Chapter 11 Improvement Areas

Question 1

Short security differences must be:

Answer 1

DEDUCTED from net capital at their market value if unresolved for 7 business days after discovery, posted to a separate ledger account

Question 2

When is short security differences deduction required? When must they be bought in?

Answer 2

• deducted on 8th business day after discovery

- bought in within 45 calendar days if unresolved

Question 3

Impact of Long Security differences on net capital

Answer 3

neither increase nor decrease provided they aren’t sold. if sold, net capital must be reduced.

Question 4

Haircuts:

Answer 4

• reduces a broker-dealers net capital

- always applied to market value of security

Question 5

Haircut applied to common stocks that are readily marketable + what constitutes readily marketable?

Answer 5

• 15% on the GREATER of the long and short position.
• readily marketable: traded on national securities exchange. designated as OTC margin stock. quoted on nasdaq. OTC stocks with THREE OR MORE independent market maker.

Question 6

What is the haircut on a security that’s not readily marketable, say an OTC stock with one or two market makers?

Answer 6

• 40% on both the long and short position.

Question 7

Haircut if security has no ready market:

Answer 7

• 100%.

Question 8

Undue concentration haircut

Answer 8

• immediately applied to position that exceeds 10% of a firms tentative net capital.

firms tentative net capital is 300k, inventory is 50k of abc. 300k x .10 = 30k. 50k-30k = 20k subject to haircut- whatever is excess of 10% is subject.

Question 9

Fails to receive must be bought in:

Answer 9

if it is outstanding more than 30 days

Question 10

Fails to deliver:

Answer 10

• if outstanding more than 5 business days must be marked to the market and haircut taken on market value of securities.
• for munis, haircut is taken when securities have aged 21 business days.

contract value is 12k. market is 10k. 2k mark to market + 1500 haircut (10k x .15). = 3500 total deduction

Question 11

SEC Rule 17a-3 record keeping rule requires blotters and records of original entry reflect:

Answer 11

• all receipts of disbursements of cash
• all purchases and sales of securities
• all receipts and deliveries of securities

Question 12

SEC Rule 17a-3 record keeping rule also requires BDs maintain record for long and short sides:

Answer 12

• long side: ownership of securities in firm possession or control
• short side: location of securities subject to firm’s possession or control

Question 13

ABC corp carries omnibus acct for XYZ. Transactions are effected for customers of XYZ. Who maintains records?

Answer 13

• XYZ since it’s their customers and the carrying firm would not know client info for an omnibus acct.
• omnibus accts generally trusts or retirement accts

Question 14

Customers of a fully disclosed or introducing firm must be treated as:

Answer 14

• customers of the clearing firm. customer acct records of introducing or fully disclosed firms must be maintained by clearing firm.
• fully disclosed or introducing firms do NOT carry their own customers accts

Question 15

Records that must be kept for life of the BD:

Answer 15

SPAM. Stock cert books. Partnership agreement. Articles of Incorp. Minutes

Question 16

Blotter and other records of original entry are kept by:

Answer 16

• trade date, not settlement

Question 17

Bank statements, memorandums, internal audit reports are kept for how long?

Answer 17

3 years

Question 18

Records reflecting all assets and liabs of BD are kept for how long?

Answer 18

6 years

Question 19

Form X17a-5 (Focus Report)

Answer 19

• main reporting form used by BDs to report their financial condition.
• reporting if the firm carries customer accts:
• part I: Certain key ratios and numbers. must be filed MONTHLY
• Part II: Balance sheet, income statement, net cap computation, and customer protection rule reserve acct calculation. Must be filed QUARTLERY.
• Part IIA same as Part II without the reserve acct calc.

Question 20

When must annual audited financial statements be filed & sent to customers?

Answer 20

• within 60 days after date of financial statements

- must be sent to customers within 105 days after date of audited report

Question 21

Broker dealers who do not clear or carry customer accts must file:

Answer 21

• Part IIA quarterly

- annual audited financial statements

Question 22

Unaudited financial statements must be sent to customers:

Answer 22

• within 65 days following 6 months of the date of the audited financial statement

Question 23

Introducing broker dealers (fully disclosed) when it comes to sending out financial statements:

Answer 23

• they are exempt bc that will be done by the carrying firm.

Question 24

SEC Rules requires a BD to make filings with the SEC if any of the following occur:

Answer 24

• change in firms fiscal year
• extension of time is needed to file annual report
• services of accountant are contracted
• services of accountant are terminated

Question 25

If an independent public accountant is replaced, the BD must file a notice which includes:

Answer 25

• details of any unresolved problems that would cause accountant to make a notion on the audit
• details of any problems in last 24 months that have been resolved and caused the accountant to make a notation on the audit if they had not been resolved
• details of any adverse opinion given by accountant on audit reports over last 24 months
• letter from terminated accountant with regard to agreement or disagreement with content of notice filed by BD as to replacement

Question 26

Clearing or carrying BDs must receive position statements from their clearing corporations or custodians how often?

Answer 26

• monthly, and reconcile such statements monthly

Question 27

• BD must file a report or notice of replacement of an independent public accountant with who?

Answer 27

• nearest SEC regional office
• SECs principal office in washington
• principal office of firms designated examining authority (FINRA)

Question 28

When must a BD notify its examining authority that a deficiency occurred?

Answer 28

• on the same that the aggregate indebtedness to net capital ratio is in EXCESS of 12 to 1 (1200 percent)
• if its net capital is LESS than 120% of its required net capital.

Question 29

Same day notice required to appropriate reg authorities in addition to deficiency when?

Answer 29

• bd fails to make and keep current books and records required
• whenever a BD is informed by independent public accountant of existence of any material inadequacies in accounting system, procedures for safeguarding securities, or internal accounting control.

Question 30

When would a firm be considered to be in or nearing financial or operational difficulty?

Answer 30

• excess net capital declined more than 30% in last 3 months
• members books and records are not kept current
• member is not able to clear and settle trades promptly
• ratio of aggregate indebtedness to net capital was 15:1 or higher
• except for periods of up to 60 days, BDs may not allow outstanding principal amount of non-equity subordination agreements to exceed 30% of total capital.

Question 31

Quarterly box count

Answer 31

• must be made or supervised by persons whose regular duties do not require them to have direct responsibility for protection of securities

Question 32

What must the quarterly box count include?

Answer 32

• securities of transfer agent
• unresolved differences discovered as a result of count must be recorded within 7 days of count
• securities used in repurchase agreements also included in the count.