Exam 1 Flashcards
In computing net capital, a broker-dealer would include:
a- Net worth plus unrealized profit or minus unrealized loss in the broker-dealer’s account
b- Net worth, plus unrealized profit or minus unrealized loss in the broker-dealer’s account, plus fails to deliver that are not aged
c- Net worth, plus unrealized profit or minus unrealized loss in the broker-dealer’s account, plus subordinated loans subject to a satisfactory subordination agreement
d- Net worth plus subordinated loans subject to a satisfactory subordination agreement
C
The capital of a broker-dealer consists of its net worth, to which unrealized profits on proprietary positions are added and unrealized losses are deducted. In addition, subordinated loans that are subject to a satisfactory subordination agreement are added.
ABC & Co. is an introducing broker-dealer that receives, but does not hold, customer securities. In its first year of operation, ABC must maintain:
a- A minimum net capital of $5,000 and a ratio of aggregate indebtedness to net capital of no more than 15 to 1
b- A minimum net capital of $50,000 and a ratio of aggregate indebtedness to net capital of no more than 15 to 1
c- A minimum net capital of $5,000 and a ratio of aggregate indebtedness to net capital of no more than 8 to 1
d- A minimum net capital of $50,000 and a ratio of aggregate indebtedness to net capital of no more than 8 to 1
D
An introducing broker-dealer that receives, but does not hold, customer securities for delivery to its clearing firm must have minimum net capital of $50,000. In addition, its ratio of aggregate indebtedness to net capital may not exceed 8 to 1 in its first year of operation.
In regard to a secured demand note, which of the following statements are CORRECT?
I- The lender maintains ownership of the securities pledged as collateral and has the benefits of any increase and the risks of any decrease in value.
II- The broker-dealer has the right to keep cash dividends paid on the securities pledged as collateral.
III- The lender has the right to substitute other securities for those pledged as collateral.
IV- The broker-dealer has the right to liquidate securities if the market value declines to a point where it no longer adequately collateralizes the note.
a- I, II, and IV only
b- I, III, and IV only
c- II, III, and IV only
d- I, II, III, and IV
B
On a secured demand note for which securities have been deposited as collateral, the lender retains all rights and risks of ownership, including the right to dividends paid on the securities. The lender has the right to substitute other securities as collateral at any time. If the collateral value of the securities drops below the amount of the note, the broker-dealer must notify the lender. If the lender fails to deposit additional collateral, the broker-dealer has the right to liquidate a sufficient amount of the securities to bring the collateral value up to the amount of the note.
If there is a deficiency in the value of securities pledged on a secured demand note, the broker-dealer must begin selling the securities if the lender fails to deposit additional collateral:
a- On the day the deficiency occurs
b- Prior to noon on the business day after the deficiency occurs
c- Prior to noon on the second business day after the deficiency occurs
d- On the fifth business day after the deficiency occurs
B
If the collateral value of securities pledged on a secured demand note drops below the amount of the note, the broker-dealer must immediately notify the lender and the Examining Authority. The lender will be required to deposit additional cash or securities prior to noon on the next business day. If the lender fails to deposit additional cash or securities by noon of the next business day, the broker-dealer must liquidate sufficient shares to raise the collateral value to the required amount.
Which of the following situations would require reporting under Rule 17a-11?
I- A broker-dealer is notified by its independent auditor of a material inadequacy in its internal accounting procedures.
II- A broker-dealer calculates its subordinated liabilities to be $80,000 and its equity to be $20,000 for a period of 75 days.
III- A broker-dealer with a minimum net capital requirement of $50,000 has net capital of $70,000.
IV- A broker-dealer with net capital of $250,000 has aggregate indebtedness of $3,100,000.
a- I and IV only
b- I, II, and III only
c- II, III, and IV only
d- I, II, III, and IV
A
Rule 17a-11 requires reports be sent to the SEC if:
An independent auditor discovers material inadequacies in its internal accounting procedures
If the firm’s debt-to-equity ratio exceeds 70% for more than 90 days
Its dollar amount of net capital is less than 120% of the minimum requirement
Its ratio of aggregate indebtedness to net capital exceeds 12 to 1
A clearing broker-dealer must file a notice under the provisions of Rule 17a-11 if which of the following situations occur?
I- Its aggregate indebtedness is 11 times its net capital.
II- Its net capital is $275,000.
III- Its books are not current.
IV- It is informed by an independent auditor that its internal procedures for safeguarding securities or maintaining records are inadequate.
a- II only
b- III and IV only
c- II, III, and IV only
d- I, II, III, and IV
C
Rule 17a-11 requires a broker-dealer to file a notice if its aggregate indebtedness exceeds 12 times its net capital or if the dollar amount of net capital is less than 120% of the minimum requirement. If a clearing broker-dealer’s net capital is less than $300,000 (120% of the $250,000 minimum), a notice must be filed within 24 hours. The broker-dealer must also file if it has books and records that are not current or material inadequacies in its accounting or control procedures.
Rule 17a-11 requires a broker-dealer to send immediate telegraphic notice to the SEC, followed by a written report, if its books and records are not current. If it is informed of any material inadequacy in it internal procedures, notice must be filed within 24 hours, followed by a proposed solution within 48 hours.
An established introducing broker-dealer makes a market in 20 securities selling at $5 per share or less and 20 securities selling for more than $5 per share. Its aggregate indebtedness is $1,800,000. Its minimum net capital requirement is: a-$70,000 b-$100,000 c-$120,000 d-$225,000
c-
An established market maker requires net capital of 1/15th of its aggregate indebtedness, with a minimum of $100,000. 1/15th of $1,800,000 equals $120,000. Twenty securities priced at $5 or less require $20,000 of capital (20 x $1,000), while 20 securities priced at more than $5 require $50,000 of capital (20 x $2,500), for a total market maker requirement of $70,000. The largest of the three requirements is $120,000.
Reclamation for delivery of a bond is permitted:
I- If the bond is refused by the transfer agent because it has been reported stolen
II- If a called bond is delivered when part of the issue has been called for redemption
III- If a bond is called for redemption after the settlement date
IV- If a bond is delivered after notice that the entire issue has been called for redemption
a-I only
b-I and II only
c-I, II, and IV only
d- II, III, and IV only
b-
Reclamation is the right to return or to demand the return of securities that were previously delivered. If a bond is stolen or otherwise is unacceptable to the transfer agent, reclamation is permitted. If a particular bond has been called for redemption, reclamation is permitted. However, reclamation is not permitted if an entire bond issue has been called. For example, if a broker-dealer buys a bond issued by a corporation and, prior to settlement date, that bond is called, the buying broker-dealer has the right to return the bond to the selling broker-dealer. However, if the entire issue is called for redemption, the buying broker-dealer must accept the bond.
In regard to fails to deliver on municipal securities, which TWO of the following statements are CORRECT?
I- The securities are subject to a haircut when they are 11 days old.
II- The securities are subject to a haircut when they are 21 days old.
III- The haircut on fails to deliver is the same as the amount applied to securities held in the broker-dealer’s proprietary account.
IV- The haircut is 5% regardless of the maturity date.
I and III
I and IV
II and III
II and IV
c-
A fail to deliver on a municipal security becomes aged when it is 21 days old. For corporate securities a fail to deliver is aged when it is five days old. In both cases, a haircut is applied in the same amount as is applied to a broker-dealer’s proprietary position.
Receivables due from participation in municipal securities underwritings:
a- Are not allowable assets in computing net capital
b- Are allowable assets under all circumstances
c-Are allowable assets if they are less than 115 days old
d-Are allowable assets if they are 60 days old or less
d-
Receivables due from municipal securities underwritings are not allowable assets if they are more than 60 days old.
The seller of a municipal bond delivers an interest check with the securities. When trying to cash the check, the buyer learns that the check bounced. Reclamation can be made:
a- Within five business days of learning that the check is not good
b- Within three business days of learning that the check is not good
c- Within one business day of learning that the check is not good
d- At any time since there is no limitation for reclamation in these circumstances
b-
If the seller of a municipal bond delivers an interest check with the bond and the check bounces, reclamation can be made within three business days of learning that the check was not honored.
What information must be disclosed to a customer buying a new issue of municipal bonds underwritten on a negotiated basis? I- The total underwriting spread II-The additional takedown III-The total takedown IV-The manager's fee a-I only b-I and IV only c-II and III only d-II and IV only
a-
For negotiated offerings, the total underwriting spread must be disclosed to customers. The manager’s fee, total takedown, and additional takedown are not disclosed to customers
Newton brokerage borrows stock from Bullard brokerage. This transaction would be reflected in the: a-Purchase and Sales blotter b- General Ledger c- Mark to Market blotter d- Daily SIC folio
b- Stock borrowed and stock loaned are reflected in the general ledger for both broker-dealers. For Bullard this would be a liability, and for Newton it would be reflected as an asset. Initially, the transaction would be posted to a subsidiary ledger, and if the contract was still outstanding at month end, it would be reflected in the general ledger of each firm.
The provisions of the Customer Protection Rule do not apply to:
I. Broker-dealers that have a ratio of net capital to aggregate indebtedness of more than 12 to 1
II. Broker-dealers that introduce customers on a fully disclosed basis
III. Broker-dealers that effect all financial transactions through a bank account designated as “Special Account for the Exclusive Benefit of Customers”
IV. Broker-dealers with less than $1,000,000 in customer credit balances
I and IV only
II only
II and III only
III and IV only
SEC Rule 15c3-3 has several exemptions which are addressed in paragraph (k) of the rule. Choices (II) and (III) are the exemptions found under (k)(2)(ii) and (k)(2)(i) of the rule.
The financial reporting responsibility of an introducing broker is limited to:
a-Having the clearing broker-dealer file the necessary reports
b-Filing FOCUS Report Part II semiannually
c-Filing FOCUS Report Part IIA quarterly
d-Filing only financial reports upon termination of membership interest
An introducing firm files a FOCUS Report Part IIA quarterly. A clearing firm files FOCUS Report Part I and II.
Fidelity bond coverage is based on: The number of employees of the firm Whether the firm maintains custody of client assets The firm's net capital requirement All of the above
C- The basis of the fidelity bond requirement is the firm’s highest required net capital during the immediately preceding 12-month period. This computed figure, which the firm has at its disposal, is the basis of the minimum required coverage for the succeeding 12-month period
Elgin Brothers makes markets in 450 equity issues; 400 issues are priced greater than $5 and 50 issues at $5 or less. Its net capital requirement based on market making is: a-$400,000 b-$250,000 c-$1,000,000 d-$1,050,000
C- Elgin Brothers makes markets in 450 equity issues; 400 issues are priced greater than $5 and 50 issues at $5 or less. Its net capital requirement based on market making is: $400,000 $250,000 $1,000,000 $1,050,000 Explanation: Correct. The maximum net capital requirement based on the number of markets made is $1,000,000. Generally the price of the security is taken into account.
Shares greater than $5: 400 x $2,500 = $1,000,000
Shares less than or equal to $5: 50 x $1,000 = $50,000
But the net capital rule puts a $1,000,000 ceiling on this.
Which TWO of the following statements are TRUE regarding a broker-dealer’s annual report filed with the SEC?
I-There must be an oath or affirmation attached made by the Financial and Operations Principal.
II-There must be an oath or affirmation attached made by a general partner or principal.
III-The report must be prepared by an independent public accountant with at least five years experience.
IV-If there are discrepancies between the annual report and the FOCUS Part II or Part IIA, a reconciling statement should accompany the report.
a-I and III
b-I and IV
c-II and III
d-II and IV
D- A broker-dealer’s annual report must have an affirmation made by a general partner of principal. There is no specific experience required for the independent public accountant preparing the report. A reconciling statement should be attached for material discrepancies between the annual report and the corresponding quarterly FOCUS report.
Which of the following statements is TRUE when an investor pledges securities as collateral for a secured demand note?
a- The investor has no control over how the securities will be used by the broker-dealer.
b-The investor may not exchange or substitute the pledged securities with different securities.
c-The broker-dealer may use the securities for any business purpose whatsoever but may not pledge them as collateral for a loan from another party.
d- The investor retains her status as the beneficial owner of the securities, and the securities may be registered in the customer’s name.
A- The securities pledged as collateral for a secured demand note are under the control of the broker-dealer and the SEC net capital regulations preclude the lender from placing restrictions on how the broker-dealer may use the assets.
A broker-dealer has tentative net capital of 1,500,000. In its trading account is a position of 20,000 shares of Executron Inc. at $10. The haircut on this position would be: a-$225,000 b-$36,000 c-$30,000 d-$37,500
B- The applicable charge is based on the $200,000 value of the equity position, which is $30,000 ($200,000 x 15%). Keep in mind that the standard common stock haircut is 15%, assuming a ready market exists. Since this position exceeds 10% of the tentative net capital of the firm, an undue concentration charge is also applied. The undue concentration charge is applied to the amount that exceeds 10% of the tentative net capital. In this example, the amount subject to the undue concentration charge is $50,000. This amount is then reduced by the greater of $10,000 or the value of 500 shares. As a result, the $50,000 is reduced to $40,000, and this amount is subject to an additional15% (or $6,000) charge. This leaves a total haircut for this equity position of $36,000 ($30,000 + $6,000).
When a subordinated loan matures, a broker-dealer:
a-Must return the principal amount of the loan to the lender
b-May not repay the principal amount of the loan if it would cause aggregate indebtedness to exceed 1,500% of net capital, or the dollar amount of net capital to fall below 120% of the minimum dollar requirement of Rule 15c3-1
c-May not repay the principal amount of the loan if it would cause aggregate indebtedness to exceed 1,200% of net capital, or the dollar amount of net capital to fall below 120% of the minimum dollar requirement of Rule 15c3-1
d-May not repay the principal amount of the loan if it would cause aggregate indebtedness to exceed 1,000% of net capital, or the dollar amount of net capital to fall below 120% of the minimum dollar requirement of Rule 15c3-1
C- A subordinated loan may not be repaid at maturity if repayment would cause aggregate indebtedness to exceed net capital by more than 1,200% or if the dollar amount of net capital falls below 120% of the minimum requirement. A subordinated loan may not be prepaid prior to maturity if prepayment would cause aggregate indebtedness to exceed net capital by more than 1,000% or if the dollar amount of net capital falls below 120% of the minimum requirement.
A broker-dealer is a sole proprietorship with net capital of $400,000 and aggregate indebtedness of $1,500,000. The broker-dealer carries customer accounts but clears its trades through a bank and claims an exemption from Rule 15c3-3 under paragraph (k). The maximum amount of equity that may be withdrawn by the broker-dealer is: a-$300,000 b-$250,000 c-$150,000 d-$100,000
B- A withdrawal of capital is not allowed if it would cause the ratio of aggregate indebtedness to net capital to exceed 10 to 1, or if it would cause net capital to decline below 120% of the minimum. A withdrawal of $250,000 would leave $150,000 of net capital. This would give the broker-dealer a ratio of 10 to 1 ($1,500,000 of aggregate indebtedness divided by $150,000 of net capital). Net capital would also exceed $120,000, which is 120% of the minimum requirement of $100,000.
A broker-dealer has the following items listed on its trial balance.
Subordinated Loan $300,000 Retained Earnings $350,000 Common Stock (Par Value) $250,000 Unrealized Profits $100,000 The subordinated loan represents what percentage of the broker-dealer's total debt-equity?
a- 30%
b- 43%
c- 50%
d- 82%
A-
The debt-equity of a broker-dealer consists of subordinated loans, common and preferred stock issued by the broker-dealer, retained earnings, and unrealized profits. The total of the debt and equity for the broker-dealer referred to in this question is $1,000,000. Of this total debt-equity, the subordinated loan represents 30% of the total (subordinated loan of $300,000 divided by debt-equity total of $1,000,000).
Which of the following situations would constitute a violation of Rule 15c2-1 regarding the hypothecation of securities?
I- A broker-dealer has granted the bank a cross-lien on securities it has pledged for its own account as additional collateral for a loan on customer securities.
II- A broker-dealer commingles stock of all of its customers for a loan without prior approval of the customers.
III- A broker-dealer commingles customer stock with his own stock after obtaining the approval of the customers.
IV- A broker-dealer borrows $200,000 against customer securities when the aggregate debt of the customers is $175,000.
a- II and IV only
b- I, III, and IV only
c- II, III, and IV only
d- I, II, III, and IV
C-
A broker-dealer is restricted in the use that it may make of customers’ securities. If a broker-dealer wishes to hypothecate customers’ securities at a bank for purposes of obtaining a an on the securities, it may commingle the securities of various customers in a single loan account only with the permission of the various customers. Choice II is therefore a violation because permission of each customer was not obtained.
A broker-dealer may never commingle the securities of customers with those of non customers, including its own securities, under any circumstances. Therefore, Choice III is a violation of Rule 15c2-1.
A broker-dealer may not borrow more than it loaned the customers. For example, if the debit balances of customers is $175,000, the maximum that the broker-dealer could borrow, using the customers’ securities as collateral, is $175,000. The broker-dealer may use as collateral (not borrow) stock with a value of 140% of the debit balance. Therefore, stock worth $245,000 may be used as collateral. Choice IV represents a violation because the broker-dealer is borrowing more than it loaned the customers.
If a broker-dealer has taken its own securities to a bank in a separate loan account, the broker-dealer may authorize the bank to have a cross-lien on its own stock as additional collateral for the loan granted on customers’ stock. However, it may not authorize a cross-lien on the customers’ stock as additional collateral on its own loan. Choice I is not a violation because the cross-lien is being granted on the broker-dealer’s stock, not the customers’ stock.
A broker-dealer has a short contractual commitment for $20,000 in XYZ common stock, which is designated as a Nasdaq . The current market value is $18,000. The haircut would be:
a- 15% of $20,000
b- 30% of $18,000
c- 30% of $20,000 minus $2,000
d- 15% of $18,000 minus $2,000
D-
A haircut of 15% is applied to the market value of $18,000, since XYZ is a Nasdaq security. Since the market value has decreased by $2,000, this represents an unrealized profit on the short contractual commitment. Therefore, the haircut is decreased by $2,000.
A husband and wife both maintain separate cash accounts with a broker-dealer. In addition, they maintain a joint margin account. SIPC will provide coverage for which of the following?
I- Neither account is covered by SIPC.
II- Each cash account is treated as a separate customer.
III The joint margin account is treated as a separate customer.
IV- All accounts are combined.
a- I only
b- II only
c- IV only
d- II and III only
D-
SIPC provides coverage for each separate customer. Each separate cash account would be covered. In addition, the joint account would also be covered.
A customer has purchased $20,000 of stock in her special cash account. The stock has a current market value of $18,000. The customer has a valid reason for failing to pay for the securities and the broker-dealer requests an extension. Assuming the extension is granted, the required deduction from net capital is: a- $20,000 b- $18,000 c- $5,400 d- $0
D-
If a member firm has requested an extension and the extension has been granted by the Examining Authority, any unsecured amount owed by the customer may be disregarded in the computation of the member firm’s net capital.
Subsidiary ledgers must be maintained for: a- One year b- Three years c- Six years d- The life of the firm
B- Subsidiary ledgers must be maintained for three years.
Pursuant to SEC Rule 15c3-3, an introducing broker-dealer must take which of the following actions upon receipt of customer funds and securities?
a- Deposit them in an escrow account.
b- Transmit them to a broker-dealer claiming the k(2)(i) exemption.
c- Make a daily determination that they are in possession and control.
d- Promptly transmit them to the clearing broker.
D- An introducing broker-dealer may accept funds and securities from customers but may not hold them; such items must be promptly transmitted to the clearing broker.
Emilio Di Matteo works in operations for Equinox Brokerage. On a day-to-day basis his responsibilities include the proper care and protection of securities. His role in the quarterly box count would be which of the following?
a-He may participate in the count.
b-He may not participate in the count.
c-He may not participate in the count, but he may supervise the count.
d- He may participate in the count with a waiver from FINRA.
A- Pursuant to SEC Rule 17a13 (5)(d), the examination count, verification, and comparison shall be made or supervised by persons whose regular duties do not require them to have direct responsibility for the proper care and protection of securities.
Mel Thurston, a friend of one of the senior officers at Arkwright Securities, is willing to grant a subordinated loan to the broker-dealer for a ten-month period at the prime rate plus 2%. A written agreement is prepared and submitted to FINRA. FINRA will determine:
a- That it is subject to a haircut
b-That it is not allowable for capital purposes
d- That it may not be used to acquire inventory
d- That it may only be used for underwritings
B- A satisfactory subordination agreement requires a minimum maturity of one year. A temporary subordination agreement may have a maximum maturity of 45 days.
Which of the following items does not need to appear on an interdealer confirmation?
a-Whether the securities are trading ex- legal or flat
b-Whether the securities are fully registered or registered as to principal only
c-The signature of the registered representative who entered the transaction
d-For new issues, the dated date from which interest accrues
C- All of the choices must appear on confirmations for transactions between broker-dealers except the signature of the registered representative who entered the transaction.
According to MSRB record-keeping rules, which party is responsible for maintaining records for syndicate transactions?
a- Each member of the syndicate
b-The NRMSIR closest to the managing underwriter’s office
c-The managing underwriter for the syndicate
d- The issuer of the syndicated security
C- The managing underwriter for the syndicate is responsible for maintaining records for syndicate transaction
Liabilities that are subordinated to the claims of creditors but are not subject to a satisfactory subordination agreement pursuant to Rule 15c3-1 are: a- Not permitted under any circumstances b- Excluded from aggregate indebtedness c-Included in aggregate indebtedness d- Deducted from net capital
B- Aggregate indebtedness of a broker-dealer consists of certain liabilities, such as fails to receive for the account of customers and securities loaned for the account of customers. Other liabilities, such as stock loaned for the account of the firm, are not aggregate indebtedness. A subordinated loan is a liability of a broker-dealer, but it is never aggregate indebtedness. Under certain circumstances, the subordinated loan may be considered to be part of the broker-dealer’s net capital, and in other circumstances, it may not be considered to be part of his net capital. However, the subordinated loan is never considered to be aggregate indebtedness.
Liabilities that are subordinated to the claims of creditors under a satisfactory subordination agreement filed with the SEC are considered to be part of the broker-dealer’s capital. A subordinated loan that is not subject to a satisfactory subordination agreement is not considered to be part of the broker-dealer’s capital.
A broker-dealer has total capital, before any deductions, of $1,000,000. The broker-dealer has a long securities position that consists of $100,000 of an 8% municipal bond maturing in 2025. The haircut on this position would be: a- $8,000 b- $7,500 c- $7,000 d- $6,500
C- The maximum haircut on municipal bonds applies to those with maturities exceeding 20 years and is 7% of the market value. 7% of $100,000 equals $7,000.
A broker-dealer computes its reserve requirement pursuant to Rule 15c3-3 to be $200,000. The broker-dealer currently has $250,000 on deposit in the Reserve Bank Account. It may reduce its aggregate indebtedness by: $250,000 $200,000 $75,000 $60,000
B- The requirement is $200,000. The broker-dealer may reduce its aggregate indebtedness by this amount only.
A newly formed introducing broker-dealer makes a market in 500 securities selling at more than $5 per share. Its aggregate indebtedness is $12,000,000. Its net capital requirement is: a- $800,000 b- $1,000,000 c- $1,250,000 d- $1,500,000
D- Rule 15c3-1 requires nonclearing market makers to maintain net capital of at least the greater of:
$100,000
$1,000 for each security trading at $5 per share or less plus $2,500 for each security trading at more than $5 per share, to a ceiling of $1,000,000
1/15th of aggregate indebtedness (1/8 of AI in the first year of operation).
A new market maker requires net capital of 1/8th of its aggregate indebtedness, with a minimum of $100,000. 1/8 x $12,000,000 = $1,500,000. Although 500 securities times $2,500 equals $1,250,000, the maximum market maker requirement is $1,000,000. The aggregate indebtedness requirement applies since it is the largest of the three.
If a physical count of XYZ Corporation indicated that the broker-dealer had 1,200 shares in its possession, indicating a long securities difference of 200 shares, and the broker-dealer had not resold the securities, the net capital would be: a- Increased by $10,000 b- Increased by $7,000 c-Decreased by $10,000 d- Unaffected
D- Long securities differences for securities that have not been sold by a broker-dealer are disregarded in the net capital computation.
A broker-dealer holds a secured demand note. The collateral value of the securities pledged on the note is insufficient to collateralize the note. The broker-dealer may take which of the following steps?
I- Obtain additional cash to raise the collateral value to the required amount.
II- Obtain additional securities to raise the collateral value to the required amount.
III- Sell sufficient securities that have been pledged as collateral.
IV- Reduce the principal amount of the secured demand note with the permission of the broker-dealer’s Examining Authority.
a- I and II only
b- I, II, and III only
c- II, III, and IV only
d- I, II, III, and IV
D- If a broker-dealer holds a secured demand note whose collateral value is less than the amount of the note, the broker-dealer must obtain additional cash or securities to raise the collateral value to the required amount. If the lender fails to deposit additional collateral, the broker-dealer must sell enough of the securities to bring the collateral value to the required level.
If the broker-dealer wishes to reduce the amount of the demand note instead of requiring more collateral from the lender, it may do so only with the permission of its Examining Authority.
A purchaser may execute a close-out by which of the following means?
I- Purchase at current market value all or any part of the securities necessary to complete the transaction for the account and liability of the seller.
II- Accept from the seller securities which are comparable in quantity, quality, price, and maturity, with any additional expense borne by the seller.
III- Require the seller to repurchase the securities with accrued interest with the seller bearing the burden of any change in market price or yield.
I only
II only
III only
I, II, and III
D- Any one of these three methods may be used by the buyer to close out the seller. Note that if one of these methods is not completed during the close-out period, the close-out process lapses, and a new close-out notice must be sent.
A broker-dealer has the following items listed on its trial balance.
Subordination Agreement $100,000 Par Value of Common Stock $75,000 Retained Earnings $200,000 Unrealized Profits $25,000 The amount of debt in relation to the debt-equity of the broker-dealer is:
a- 25%
b- 31.25%
c-33%
d- 36.4%
A- The debt-equity ratio is the ratio of debt to the total debt and equity. The debt (subordinated loan) is $100,000. The total of debt and equity is $400,000. Therefore, the ratio is 25% ($100,000 of debt divided by $400,000 of debt and equity).
A broker-dealer clears all of its trades through a bank. In this case:
a- The broker-dealer is required to maintain all the records required by Rule 17a-3
b- Both the broker-dealer and the bank are required to maintain all the records required by Rule 17 a-3
c- The broker-dealer is required to maintain certain records required by Rule 17a-3 and the bank is required to maintain other records required by Rule 17a-3
d- The broker-dealer is excused from maintaining the records required by Rule 17a-3 if the bank maintains the records and notifies the SEC that they are available for inspection
D- If a member firm clears all its transactions through a bank, and the bank agrees to abide by the record-keeping requirements of Rule 17a-3, the broker-dealer is not required to maintain the required records.
Blotters reflecting purchases and sales of securities, receipts and deliveries of securities, and receipts and disbursements of cash are prepared: a- Daily b- Weekly c- Quarterly d- Annually
A- The blotter, which is a record of original entry, is prepared daily.
A broker dealer had retained earnings of $800,000 and capital stock of $400,000. During the next accounting period, expenses were $300,000, commissions were $500,000, and the value of its holdings after haircuts increased by $200,000. The ending capital will have: a- Increased by $200,000 b- Decreased by $100,000 c- Increased by $400,000 d- Increased by $700,000
Offset the expenses and commissions to produce an increase of $200,000; then add the unrealized gain for a total increase of $400,000.
Consider the following data for Elkington Securities.
Tentative Net Capital $3,500,000
Long Position – Big Enchilada Corp. $500,000
Short – Marguerita Corp. $420,000
Assume both positions are Nasdaq National Market issues. The undue concentration haircut would be:
a- Determined by netting the long and short position
b- Based on the greater of the long or short position
c- Based on the long position only
d- Added to the regular haircut on the securities
D- In the example, both the long and short position would be subject to an undue concentration charge as each position is greater than 10% of tentative net capital, (as well as a regular haircut). 10% of Tentative Net Capital is $350,000; $150,000 of Big Enchilada is subject to the charge, and $70,000 of Marguerita is subject to the charge.
Which of the following choices would not be eligible for SIPC coverage? a- Municipal bonds b- Options c- Futures d- Pink Sheet issues
C- Futures are not securities. SIPC only covers securities.
A security is deemed to be under the control of a broker-dealer for purposes of Rule 15c3-3 under which of the following circumstances?
I Securities in the custody of a clearing corporation of a national securities exchange that will be delivered to the broker-dealer without payment of money
II- Securities in the custody of another broker-dealer in a special omnibus account free of any lien
III- Securities in transfer for a period of less than 40 calendar days
IV- Securities failed to receive from another broker-dealer
a- I and II only
b- II and III only
c- I, II, and III only
d- I, II, III, and IV
C- Choices I, II, and III are considered to be control locations. Securities that the broker-dealer has failed to receive from another broker-dealer are not considered to be in the broker-dealer’s possession or under its control.
A broker-dealer with a ratio of aggregate indebtedness to net capital of 6 to 1 that carries customer funds of $1,500,000 may compute the amount required to be on deposit in its Reserve Bank Account: a- Daily b- Weekly c- Monthly d- Weekly or monthly, at its option
B- The broker-dealer is carrying funds in excess of $1,000,000. A weekly calculation is required.
A broker-dealer may not allow the withdrawal of equity capital if it would cause which TWO of the following situations to occur?
I- The aggregate indebtedness would exceed the net capital by 1,200%, or the net capital would fall below 120% of the minimum dollar requirement.
II- The aggregate indebtedness would exceed the net capital by 1,000%, or the net capital would fall below 120% of the minimum dollar requirement.
III- The dollar amount of subordinated agreements would exceed 70% of the total of debt and equity.
IV- The dollar amount of subordinated agreements would exceed 60% of the total of debt and equity.
a- I and III
b-I and IV
c- II and III
d- II and IV
C- A broker-dealer may not withdraw equity capital if such withdrawal would cause aggregate indebtedness to exceed net capital by more than 1,000% or if such withdrawal would cause the dollar amount of net capital to fall below 120% of the minimum dollar requirement. For example, if a broker-dealer has aggregate indebtedness of $1,000,000 and net capital of $100,000, its ratio would be 10 to 1. No withdrawal of capital would be allowed as this would cause the ratio to exceed 10 to 1.
Equity capital may not be withdrawn if such withdrawal would cause subordinated loans to exceed 70% of the debt-equity total.
A clearing broker-dealer calculates its net capital to be $270,000. The broker-dealer is required to:
a- Send immediate notice to the SEC and its examining authority
b- Cease conducting business with the public
c- File a notice with the SEC and its examining authority within 24 hours
d- File Part II of the FOCUS Report within 48 h
C- If a broker-dealer’s dollar amount of net capital dropped below 120% of the minimum specified under Rule 15c3-1, it would be required to file a notice within 24 hours. Since a clearing broker-dealer requires $250,000 of net capital, a notice would be filed if its net capital fell below $300,000.
Which of the following statements is true of a clearing broker-dealer that has aggregate indebtedness of $5,850,000 and net capital of $450,000?
a- It must immediately file a notice of net capital deficiency.
b- It must file a notice with the SEC and its examining authority within 24 hours.
c- It must file a notice of net capital deficiency if its ratio of aggregate indebtedness to net capital does not decrease below 12 to 1 within 90 days.
d- It is not currently subject to any notice requirement.
B- This broker-dealer’s ratio of aggregate indebtedness to net capital is 13 to 1. This is not a net capital deficiency. However, if the ratio is above 12 to 1, the broker-dealer must file an Early Warning notice with its examining authority and the SEC within 24 hour
A broker-dealer has a short contractual commitment for $12,000 in DEF, a listed common stock. The current market value is $11,000. The haircut would be: a- $3,300 b- $2,300 c- $1,650 d- $650
D- The haircut on a short contractual commitment is the regular haircut for that type of security, increased by any unrealized loss or decreased by any unrealized gain. The haircut for contractual commitments is 30%, unless the security is listed on an exchange or designated as a Nasdaq National Market System (NNM) security, in which case the haircut is 15%.
The basic haircut is 15%, since DEF is a listed security. In addition, there is an unrealized profit of $1,000. The broker-dealer will receive $12,000 upon delivery of the stock, which currently has a market value of $11,000. The net haircut is therefore $650 (15% of $11,000, minus the unrealized profit of $1,000).
A broker-dealer computes its reserve requirement pursuant to Rule 15c3-3 to be $200,000. The broker-dealer currently has $150,000 on deposit in the Reserve Bank Account. It may reduce its aggregate indebtedness by: a- $200,000 b- $150,000 c- $60,000 d- $45,000
B- A broker-dealer is allowed to reduce its aggregate indebtedness by the amount that is required to be on deposit and is on deposit in the Customer Reserve Bank Account.
A broker-dealer has an aged fails to deliver. The contract price is $20,000, and the market price is $22,000. The haircut would be: a $1,300 b $3,000 c $5,000 d $5,300
A- In this situation, the haircut would be 15% of the market price of $22,000 ($3,300) minus the $2,000 excess of the market price over the contract price, for a total haircut of $1,300.
A due bill occurs on a trade that is:
a Executed before the ex-dividend date and delivered before the record date
b Executed before the ex-dividend date and delivered after the record date
c Executed after the ex-dividend date and delivered before the record date
d Executed after the ex-dividend date and delivered after the record date
B- Correct.
A due bill occurs on a trade that is executed before the ex-dividend date and delivered after the record date.
Rule 17a-3 requires a broker-dealer to prepare which of the following records?
I A memorandum of each order showing the time of the order, the account for which the order was entered, the time of entry, and the time of execution
II Copies of all confirmations of purchases and sales for customers
III A record of each cash and margin account containing the name and address of each customer
IV A record of each customer’s securities position for the past five years, or for the life of the account if opened for less than five years, showing each purchase and sale
II and IV only
I, II, and III only
II, III, and IV only
I, II, III and IV
B- Choices I, II, and III are requirements of Rule 17a-3. There is no requirement to maintain a record of each customer’s securities position for the past five years.
A broker-dealer is required under the provisions of Rule 17a-13 to do which of the following?
I Physically count and examine all securities held by the broker-dealer.
II Account for all securities subject to its control but not in its physical possession, such as securities in transfer, fails to receive, and fails to deliver.
III Verify all securities subject to its control but not in its possession, such as securities in transfer, where such status has existed for more than 30 days.
IV Record on its records all unresolved security differences.
a I and II only
b I, II, and III only
c II, III, and IV only
d I, II, III, and IV
D- Rule 17a-13 deals with the quarterly count of securities. The broker-dealer must physically count and examine all securities in its possession. For securities under its control but not in its possession, such as securities in transfer, the broker-dealer must account for these securities and verify their location if necessary. Any short difference must be recorded on the broker-dealer’s records.
A FINRA member is required to review its fidelity bond coverage:
a Monthly
b Annually
c Only if they are subject to reporting under SEC Rule 17a-11
d Only if they have claim against them
B- A member is required to review its fidelity bond coverage annually.
