Chapter 2 Flashcards
What are blotters and by when should they be prepared?
Records of original entry. T+1
How often should the general ledger be prepared?
Monthly
What information do subsidiary records contain?
securities in transfer
securities/money borrowed/loaned
failed to r/d
dividends/interest received
What does securities position book / stock ledger contain?
long/short positions
Order tickets maintained if order not executed?
Yes
How do firms file Net capital computations ?
FOCUS form
Records preserved for 3y?
subsidiary, trial balance, employment app, order tickets, checkbooks/bank statements, FOCUS, U4 U5, manuals
Records preserved for 6y?
blotters, gen ledger, sec pos, customer ledger
Records preserved for life?
minutes, stock certif books, articles
How long records kept in readily accessible place?
2 years
Introducing BD record requirements?
None, unless clearing is done on omnibus basis
What are requirements if Introducing BD clears trades via bank?
If transactions are cleared through bank: bank statement that account is BD’s + bank provides notice to SEC that records available
Net capital formula
liquid assets - total liabilities
Clearing BD need to be member of?
DTCC & NSCC
NC for M&A, Inv co. subscription basis, no customer funds & securities
$5k
NC for Purchases inv co. shares on wire basis or sells stock for customers whose proceeds are immediately invested in open end inv co.
$25k
NC for Intro BD immediate delivery to clearing firm, best effort & all-or-none underwritings
$50k
NC for Market Makers, more than 10 prop trades / y, firm commitment underwriting
$100k
NC for General securities BD
$250k
NC for Prime broker
$1.5M
What kind of debt does Aggregate indebtedness include? What are AI/NC max ratios to be respected?
Aggregate indebtedness only includes debt related to customers & tax payable.
AI needs to be: 8:1 in Y1, 15:1 thereafter
What is a haircut and what are the levels?
Haircut: deduction from MV of securities for purpose of calculating NC requirements
Haircut = MV minus:
15% if 3 or more independant market makers
40% if 1 or 2
100% if unregistered or no market
Undue concentration haircut: additional 15% if prop position >10% of tentative net capital
30% for open contractual commitment (underwriting, delayed delivery)
What is a box count? How often? What impact can count differences have?
security counts to be made by certain exchange members, brokers, and dealers
if BD has custody => quarterly count
If count of certificates is below records => “short securities difference” situation => deduction of net capital of 25, 50, 75 or 100% after 1, 2, 3 or 4 weeks respectively
Long securities difference has not effect on NC.
Reporting of Missing & lost securities
Reporting with 1 biz day to SIC, TA and FBI if criminal activity
Otherwise: SIC & TA on 3rd biz day
What is the Customer protection rule?
Customer funds maintained in safe / seggregated area or special reserve bank account
How much should be deposited in the special reserve account if monthly computation?
(credit - debit) * 105%
How much should be deposited in the special reserve account if weekly computation? When do broker dealers need to compute weekly?
(credit - debit) * 100%
If: Aggregate Indebtedness > 800% of NC or if Agg Funds > $1M
What are the exemptions to the customer protection rule?
1/no margin accounts + promptly transmits all funds & securities + no customer funds & securities held
2/uses a clearing BD + promptly transmits everything to clearing BD
When are FOCUS reports files? What do they contain? How often are they filed?
FOCUS Part 1 report filed monthly: financial ratios & numbers
FOCUS Part 2 report filed quarterly: BS, IS, NC
Part 2A filed if BD doesn’t carry customer accounts
What is the Early warning rule?
FINRA & SEC need to be notified within 24h if:
AI:NC > 12:1
NC <120% of requirement
What forms need to be filed when Early warning rule is breached? And for how long?
FOCUS Part 2 or 2A need to be filed within 15 days of month end and filing must continue until 3 consecutive months where Early Warning conditions have not been met
What happens if NC < requirement
BD must immediately cease business with public, notify SEC & DEA, file FOCUS Part 2 within 24h
What happens if BD fails to make and keep current books & records or discovers there is a material inadequacy in books?
immediate notice of SEC and it’s DEA + corrective measure report within 48h
FINRA Financial requirements (expansion, reduction)
FINRA can require the firm to:
stop expanding if:
NC < 150% of requirement
AI:NC > 10:1
reduce business if:
125%
12:1
BD subordinated loan restrictions? What is excluded from violation calculation? Filing requirement?
-capital violation if subordination agreement > 70% of BD’s debt + equity for 90 days
-excluded from calculation: stockholder or partner loans and > 1y remaining to maturity on loan with term > 3y
-if there is a satisfactory subordination agreement, subordinated debt may be considered part of BD’s NC
-filed with SEC and DEA 30 days prior to becoming effective
NC formula
(net worth + subordinated loans) - non allowable assets - haircuts
What are non allowable assets in the context of NC calculation?
buildings, exchange membership, equipment, prepaid expenses, intangibles…
What is a fidelity bond? What are the levels required?
covers customers against fraud, forgery, loss of securities. Not bankruptcy or $ losses.
120% of NC if NC <$600k
$750k to $5M if above
