approved depository (domestic/foreign), at a bank (free of encumbrance), or in transit between BD offices.
When must FINRA be notified if a fidelity bond is modified or cancelled?
Promptly.
How often will a BD calculate the required deposit in its Special Reserve Bank Account?
On a weekly basis.
On what is a BD’s minimum fidelity bond requirement based?
Its net capital requirement.
For how long are employee questionnaire (Form U4) and fingerprint cards retained?
For 3 years after the representative leaves the firm.
True or False: BDs are required to notify clients that customer free credit balances are payable on demand.
TRUE.
When does reporting begin for the AI to NC ratio?
When a firm’s ratio exceeds 12:1.
What is the percentage reduction (haircut) for equity securities with a ready market?
15%.
What is the net capital requirement for a Prime Broker?
$1,500,000.
What is a haircut in the context of computing net capital?
An inventory adjustment that must be taken on certain assets.
What is the minimum net capital for a firm participating in best-efforts underwriting?
$50,000.
What three provisions must a subordinated loan satisfy to qualify as equity capital?
Made by a BD partner/stockholder, an initial life of three years (one year left), no accelerated maturity provision.
What is an established BD?
A BD that has been in business for longer than 12 months.
What bond does a BD post to cover fraudulent or deceitful activities of employees?
A fidelity bond.
What is the reporting period if securities are discovered missing during a quarterly securities count?
No later than 10 business days from discovery.
For how many years are customer ledgers (account records) maintained?
Six years.
How often must a physical count of all securities in the firm be conducted?
Every quarter.
What limitation is placed on an investment companies/variable contracts firm with a $5,000 net capital requirement?
It may NOT receive client funds (subscription basis only).
What is a self-clearing BD’s minimum net capital requirement?
$250,000.
When is an undue concentration charge assessed to a BD?
When the BD has a single position in excess of 10% of its tentative net capital.
What is the role of the Securities Information Center (SIC)?
To maintain a database of lost, missing, stolen, or counterfeit securities that have been reported.
Is an SIC inquiry required if a BD receives stock from an existing client?
No. Since the stock was received from an existing client, no inquiry is required.
True or False: BDs must account for all securities in its possession as well as those in transit or transfer.
TRUE.
What transactions do not require an inquiry of the SIC?
Transactions of less than $10,000.
For how many years must Form U5 be retained by member firms?
Three years.
With whom are FOCUS Reports filed?
The SEC and the BD’s primary regulator.
What is the maximum net capital requirement for market makers?
Not more than $1 million.
What is the limitation on a BD’s outstanding subordinated debt?
It may NOT exceed 70% of its debt-equity total for a period exceeding 90 days.
What percentage reduction in a BD’s excess net capital over the last three months would indicate financial difficulty?
30%.
After how many days do short securities differences have a 100% haircut?
28 days.
For how long after an associated person leaves a BD are employee records maintained?
Three years.
What is the basis for an asset’s haircut when determining its carrying value for net capital purposes?
Liquidity.
True or False: A BD’s vault is NOT considered a good control location for client assets.
False. A BD’s vault is considered a good control location.
To be considered a ready market stock, how many market makers must it have?
At least three.
What are excess margin securities defined as?
Securities whose value exceeds 140% of a client’s debit balance.
What must free credit balance notices disclose?
If funds are NOT segregated and may be used in conducting the BD’s business.
What is the net capital requirement for an established carrying BD?
The greater of $250,000 or 1/15 of its A.I.
How many business days does a carrying BD have to file FOCUS Report Part I?
Within 10 business days of month-end.
How often may a small BD compute its reserve requirement?
On a monthly basis.
What is a limited market stock?
One with fewer than three market makers.
Are subordinated loans and loans collateralized by BD-owned stock included in a firm’s aggregate indebtedness?
No.
What is the SIC?
Securities Information Center; created to identify and intercept stolen, forged or missing securities.
What net capital issues may require a member firm to curtail its business?
If a member’s net capital falls below 120% of its minimum capital requirement or its AI to NC ratio exceeds 12:1.
When must the Annual Report of Financial Condition be filed with the SEC?
No later than 60 days from the date of the financial statement.
What is the capital requirement per issue if making a market in securities priced above $5?
$2,500.
What percentage reduction in a BD’s excess net capital over the past two months would indicate financial difficulty?
25%.
When must a BD notify the SEC and its DEA regarding net capital?
When its net capital is less than 120% of its minimum requirement.
What does a BD’s Special Reserve Account contain?
100% of the difference between customer-related debits and credits.
What is the percentage haircut (reduction) taken for fixed assets and restricted stock?
100%.
What are excess margin securities?
Securities whose value exceeds 140% of the customer’s debit balance.
