Exam 2 Flashcards
1
Q
Annual reports required under Rule 17a-5 must comply with which of the following requirements?
I. The report must be prepared by an independent public accountant.
II. The report must contain an oath or affirmation by a partner or officer that the information is true and correct.
III. The report must contain a supplement regarding the status of the membership of the broker-dealer in SIPC.
IV. The report must be filed with the SEC in Washington, D.C., with the SEC regional office where the broker-dealer has its principal place of business, and with 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
A
D-
All of the elements listed in the answer are correct statements.
2
Q
A broker-dealer has a debt-equity totaling $250,000, of which $50,000 is equity and $200,000 is a subordinated loan. Under what circumstances could the broker-dealer consider the subordinated loan to be part of its equity capital?
I. Under no circumstances may a subordinated loan be considered part of equity capital.
II. The lender must be a partner or stockholder.
III. The loan must have an initial term of three years or longer.
IV. The loan may not have any provision for accelerated maturity.
a. I only
b. II only
c. II and IV only
d. II, III, and IV only
A
D-
A subordinated loan is considered to be part of a broker-dealer’s net capital if the lender agrees to a minimum duration of one year. If the broker-dealer wishes to consider the subordinated loan to be part of its equity as well as part of its net capital, the lender must be a partner or stockholder. The loan must have a minimum duration of three years, and there may be no provision for accelerated maturity.
3
Q
The haircut on common stock positions is:
a. 15% of the long position
b. 15% of the greater of the long or short position
c. 15% of the long position and 15% of the short position
d. 15% of the greater of the long or short position and 15% on the amount that the lesser position exceeds 25% of the greater position
A
D-
The haircut on common stock is generally 15% of the greater of the long or short position. In addition, to the extent that the smaller position exceeds 25% of the greater position, there is an additional haircut of 15% on the excess. The following examples will explain how this works.
A broker-dealer has a long position of $400,000 and a short position of $50,000. The long position is greater than the short position, and the haircut would be 15% of $400,000 ($60,000). As the short position is less than 25% of the long position, there is no additional haircut.
A broker-dealer has a long position of $250,000 and a short position of $400,000. The short position is greater than the long position, and the haircut would be 15% of $400,000 ($60,000). The long position exceeds 25% of the short position (25% of $400,000 equals $100,000). On the excess short position of $150,000, there is an additional haircut of $22,500 (15% of the excess).
4
Q
Pursuant to a securities count that broker-dealers are subject to:
a. A firm may select a sample of securities to be counted
b. Items such as securities pledged or securities borrowed may be ignored
c. A count conducted on May 15 must be followed by a count no later than October 15
d. Securities pledged, loaned, or borrowed must be verified if those securities have been in that status for more than 30 days
A
D-
All securities in the vault must be counted. Verification of securities not in the broker-dealer’s physical possession, i.e., securities in transit, transfer, and fails must be verified if they have been in that status for more than 30 days. The difference between May and October is 5 months; the maximum amount of elapsed time between counts is four months.
5
Q
A municipal securities broker-dealer is NOT required to preserve for any length of time:
I. Copies of the Daily Bond Buyer containing a notice of sale to which the broker- dealer responded
II. Copies of an industry publication in which the broker-dealer published a quote
III. News service printouts of articles mentioning the firm by name
IV. Standard and Poor’s or Moody’s securities manuals containing the ratings of bonds that were recommended by the firm
a. I only
b. I and II only
c. III and IV only
d. I, II, III, and IV
A
D-
MSRB rules do not require members to maintain a file of industry-related publications such as the Bond Buyer. Ratings manuals and new service printouts also need not be maintained.
6
Q
A carrying broker-dealer would like to compute its SEC Rule 15c3-3 Reserve Bank Account requirement on a monthly basis. Which of the following statements is CORRECT?
a. The firm must obtain permission from any SEC district office one week prior to its first such computation.
b. The Designated Examining Authority of the firm must be notified.
c. The customers of the firm must be notified in writing of this event.
d. The firm has a ratio of aggregate indebtedness to net capital of 9.5:1, which will not preclude it from conducting the calculation monthly.
A
B-
If a broker-dealer wants to perform this computation on a monthly rather than a weekly basis, it must satisfy certain financial tests. These include maintenance of an A.I. to N.C. ratio of no greater than 8:1. The Designated Examining Authority of the broker-dealer must be advised of this election.
7
Q
A broker-dealer that does not carry customer accounts must file which of the following? I. Focus Report Part I monthly II. Focus Report Part II quarterly III. Focus Report Part IIA quarterly IV. Annual reports a. II and IV only b. III and IV only c. I, II, and IV only d. I, II, III, and IV
A
B-
Broker-dealers who do not carry customer accounts must file the reports as indicated in this question.
8
Q
Customer X deposits $3,000 in cash in her account at 9:30 a.m. At 5:00 p.m. on the same day, she deposits another $8,000 in money orders. The firm needs to file:
a. A CTR
b. A CMIR
c. A W-9 Form
d. Nothing
A
A-
The firm needs to file a Currency Transaction Report (CTR) FinCEN Form 104 since customer X deposited more than $10,000 in cash and cash equivalents during the course of one business day. ($3,000 plus $8,000 equals $11,000.) A Currency and Monetary Instrument Transportation Report (CMIR) must be filed whenever anyone physically transports or receives currency or monetary instruments in an amount of $10,000 or more into or out of the United States.
9
Q
A broker-dealer is operating pursuant to Section (k)(2)(i) under SEC Rule 15c3-3. Which of the following is NOT TRUE concerning the activities of the firm?
a. The firm may not carry more than 100 margin accounts for retail customers.
b. Any funds or securities received in connection with the activities of the firm must be promptly transmitted.
c. The firm may not hold customer funds or securities.
d. All financial transactions between the firm and its customers must be effected through a special bank account.
A
A-
A broker-dealer operating under Section (k)(2)(i) of SEC Rule 15c3-3 is not required to maintain the Reserve Bank Account as stipulated in the Customer Protection Rule. Although regarded as a carrying firm by SEC net capital rules, the broker-dealer must promptly transmit any funds or securities that it receives in connection with its activities and must conduct all transactions between itself and customers through a Special Bank Account. This firm may not hold customer funds or securities,and is not permitted to carry any margin accounts for customers.
10
Q
A security sold before it trades ex-dividend and delivered after the record date shall be accompanied by:
a. Tax stamps
b. A QT notice
c. A DK notice
d. A Due bill
A
D-
The due bill evidences that the buyer has rights to the distribution and the seller has the obligation.
11
Q
If the collateral value of securities pledged on a secured demand note falls below the principal amount of the note:
a. The broker-dealer must immediately notify the lender and the Designated Examining Authority
b. The broker-dealer must immediately liquidate a sufficient amount of securities to raise the collateral value of the cash plus the remaining securities to the amount of the secured demand note
c. The broker-dealer must comply with the requirements of (a) and (b) only if the collateral value of the securities drops below 50% of the amount of the note
d. None of the above are correct
A
A-
If the collateral value of securities pledged on a secured demand note falls below the principal amount of the note, the broker-dealer must immediately notify the lender and the Designated Examining Authority.
12
Q
Which of the following activities would be prohibited under MSRB Rule G-37?
I. A dealer making a $10,000 charitable donation to the Adopt A Greyhound foundation at the request of an issuer official
II. A Municipal Finance Professional (MFP) attending a $200 a plate fundraising dinner for the mayor of her town
III. A Municipal Finance Professional (MFP) making phone calls to his friends to attend the fund raiser
IV. A Municipal Finance Professional (MFP) doing volunteer work at a municipally-owned shelter
a. I only
b. III only
c. I and III only
d. II and IV only
A
B- Charitable contributions (Choice I) are not covered under pay to play rules. Volunteer work (Choice IV) is acceptable with the exception of political fund-raising activities. Choice (III) would be considered a solicitation of a political contribution and is therefore prohibited.
13
Q
A broker-dealer has a fail to deliver on its books. It is based on a common equity security trading on the New York Stock Exchange. The contract value is $60,000, and the market value is $65,000. The haircut on this position is:
a. $14,750
b. $4,750
c. $14,000
d. $4,000
A
B-
The haircut is taken when the fail to deliver is aged, which is greater than four days old. The charge is applied to the market value of the fail and then adjusted for any difference between market value and contract value. In this case, since the market value is greater than the contract value, this unrealized gain is subtracted from the initial haircut. A 15% haircut on $65,000 is $9,750, less $5,000 for a total haircut of $4,750.
14
Q
A count of securities under Rule 17a-13 may be made:
a. Only by employees whose regular duties involve direct responsibility for the care and protection of securities
b. By employees whose regular duties involve direct responsibility for the care and protection of securities under the supervision of someone who is outside the area of care and protection of securities
c. Only by employees whose regular duties do not involve direct responsibility for the care and protection of securities
d. By a principal of the member firm
A
B-
The quarterly count of securities required under the provisions of Rule 17a-13 may be conducted by employees who are directly responsible for the handling of the securities if the count is supervised by a person whose regular duties do not involve direct responsibility for the handling of the securities.
15
Q
All of the following are filed with the SEC EXCEPT:
a. FOCUS Report Part I
b. FOCUS Report Part II
c. A summary of SRO assessments
d. A notification regarding the hiring of an auditor
A
C-
Focus I and Focus II are filed on a monthly and quarterly basis, respectively with the SEC and the FINRA. Assessments payable to an SRO (FINRA) are not filed with the SEC.
16
Q
Place in the proper order from first to last the sequence in which various records would be prepared if a client makes a stock purchase:
a. Purchase and sales deptartment, order ticket, transfer agent, fail to receive
b. Order ticket, purchase and sales, transfer agent, fail to receive
c. Fail to receive, purchase and sales, order ticket, transfer agent
d. Order ticket, purchase and sales, fail to receive, transfer agent
A
D-
The trade is initiated with the order ticket then recorded in the purchase and sales department. If the stock is not delivered by the settlement date, the transaction becomes a fail to receive. When the securities are finally delivered, they can be sent to the transfer agent.
17
Q
All of the following securities may be used as collateral in a margin account EXCEPT:
a. Convertible bonds that have been transferred from a UTMA account into the name of the owner who has just reached the age of majority
b. Mutual funds purchased more than one month ago that are subject to a contingent deferred sales charge for the next three years
c. Treasury bills that mature in less than 30 days
d. Shares of a new offering of a Nasdaq stock that have just been allocated to a customer by a syndicate member
A
D-
Broker-dealers that are participating in a distribution of new securities may not extend credit on those securities until they have been held by the customer for 30 days. Regarding choice (b), note that mutual fund shares sold by a dealer may be used as collateral in a margin account after they have been held by the customer for 30 days.
18
Q
A client wants to write uncovered options. In addition to obtaining a signed option agreement your firm should obtain:
a. A minimum equity of at least $25,000
b. A signed margin agreement
c. Form W-9
d. Fully paid stock as collateral
A
B-
Uncovered options must be executed in a margin account. If the client has not previously established a margin account, she must do so.
19
Q
Fred Burroughs is a client of Marlboro Brokerage. He purchased 100 shares of Mysteria Industries. Marlboro acted as his agent and purchased the shares from Harrison Brokerage. Harrison does not deliver the stock to Marlboro on the settlement date. Marlboro’s stock record will reflect:
a. Long 100 shares in inventory
b. Long 100 shares owned by Burroughs and fail to deliver
c. Nothing until the delivery is made
d. Long 100 shares (owned by Burroughs) and fail to receive 100 shares
A
D-
The stock record reflects the ownership and location of the securities. Mr Burroughs is long the shares, and the location is fail to receive.
20
Q
A broker-dealer may enter into a temporary subordination agreement for purposes of:
a. Engaging in an underwriting
b. Raising equity to correct a deficiency in its Reserve Bank Account under Rule 15c3-3
c. Raising equity to correct a deficiency in its net capital ratio under Rule 15c3-1
d. Increasing its net capital to 120% of the minimum required under Rule 15c3-1
A
A-
Temporary subordination agreements, which may not exceed 45 days in duration, are limited to underwritings only.
21
Q
According to MSRB rules, subsidiary records are intended to reflect municipal securities: In transfer To be issued Borrowed or loaned Not completed by the settlement date I and III only II and IV only I, III, and IV only I, II, III, and IV
A
C-
MSRB rules state that subsidiary records should reflect municipal securities in transfer, municipal securities borrowed or loaned, municipal securities to be validated, and municipal securities transactions not completed by the settlement date. Securities to be issued will not be reflected in subsidiary records.
22
Q
Which of the following items would not be considered part of the beginning capital of a broker-dealer?
a. Retained earnings
b. Bank loans secured by customers securities
c. Paid in capital
d. Common stock account
A
B-
Bank loans secured by customer securities do not contribute to the beginning capital of the broker dealer.
23
Q
Reclamation based on the fact that a municipal security was delivered after publication of notice of call may be made:
a. Within 10 days
b. Within 30 days
c. Within 60 days
d. With no time limit
A
D-
There is no time limit, however, this rule does not apply if the entire issue has been called for redemption or if the security involved was traded as a called security.
24
Q
The 5% Policy applies to which of the following? I. Agency sales in the OTC market II. Principal transactions in municipal bonds III. Mutual fund sales IV. New issues of corporate securities a. I only b. I and IV only c. II and III only d. I, II, and III only
A
A-The 5% Policy applies to both agency and principal OTC transactions. However, it does not apply to any sale under a prospectus, such as a mutual fund or a new issue, or to transactions in governments or municipals.
25
A broker-dealer has various equity positions in its trading account. When determining the haircut:
a. Long and short positions are netted
b. The greater of the long or short position is charged
c. Each long and short position is separately treated
d. All equity positions in the trading account receive the same percentage haircut
B-
In the firm trading account when dealing with equities, the haircut is applied to the greater of the long or short position. If the lower side exceeds 25% of the value of the higher side, an additional charge must be applied.
26
Which of the following statements is NOT TRUE regarding a temporary subordinated loan?
a. It may not be used as part of the broker-dealer's capital.
b. A firm is limited to executing three such agreements in a 12-month period.
c. The loan may not have more than 45 days to maturity.
d. The proceeds of the loan are to be used for underwriting purposes only.
A-
Temporary subordinated loans are short-term loans that are used for underwriting purposes. A broker-dealer is limited to executing no more than three such loans per year, with maturities of no greater than 45 days. These loans are acceptable as capital in the broker-dealer's financial structure.
27
A customer has purchased stock worth $25,000 in her special cash account. If the stock has a market value of $100, how many shares of stock must the broker-dealer have under its control under the provisions of Rule 15c3-3?
a. 250
b. 125
c. 100
d. 25
A- The broker-dealer must obtain possession of all the fully paid stock of the customer.
28
Which of the following statements is TRUE of a carrying broker-dealer with $200,000 of net capital?
a. It need not file a notice of capital deficiency unless the deficiency persists for more than 90 days.
b. The broker-dealer must file an Early Warning notice within 24 hours.
c. The broker-dealer must immediately file a notice stating its net capital and required net capital.
d. The broker-dealer must file a notice only if instructed by its Designated Examining Authority.
C- Since this broker-dealer's net capital is less than the minimum dollar requirement, it must immediately file a notice of net capital deficiency. The notice must include the broker-dealer's net capital and its required net capital.
29
Which TWO of the following statements regarding disciplinary proceedings under the Code of Procedure are TRUE?
I. Original jurisdiction rests with a Hearing Panel.
II. Original jurisdiction rests with the National Adjudicatory Council.
III. Appellate jurisdiction rests with a Hearing Panel.
IV. Appellate jurisdiction rests with the National Adjudicatory Council.
a. I and III
b. I and IV
c. II and III
d. II and IV
B- Under the Code of Procedure, original jurisdiction rests with a FINRA Hearing Panel. It is the Hearing Panel that holds hearings, considers complaints, and assesses penalties. If a respondent disagrees with the findings of the Hearing Panel, the respondent may appeal to the National Adjudicatory Council, which has both appellate and review jurisdiction.
30
Which of the following statements are TRUE regarding the activities of introducing broker-dealers subject to a $50,000 net capital requirement?
I. They do not have fails to deliver on their books.
II. They may not act as a market maker.
III. They may charge commissions on an exchange-traded issue.
IV. They may participate in all types of underwritings.
a. I, II, and III only
b. I and III only
c. II, III, and IV only
d. III and IV only
B- Only clearing broker-dealers have fails to deliver and fails to receive on their books. An introducing broker-dealer would require $100,000 to act as a market maker. Firm commitment underwriting requires $100,000 of net capital. Introducing broker-dealers can always charge a commission on a trade.
31
What does not need to be reported under the requirements for reporting with respect to missing, lost, stolen, or counterfeit securities?
a. Denomination
b. Purchase price
c. Certificate number
d. Date of issue
B- Purchase price is not a reportable item
32
A broker-dealer's aggregate indebtedness fell but its net capital requirement rose. This could be attributable to:
a. Greater haircuts
b. Making more markets
c. Higher firm fails to receive
d. All of the above
B- A reduction in aggregate indebtedness could reduce a firm's net capital requirement, but there are other factors at work. If a broker-dealer increased the number of markets it makes, its net capital requirement could rise. Remember that there is a ceiling of $1,000,000 as a capital requirement based on market-making activities.
33
On a secured demand note, the value of the note may not be more than what percentage of the market value of common stock pledged to back the note?
a. 30%
b. 50%
c. 70%
d. 85%
C- Securities that are pledged on a secured demand note are usually subject to the same haircuts that apply to securities held in a broker-dealer's proprietary accounts. However, if common stock is pledged as collateral to back a secured demand note, it is subject to a haircut of 30%, rather than 15%. Therefore, the value of the note may not exceed 70% of the value of the stock.
34
Which of the following statements is TRUE of a CUSIP number?
a. It is assigned in place of a serial number when a bond is not part of a serial issue.
b. It is required to be printed on the face of the bond certificate and be legible to effect good delivery.
c. It is assigned to each bond certificate to identify the security with the book of record of the registrar.
d. It must be promptly obtained by the managing underwriter for each new municipal issue.
D- Each broker-dealer who acquires, as principal or agent, a new issue of municipal securities from the issuer for the purpose of distributing such issue, must apply in writing to the MSRB for assignment of a CUSIP number to the new issue. This task is generally performed by the syndicate manager. However, member firms need not apply if the issuer has made application for the number.
35
Armstead Brokerage determines that it is missing 1,000 shares of Neshiminy Corp. after it conducted its quarterly securities (box) count. Armstead's responsibility is to:
a. Report within two business days if the securities are not recovered
b. Only report this if there is a suspicion of criminal activity
c. Request duplicate certificates from the transfer agent
d. Report within 10 business days
D- Unlike other circumstances where reporting must occur much sooner (one business day after securities have been determined to be missing for two business days), a reporting institution is given 10 business days to make such a report if the short security difference was discovered as the result of the quarterly box count.
36
A full-service broker-dealer is computing its customer Reserve Bank Account requirement on a monthly basis. It has just discovered that its ratio of aggregate indebtedness to net capital is 10.5:1. What action is required at this point?
a. The AI:NC ratio must be lowered within 30 days to avoid citation.
b. The firm must notify its independent public accountant.
c. The firm must change to a weekly computation.
d. The chief financial officer of this firm must complete Focus Report Part II and file it with the SEC within five business days.
C= In this circumstance, the firm is no longer eligible for a monthly calculation. It must now alter its schedule to weekly computations. If the firm wishes to return to a monthly routine, it must maintain an acceptable ratio for four successive weeks before making its change. The maximum allowable A.I. to N.C. ratio for a monthly computation is 8:1.
37
Concerning the validation of a customer account for transfer purposes:
I. The carrying member must freeze the account to be transferred following validation
II. All open orders must be canceled and no new orders may be accepted following validation
III. Exceptions to a member's transfer instruction may be taken because of a dispute involving securities positions or the money balance in the account
IV. Members may use their own discretion in validating customer account transfers
a. I and II only
b. I and III only
c. II and III only
d. III and IV only
A- Upon validation of a transfer instruction, the carrying member must freeze the account to be transferred and cancel all open orders on its books. Thereafter, no new orders may be accepted. A carrying member may not take exception to a transfer instruction because of a dispute over securities positions or the money balance in the account to be transferred. In such cases, the carrying member must still transfer the securities positions and/or money balance reflected on its books for the account.
38
A broker-dealer whose ratio of aggregate indebtedness to net capital exceeds the limits established under Rule 17a-11 is required to notify:
a. The SEC in Washington, D.C.
b. The SEC regional office where the broker-dealer has its principal place of business
c. The broker-dealer's Examining Authority
d. All of the above
D- If a broker-dealer's aggregate indebtedness exceeds its net capital by more than 15 times (8 times in the first year of operation), or the dollar amount of net capital falls below the minimum required by Rule 15c3-1, the broker-dealer must notify the SEC both in Washington and in the region where it is located. The broker-dealer must also notify its Examining Authority (FINRA).
39
```
How can customer credits arise?
I. Cash dividends are received.
II. Short selling proceeds are received.
III. Customer makes a Reg T deposit.
IV. Customer grants a subordinated loan.
a. I and II only
b. I and III only
c. I and IV only
d. II, III, IV only
```
A- When issuers pay dividends, the dividends are allocated to customers according to their specific holdings. Selling short also generates a credit. When a customer pays for her trade, she is reducing her debit, not creating a credit. If a customer granted a subordinated loan, a liability called Subordinated Loan would be created. This is not a customer credit, it's a broker-dealer credit (liability) on its balance sheet.
40
According to the SEC Net Capital Rule, a ready market would not be deemed to exist in which of the following cases?
a. A preferred stock issue trading on a regional stock exchange
b. An issue of common stock sold under Regulation D in the trading account of the firm
c. Shares of a REIT being quoted on the Nasdaq system
d. A subordinated debenture, listed on an exchange, now being held at a bank as collateral for a loan
B- A ready market is considered to exist if on a recognized securities exchange, there are independent quotations provided for a security, thus allowing for an immediate and reasonable price to be determined. Where securities have been accepted as collateral for a loan by a bank, the SEC will also consider a ready market to exist.
41
According to the SEC Net Capital Rule, a ready market would not be deemed to exist in which of the following cases?
A preferred stock issue trading on a regional stock exchange
An issue of common stock sold under Regulation D in the trading account of the firm
Shares of a REIT being quoted on the Nasdaq system
A subordinated debenture, listed on an exchange, now being held at a bank as collateral for a loan
B-
A ready market is considered to exist if on a recognized securities exchange, there are independent quotations provided for a security, thus allowing for an immediate and reasonable price to be determined. Where securities have been accepted as collateral for a loan by a bank, the SEC will also consider a ready market to exist.
42
Roger Rep strongly suspects that one of his clients may be laundering money. The client frequently deposits cash in her account, always in amounts of less than $10,000, and then withdraws it a few days later. She shows little interest in investing most of the funds in the account. Since Roger does not know for sure, he decides to ignore the situation. The client is eventually arrested for drug trafficking and money laundering. All of the following statements are TRUE EXCEPT:
a. Roger may be subject to civil fines
b. Roger may be prosecuted criminally
c. Roger may be sentenced to a maximum of six months in jail
d. Roger's firm may be held liable for his failure to report his suspicions
C-
A registered representative may be prosecuted for violating the anti-money laundering (AML) laws if he was willfully blind to the activity -- he deliberately refuses to make a reasonable inquiry even though he knows it is highly likely that a crime is being committed. Actual knowledge or participation in the money laundering scheme is not required. The criminal penalties for money laundering may include jail sentences of up to 20 years.
43
In determining whether an undue concentration charge applies in the net capital computation, the broker-dealer would NOT need to determine:
a. Capital after deductions but before the application of haircuts
b. The number of shares of a specific equity security in the trading account
c. For any equity security in the trading account, whether a limited market or a ready market exists
d. The market value of the shares of a specific equity security in the trading account
C-
In determining if an undue concentration charge needs to be applied, the firm must determine its tentative net capital, which is capital after deductions but before haircuts. If any single position in the trading account exceeds 10% of the tentative net capital of the broker-dealer, the concentration charge is applied. The number of shares and the market value of the shares is necessary in making this determination.
44
Broker-dealers are required to submit annual reports:
a. On January 15 of every year
b. On March 15 of every year
c. At any time within a fiscal or calendar year
d. At a fixed or determinable date each year
D-
Annual reports must be filed with the SEC and the broker-dealer's examining authority on either a fixed date or a date that is determinable based on prior filings.
45
If an auditor finds a material inadequacy during the audit of a member firm, the auditor:
a. May ignore the inadequacy if the auditor considers such action appropriate
b. Must notify the SEC and the broker-dealer's Designated Examining Authority
c. Must notify the member firm's chief financial officer, the SEC, and the broker-dealer's Designated Examining Authority
d. Must notify the member firm's chief financial officer, who must in turn notify the SEC and the broker-dealer's designated examining authority
D- If an auditor discovers a material inadequacy during the course of an audit of a member firm, the auditor is required to notify the member firm's chief financial officer, who in turn is required to notify the SEC and the broker-dealer's Designated Examining Authority.
46
A person walks into your office and is contemplating opening an account. He requests a financial statement. According to FINRA rules:
A customer can make a request for an income statement
A customer may request a Statement of Financial Condition
This request should be handled through the OSJ
A noncustomer should be given a FOCUS report
B-
Customers can request a Statement of Financial Condition although they would receive one every six months pursuant to SEC rules.
47
Value Trade Securities made a reserve formula computation on the close of business Friday, March 31. At that time, debits exceeded credits by $250,000, and the firm had $200,000 in the Reserve Bank Account. In order to make a withdrawal from the Reserve Bank Account:
a. Notification must be given to FINRA
b. Value Trade must keep a record of the computation that it uses as the basis for its withdrawal
c. Value Trade must maintain at least $100,000 in the account at all times
d. Value Trade must give the bank a copy of the reserve computation
B-
| A broker-dealer must be able to justify that it was eligible to withdraw funds from the Reserve Bank Accoun
48
```
A client opens his account with a check for $10,000. The impact on the firm's financials is to:
I. Increase AI
II. Increase capital
III. Increase credits in the Reserve Formula
IV. Increase assets
a. IV only
b. I and II only
c. II and III only
d. I, III, and IV only
```
D-
The firm's free credit balances will increase, so AI increases. Customer free credit balances also impact the Reserve Bank Account for the exclusive benefit of customers. The receipt of the check also increases the firm's assets by $10,000
49
When a purchaser wishes to close out a transaction:
I. Notice of the close-out may be given to the seller over the telephone
II. Written notice must be sent to the seller accompanied with a copy of the seller's confirmation of the transaction
III. The execution date for the close-out must be at least 10 business days after written notice is sent by the purchaser
IV. The execution date for the close-out must be at least 10 business days after initial notice is given, be it by telephone or in written form
a. I and II only
b. II and III only
c. I, II, and III only
d. I, II, and IV only
D-
Choice (III) is incorrect. The execution date for the close-out must be at least 10 business days after initial notice of the close-out is given by the purchaser, not after written notice is sent. Initial notice is usually given over the telephone.
50
When a broker-dealer sells stock for more than its par value, the difference is recorded in which of the following accounts?
a. Retained earnings
b. Excess cash
c. Paid-in capital in excess of par
d. Earned surplus
C-
The difference between the par value and actual amount received by the broker-dealer for the shares is called paid-in capital in excess of par.
51
A broker dealer has $30,000,000 in aggregate debit items from SEC Rule 15c3-3 Reserve Formula and determines its capital under the alternative minimum net capital method. Its minimum requirement is:
a. $250,000
b. $600,000
c. Based on the aggregate indebtedness of the broker-dealer
d. $1,000,000
B-
A broker-dealer computing net capital under the alternative minimum method must maintain the greater of $250,000 or 2% of the aggregate debit items pursuant to the Reserve formula. 2% of $30,000,000 is $600,000.
52
Proxy material, annual reports, and other information sent by corporations to member firms who hold stock in street name for their customers:
a. Must be forwarded to the beneficial owners at their expense
b. Must be forwarded to the beneficial owners at the member firm's expense
c. Must be forwarded to the beneficial owners with the corporation paying the expenses
d. Need not be forwarded to the beneficial owners
C-
Proxy material and other information regarding securities held by a broker-dealer in street name must be forwarded to the beneficial owners. The issuing corporation pays any expenses involved.
53
Broker-dealers may reduce their coverage available under a fidelity bond if:
a. There are a minimal number of claims
b. They are members in good standing of FINRA for three consecutive years
c. Their net capital requirement is falling
d. AI/NC is less than 8:1
C-
A broker-dealer's fidelity bond coverage is based on its net capital requirement. The firm's highest net capital requirement over the past year dictates whether changes will need to be made in the bond. If the net capital requirement of the broker-dealer is falling, the firm is eligible for a smaller bond.
54
A customer, as defined under SEC Rule 15c3-3, would include which of the following:
a. Subordinated lenders
b. Broker-dealers
c. An individual's personal account
d. General partners, directors, or officers of the broker-dealer
C-
| The other choices are not considered customers of a broker-dealer under the Customer Protection Rule (SEC Rule 15c3-3).
55
All of the following securities settle regular way in three business days except:
a. Preferred stock
b. U.S. government bonds
c. Municipal bonds
d. Warrants
B-
| U.S. government bonds settle in one business day (T + 1).
56
Confirmations sent by a broker-dealer to a customer must contain all of the following information EXCEPT:
a. The capacity in which the broker-dealer acted
b. The fact that the securities are callable due to a natural disaster
c. The amount of accrued interest
d. For revenue bonds, a notation regarding the primary source of revenue
B-
If the only call provision that applies to a bond is a catastrophe call, the confirmation need not describe the bonds as callable. A catastrophe call allows the bonds to be called due to circumstances totally beyond the control of the issuer, such as a hurricane, earthquake, or flood.
57
Good-faith deposits arising in connection with an underwriting of stock:
a. Are not an allowable asset
b. Are an allowable asset only if the underwriting has not settled
c. Are an allowable asset if 11 days or less have elapsed from the settlement of the underwriting with the issuer
d. Are an allowable asset if less than 30 days have elapsed from the settlement of the underwriting with the issuer
C-
A good faith deposit represents the cash deposit made by a broker-dealer that is bidding for an underwriting. Once the underwriting is completed, the issuer that is holding the good-faith deposit will return it to the broker-dealers. If the deposit has not been returned within 11 days of the settlement of the underwriting, the full amount of the deposit must be deducted from capital.
58
A call option contract may be bought:
a. On margin in the general account
b. In the cash or margin account
c. For either cash or margin
d. In the margin account only if it is in the money
B-
Call options have no loan value under Regulation T and therefore must be bought for cash. Options could be purchased in a margin account provided the full purchase price is deposited.
59
Savatiar Inc., a new FINRA member firm, has 75 registered representatives providing diverse services to its clients. Within the supervisory system of this firm, FINRA requires that procedures exist for all of the following situations EXCEPT:
Amending its supervisory procedures where appropriate after changes occur in SEC or FINRA rules
The approval by a registered principal of every transaction entered by its registered reps
The participation of each registered rep in an annual compliance review
Performing a credit check on each employee hired by the firm
D-
General supervisory rules of FINRA provide for most of these items. However, although member firms should be familiar with the background of each employee, they are not required to perform a credit check.
60
A clearing broker-dealer has been in business for more than 12 months. The firm's net capital is $350,000 and its aggregate indebtedness is $2,450,000. The firm would violate the net capital rule under which of the following circumstances?
a. If aggregate indebtedness increased to $5,300,000
b. If aggregate indebtedness increased to $3,750,000
c. If net capital declined by $100,000
d. All of the above
A-
If aggregate indebtedness increased to $5,300,000, the ratio of AI/NC would be greater than the allowable amount of 15:1. If the net capital decreased to $250,000, the firm would be at the minimum threshold, but this would not constitute a violation.
61
A clearing broker-dealer has been in business for more than 12 months. The firm's net capital is $350,000 and its aggregate indebtedness is $2,450,000. When would the broker-dealer be required to file notice with the regulatory authorities?
a. If aggregate indebtedness increased to $4,250,000
b. If aggregate indebtedness increased by $1,000,000
c. If net capital fell by $50,000
d. If aggregate indebtedness increased to
A-
The firm's ratio of AI/NC would be greater than 12:1 in this instance, triggering a notification to the regulators. A drop in net capital to $300,000 would not trigger a reporting requirement because the firm would still have the 20% cushion over $250,000 that the net capital rule requires. Another further drop below $300,000 would trigger a notification.
62
A client informs a registered representative that she will be purchasing securities with five shipments of $9,500 in cash, each sent by federal express from either Moscow, Kiev, or St. Petersburg. The registered representative does not see any business purpose or rational explanation for paying for the transactions in this odd manner. The registered representative must contact her supervisor about filing a:
a. CTR only
b. SAR only
c. CTR and a CMIR
d. CTR, a CMIR, and possibly an SAR
D-
A Currency Transaction Report (CTR) must be filed since all the transactions in the aggregate total more than $10,000. A Currency and Monetary Instrument Transportation Report (CMIR) must be filed since the cash is being physically transported into the United States from abroad. A Suspicious Activity Report (SAR) may also need to be filed since the transactions do not appear to have any business or lawful purpose.
63
A broker-dealer with total customer credits of $500,000 and total customer debits of $450,000 computes its reserve requirement under Rule 15c3-3 under the alternate method. The broker-dealer must deposit into its Reserve Bank Account:
a. $50,000
b. $52,500
c. $55,000
d. None of the above
B-
Computations under the Reserve Formula must be made weekly, and the difference between the credit items and the debit items must be deposited in the Reserve Bank Account no later than one hour following the opening of banking business on the second business day following the computation.
Under certain circumstances, a broker-dealer may make a monthly rather than weekly computation. The monthly computation is allowed if the broker-dealer's ratio of aggregate indebtedness to net capital does not exceed 8 to 1 and the broker-dealer does not carry aggregate customer funds in excess of $1,000,000. In this case, the broker-dealer must maintain 105% of the difference between credits and debits.
In this question, the difference is $50,000. If the broker-dealer made weekly computations, it would deposit $50,000. If the broker-dealer makes monthly computations, it would deposit $52,500 (105% of $50,000).
64
A member firm that is required to make substantial adjustments to its fidelity bond must:
a. Immediately notify the SEC
b. Immediately notify FINRA
c. Within 24 hours notify either the SEC or FINRA
d. Within 30 days notify either the SEC or FINRA
B-
A member firm must review its fidelity bond coverage annually based on its net capital requirement for the previous 12 months. If, after the review, the firm determines that there must be an adjustment to the amount of its fidelity bond, a change must be made. If the change is substantial, FINRA must be notified immediately.
65
A short securities difference:
a. Does not affect net capital
b. Requires a 30% haircut immediately
c. Requires a 100% deduction immediately
d. Requires a 100% deduction after 28 business days
D-
A short securities difference represents the deficit amount of securities that a broker-dealer has in its possession over the amount reflected on its records. For example, a broker-dealer indicates on its records that it has 800 shares of XYZ stock. A physical count of the securities reveals that it has only 700 shares. The broker-dealer has a short securities difference of 100 shares.
If the broker-dealer fails to resolve the difference within 28 business days, it is required to deduct the full market value of the securities from its net capital. Under the current requirement a short securities difference is subject to a graduated deduction, and becomes a 100% deduction after 28 days.
66
The market value of securities collateralizing a secured demand note is insufficient. The broker-dealer would require prior consent from its Designated Examining Authority in order to:
a. Accept additional cash from the lender
b. Accept additional securities from the lender
c. Liquidate securities pledged by the lender
d. Reduce the amount of the note
D-
If the market value of securities that are pledged as collateral on a secured demand note is less than the amount of the note, the broker-dealer is required to take certain steps. It must notify the lender, who may deposit additional cash or securities to raise the collateral value, or the broker-dealer may liquidate a sufficient amount of securities to raise the collateral value of the remaining securities plus cash from the sale of the securities to the required level. These steps may be taken without requiring permission from the broker-dealer's Designated Examining Authority. If the broker-dealer wishes to reduce the amount of the secured demand note, the permission of the Examining Authority is required.
67
According to MSRB rules, who determines the freeze period in a close-out procedure?
a. The buyer of the bonds
b. The seller of the bonds
c. The MSRB's Arbitration Board
d. Negotiation between buyer and seller
B-
If the seller, at any time before a close-out is completed, believes it can deliver the bonds that it has failed thus far to deliver, it can give notice to the buyer of its intention to deliver the bonds. After the buyer receives the notice, it may not execute the close-out for two business days following the date of the notice and the period specified for the execution of the close-out is extended by two business days or, if notice is given on the last day specified for execution of the close-out, by three business days.
68
Which of the following statements is NOT correct regarding subordination agreements between a broker-dealer and an investor?
a. The funds or securities lent to a broker-dealer may be used by the firm almost entirely without restriction.
b. In the event of a broker-dealer default, the loan will be repaid after other parties are paid, assuming the firm has any assets remaining.
c. If the broker-dealer wishes to use the funds for net capital purposes, FINRA must approve the subordination agreement.
d. The repayment of the loan is covered by SIPC
D-
The funds and securities lent to a broker-dealer under the terms of a subordination agreement are not considered customer assets and are not covered by SIPC.
69
If a broker-dealer is exempt from SEC Rule 15c3-3 the broker-dealer:
a. May use customer funds to finance firm transactions
b. May pledge more than 140% of the customer's debit balance
c. Probably clears all transactions on a fully disclosed basis
d. Has a capital requirement of only $5,00
C-
One of the primary exemptions under SEC Rule 15c3-3 is called the k(2)(ii) exemption. This is carved out for introducing broker-dealers who clear all transactions on a fully-disclosed basis with a clearing broker-dealer. Technically, the introducing firm does not have customers.
70
```
Consider the following information for Kilbane Brokerage.
Cash $50,000
Inventory $200,000
Bank Loans $75,000
Stockholders' Equity $150,000
Which of the following entries would balance the financial statements of Kilbane?
a. Fail to deliver $75,000
b. Commissions $50,000
c. Fail to receive $25,000
d. Expenses $25,000
```
C-
In the data presented, Kilbane has $250,000 in debits (cash and inventory) and $225,000 in credits (bank loans and Stockholders Equity). If $25,000 in fails to receive are added to the other credit items, the books will balance. If $25,000 in fails to receive are added to the other credit items, the books will balance.
71
Which of the following persons may purchase a new issue from a member firm according to the New Issue Rule?
a. The brother-in-law of a person associated with a member firm
b. The uncle of a person associated with a member firm
c. A buy-side trader employed by a mutual fund
d. The owner of a FINRA member firm
B-
Restricted persons are not permitted to purchase shares of a new issue under FINRA rules. Immediate family members of a person associated with a member firm, portfolio managers, and owners of a broker-dealer would be considered restricted persons. Aunts, uncles, and cousins are not defined under the rule as immediate family members and are therefore not considered restricted persons. A buy-side trader would have the ability to make trading decisions and would be defined as a portfolio manager, who is considered a restricted person under the rule.
72
Which of the following situations would constitute a violation of FINRA rules?
I. A broker-dealer, after reading a financial analysis showing a downturn in an industry, advises a customer of the analysis.
II. A broker-dealer advises a customer that a specific industry will decline as indicated in a research report.
III. A broker-dealer advises a customer that a company's earnings will increase as indicated by an article in The Wall Street Journal.
IV. A broker-dealer advises a customer to wait before purchasing a stock because of a negative research report.
a. I and II only
b. II and III only
c. II, III, and IV only
d. I, II, III, and IV
B-
Member firms must comply with FINRA Conduct Rules in regard to recommendations to customers. Among the provisions of the rule is the requirement that a member firm not use promissory language. In Choice (II), the broker-dealer is stating that a specific industry will decline. In Choice (III), the broker-dealer is stating that a company's earnings will increase. In both of these statements, the broker-dealer is implying that a specific event will occur rather than stating that it might occur.
73
A broker-dealer sells its headquarters building at a profit. The impact of this transaction on the financial statements of the broker-dealer is to:
a. Increase cash
b. Increase stockholders' equity
c. Reduce net capital requirements
d. Increase rent expenses
B-
When an asset is sold for more than its carrying value, a profit is made. This serves to increase stockholders' equity. There is no certainty that cash would increase because the seller could have accepted a note from the buyer.
74
Under SEC Rule 15c3-1, assets that are NOT readily convertible into cash are:
a. Excluded in the computation of net capital
b. Included in net capital
c. Included in net capital at a reduced value
d. Added to aggregate indebtedness
A-
Assets that are not readily convertible into cash, such as furniture and fixtures, are excluded in full in the computation of net capital.
75
Which of the following items does NOT have a minimum retention requirement of three years?
a. Correspondence with customers
b. The purchase and sales blotter
c. Securities borrowed and loaned ledger
d. Order tickets
B-
| The purchase and sales blotter must be retained for six years.
76
A customer calls a broker-dealer to place an order for a stock. Because of a shortage of personnel, the broker-dealer gives the order to another member firm for execution. This would be:
a. Backing away
b. Interpositioning
c. Withholding orders
d. Free-riding and withholding
B- Interpositioning is prohibited. This refers to the placement of another party between the customer and the market-maker. If a member firm receives an order from a customer for an over-the-counter stock, the member firm is required to obtain the best possible execution for the customer. The member firm may not give the order to another broker-dealer, who in turn places the order with the market maker, unless the broker-dealer has a valid reason to do so and the price paid by the customer is better than the price that would have been paid if the first broker-dealer executed the order. Shortage of personnel is not a valid reason for interpositioning another broker-dealer.
77
If a broker-dealer engages in more than 10 transactions in any one calendar year for its own investment account, its net capital requirement is:
a. $50,000
b. $100,000
c. $250,000
d. $500,000
B-
A dealer is required to maintain net capital of at least $100,000. A dealer is defined as a firm executing 10 or more transactions in its investment account over the course of a calendar year.
78
Fails to receive for the account of the member firm for securities that have been sold:
a. Increase aggregate indebtedness
b. Have no affect on aggregate indebtedness
c. Decrease net capital
d. Are illegal
A-
If the firm sells the stock, the fail would become aggregate indebtedness. The following example will clarify the rule.
A member firm buys $10,000 XYZ stock for its own account on Monday, November 1. The selling broker fails to deliver the stock on the settlement date of November 4. The $10,000 fail is not at this point aggregate indebtedness. On November 11, while still failing to receive the stock, the member firm decides to sell the stock. At this point, the $10,000 fail would be added to aggregate indebtedness.
A fail to receive for the account of customers is always aggregate indebtedness. If a customer were to buy $10,000 worth of stock and the selling broker did not deliver the stock to the buying broker by the settlement date, the fail to receive would be added to the buying firm's aggregate indebtedness.
79
Entries on the blotter reflect transactions as of:
a. The trade date
b. The settlement date
c. Three business days following settlement date
d. Five business days following settlement date
A-
| Blotters are posted on a trade-date basis.
80
A broker-dealer has debit balances of customers totaling $900,000 and credit balances totaling $600,000. The broker-dealer may use as collateral stock with a total value of:
a. $1,500,000
b. $1,260,000
c. $900,000
d. $300,000
B-
The broker-dealer may use stock with a value of 140% of the debit balances of $900,000. $900,000 times 1.4 equals $1,260,000.
81
All of the following must be maintained for six years EXCEPT:
a. All long and short securities differences
b. Repurchase and reverse repurchase agreements
c. Dividends and interest received
d. The stock record
C-
| Ledgers reflecting dividends and interest received must be maintained for three years.
82
Relative to the stock record book (position record), the long side shows:
a. Long securities differences
b. Ownership of the securities
c. Location of the securities
d. Debit balances in long margin accounts
B-
| The long side of the stock record shows ownership of securities.
83
A broker-dealer holds stock in its proprietary account for which there is no ready market. In this case, the securities will have a value, for net capital purposes, of:
a. $0
b. 50% of the fair market value
c. 60% of the fair market value
d. 70% of the fair market value
A-
If a stock has no ready market, no value may be assigned for capital purposes. If a stock has one or two market makers, a limited market is said to exist, and the haircut in this case is 40%. In this question, there are no market makers, and therefore, the deduction is 100%.
84
In which of the following circumstances would a dealer NOT need to post to the securities records?
a. Short positions taken by the dealer
b. Securities received in and delivered out on the same day
c. The location of securities held by the dealer
d. Long security count differences
B-
If securities are received in and delivered out on the same day, on or before the settlement date, no posting to the securities records is required. However, the two offsetting transactions would appear on the blotter.
85
A broker-dealer has the following long and short positions in municipal securities.
Long
$900,000 New Jersey 7% of 2025
$600,000 Florida 6% of 2020
Short
$100,000 California 6% of 2025
$200,000 Texas 7% of 2020
The haircut that must be applied is:
a. $90,000
b. $105,000
c. $67,500
d. $60,000
B-
The haircut on municipal bonds is applied to the greater of the long or short position in each maturity category. In this question, the long position of $1,500,000 is greater than the short position of $300,000, and both are in the same maturity category. Therefore, the 7% haircut would be applied to $1,500,000 and would total $105,000.
86
On January 15, a broker-dealer has debt-equity totaling $1,250,000, of which $750,000 consists of satisfactory subordination agreements. On February 15, the broker-dealer's total debt-equity drops to $1,000,000 because of trading losses. There are no changes in total debt-equity or subordinated agreements through May 30. The broker-dealer was in violation of Rule 15c3-1 commencing on:
a. January 16
b. February 16
c. 90 days after February 15
d. 120 days after February 15
C-
Rule 15c3-1 requires that a broker-dealer's debt may not exceed 70% of the debt-equity total for a period exceeding 90 days. In this question, debt is 75% of the debt-equity total. The broker-dealer must lower the percentage of debt to 70% within 90 days. Failure to do so requires that the broker-dealer send immediate telegraphic or facsimile notice to the SEC and its Designated Examining Authority.
87
```
Use the following information to answer this question.
LONG
Client Metz 7,000
Client Renfro 600
Client Dolenz 1,200
Firm Trading 400
```
Fail to Deliver 1,000
10,200
```
SHORT
Bank Loan 4,500
Vault 1,000
Transfer 600
Securities loaned 400
```
```
Fail to Receive 3,300
9,800
You would conclude:
a. Client accounts are cash accounts
b. There is a stock record break
c. The stock at the transfer agent offsets Dolenz's position
d. All of the above
```
B- The total of the long positions is 10,200 shares. The total of the short positions is 9,800 shares. The discrepancy is 400 shares. The stock record should always be in balance, i.e., the long side equaling the short side. If not, we have a stock record break.
88
Which of the following are included as debit items in the reserve formula calculation?
I. Securities borrowed for customer short sales
II. Fails to receive for the account of customers
III. Fails to deliver for the account of customers
IV. Customer secured debit balances
a. II and III only
b. I, II, and IV only
c. I, III, and IV only
d. I, II, III, and IV
C-
The debit items that may be included in the reserve calculation include only securities borrowed for customer short sales, fails to deliver for the account of customers, and customer secured debit balances.
89
Rule 15c2-1 regarding hypothecation of customer securities considers which of the following actions to constitute fraudulent, deceptive, or manipulative acts?
I. Commingling the securities of a customer with those of another customer without first obtaining the permission of each customer
II. Commingling the securities of a customer together with those of another person who is not a bona fide customer
III. Hypothecating securities owned by customers to secure a loan for an amount that exceeds the total indebtedness of the customers
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
D-
Securities of customers may not be commingled with those of other customers as collateral for a bank loan unless each customer has granted written approval for such commingling. This approval is generally incorporated into the margin agreement signed by the customer. Customer securities may never be commingled with the securities of noncustomers, including those of the broker-dealer, under any circumstances.
If a broker-dealer has lent money to a customer who has purchased securities on margin, the broker-dealer may use some of the customer's securities as collateral for a loan. The broker-dealer may use stock with a value of 140% of the debit balance as collateral to borrow the amount it lent the customer. The following example will show how this rule is applied.
A customer has purchased $10,000 of stock on 50% margin. His debit balance is $5,000. The broker-dealer may use stock with a value of $7,000 (140% of the $5,000 debit balance) as collateral to borrow $5,000 (100% of the debit balance) from a bank.
90
Which of the following individuals are in violation of the Insider Trading and Securities Fraud Enforcement Act of 1988?
I. A director of a company who trades the company's securities on the basis of material, nonpublic information
II. An officer of a corporation who tells an associate in a different company of an upcoming announcement that the first company plans to make
III. An individual who sells shares in XYZ after being told by an employee of XYZ that the company has just lost two major clients
IV. An employee of a broker-dealer who purchases a stock for her personal account based on a recommendation from the firm's research department after it has been disseminated to the public
a. I and III only
b. II and III only
c. I, III, and IV only
d. I, II, III, and IV
A-
The Insider Trading and Securities Fraud Enforcement Act of 1988 holds that any individual who purchases or sells a security while in possession of material, nonpublic information, or has communicated such information to another party in connection with a transaction, may be held liable for a trading violation under the Act. In Choice (II), there is no reference to a transaction occurring, and in Choice (IV), there is no reference to material, nonpublic information.
91
The total amount of subordinated loans outstanding for a broker-dealer may not exceed:
a. 30% of the broker-dealer's total capital for a period exceeding 45 days
b. 70% of the broker-dealer's total capital for a period exceeding 45 days
c. 30% of the broker-dealer's total capital for a period exceeding 90 days
d. 70% of the broker-dealer's total capital for a period exceeding 90 days
D-
Under the provisions of Rule 15c3-1, a broker-dealer is required to maintain a minimum equity of 30% in relation to his debt-equity total. For example, if the debt and equity totals $1,000,000, equity may not be less than $300,000. If the total equity is less than 30% for a period exceeding 90 days, the broker-dealer is in violation of the rule and must immediately notify the SEC and its Designed Examining Authority.
92
The debt-equity total of a broker-dealer organized as a corporation would include:
a. Bonds outstanding, par value of stock, and paid in capital in excess of par
b. Satisfactory subordination agreements, subordinated loans, and par value of stock
c. Satisfactory subordination agreements, retained earnings, par value of stock, paid in capital in excess of par, and unrealized gain or loss
d. Bank loans, satisfactory subordination agreements, and par value of stock
C-
This is important because it forms the basis of the debt-equity ratio under the net capital rule. A broker-dealer may not permit its satisfactory subordination agreements to exceed 70% of its debt-equity total for a period greater than 90 days.
93
Blotters that are prepared by a broker-dealer under Rule 17a-3 must contain entries reflecting all the following EXCEPT:
a. Dividends and interest received
b. Purchases and sales of securities
c. Receipts and deliveries of securities
d. Receipts and disbursements of cash
A-
| Blotter items are indicated in Choices (b), (c), and (d). Dividends and interest received are a ledger item.
94
Which of the following is commonly associated with the activities of a carrying firm under SEC Rule 15c3-1?
a. Acting in a dealer capacity in an underwriting of corporate bonds
b. Conducting its own clearing activities
c. Making markets in Nasdaq National Market securities
d. All of the above
D-
A broker-dealer is indentified as a carrying firm under SEC Rule 15c3-1 based on the activities that it conducts and the amount of net capital it is required to maintain. This firm may act in a principal capacity in underwriting contracts, may conduct clearing activities, and may engage in market-making activities.
95
Which of the following statements is TRUE regarding the audited statement to be furnished to customers?
a. It must be sent to customers no more than 60 days after the date of the audit.
b. It must be furnished to customers no more than 105 days after the date of the audit.
c. It is identical to the audited annual report filed with the SEC.
d. It must indicate that an income statement is available for inspection at the regional office of the SEC.
B-
A broker-dealer must furnish an audited annual report to its customers no more than 105 days after the date of the audit. The report contains a Statement of Financial Condition, not the income statement.
96
Which of the following is filed with the greatest frequency?
a. Statement of Financial Condition
b. FOCUS Report Part II
c. Statement pursuant to SEC Rule 17a-5
d. Notice to customers regarding payment for order flow
B-
FOCUS Report Part II is filed quarterly, Statement of Financial Condition is filed semiannually, and the statement pursuant to SEC Rule 17a-5 is filed annually (notifying the SEC of the hiring of an outside accountant). The statement regarding payment for order flow is filed twice per year.
97
All of the following statements concerning the MSRB's underwriting assessment fee are TRUE EXCEPT:
a. The fee is paid by the manager on behalf of the syndicate
b. The fee is payable to the MSRB within 30 days following the date the invoice is sent by the MSRB
c. The payment may be credited toward the MSRB's annual continuing registration requirement
d. Municipal securities issued with a final maturity date of more than nine months are subject to this levy
C-
The underwriting fee is assessed on all issues with maturities of more than nine months and with an aggregate par value of more than $1,000,000. It is payable within 30 days following the date that the invoice is sent by the MSRB. The fee is paid by the managing underwriter on behalf of the syndicate. All fees charged by the MSRB are independent of each other. Thus, the underwriting assessment may not be credited toward the annual registration fee.
98
If an agency order is cancelled by a customer, which of the following statements is FALSE concerning the firm's record-keeping practices in reflecting the cancellation?
a. Records do not need to reflect any cancelled agency orders.
b. The conditions of the cancellation must be recorded.
c. To the extent feasible, the time of the cancellation must be recorded.
d. The date of the cancellation must be recorded.
A-
When a customer cancels an agency order, the date, conditions, and to the extent feasible, the time of the cancellation must be recorded.
99
Pembridge Brokerage has a fail to deliver on its books. The fail is three days old. The contract value is $45,000, and the market value is $40,000. The security is heavily traded on the Nasdaq system. The haircut on this fail to deliver is:
a. $6,750
b. $0
c. $11,000
d. $1,000
B-
Since this fail to deliver contract for a Nasdaq security is three days old, there is no haircut required. A fail to deliver for an equity security is considered to be aged when it becomes five days old. At that point the haircut is applied to the market value of the contract ($40,000) with an adjustment for any differential between market value and contract value. In this case, there is an unrealized loss of $5,000, which would be added to the initial haircut, which is $6,000, for a total haircut of $11,000.
100
Under the provisions of the lost or stolen securities rule, every reporting institution is required to make inquiry of the Securities Information Center with respect to which of the following transactions?
I. The delivery of 100,000 shares from another broker-dealer
II. The delivery of 100,000 shares in the customer's name from a customer of the reporting institution
III. The delivery of 100,000 shares in street name from a customer of the reporting institution
IV. The delivery of 100,000 shares in the name of a new customer of the reporting institution
a. I and II only
b. III and IV only
c. II, III, and IV only
d. I, II, III, and IV
Under the provisions of SEC Rule 17f-1 dealing with missing, lost, counterfeit, or stolen securities, a reporting institution (which includes, among others, a broker-dealer) is required to make inquiry of the Securities Information Center with respect to every security which comes into its possession unless the security is received:
1. From the issuer or issuer's agent
2. From another reporting institution or Federal Reserve Bank
3. From a customer of the broker-dealer for stock registered in the name of the customer, or stock previously sold to the customer and verified by internal firm records
Transactions under $10,000 are also exempt.
Choice (III) indicates that the stock is registered in street name rather than the customer's name, and therefore, inquiry is required. Choice (IV) indicates that stock is being delivered by a party who is not currently a customer of the broker-dealer, and therefore, inquiry is required.
101
Which of the following statements is TRUE if a broker-dealer's computed net capital falls from one period to the next?
a. The firm must compute net capital more often.
b. Expenses may have risen considerably.
c. The firm should look for a cash infusion.
d. The firm must notify SIPC.
A broker-dealer's net capital is subject to continuous fluctuation. Expenses may have risen faster than revenue, producing a loss and causing the net capital to fall. This event does not trigger a capital computation with any greater frequency.
102
If the National Uniform Practice Committee has not determined a settlement date, settlement on when, as, and if issued transactions is:
a. On the day the securities are issued
b. On the business day following the day the seller gives the buyer written notice of intention to deliver the securities
c. On the third business day following the day the seller gives the buyer written notice of intention to deliver the securities
d. On the tenth business day following the day the seller gives the buyer written notice of intention to deliver the securities
B-
If the National Uniform Practice Committee has not set a settlement date, the seller may deliver to the buyer on one day's written notice.
103
Written approval of FINRA is required in which of the following situations?
a. An associated person of a broker-dealer opens an account at another broker-dealer.
b. An employee of a broker-dealer seeks a part time maintenance job.
c. A broker-dealer seeks a change in its exempt status pursuant to SEC Rule 15c3-3.
d. A broker dealer plans to open a new office.
C-
| FINRA must provide written approval if a firm seeks to change its exempt status under SEC Rule 15c3-3.
104
Rule 17a-3 requires a broker-dealer to obtain from all partners, officers, and employees handling funds or securities a questionnaire indicating which of the following?
I. Educational institutions attended by the individual and if she graduated from the institution
II. A listing of her business connections over the past 10 years and her reason for leaving
III. A record of denial of membership in any national securities exchange
IV. A record of arrest or indictment for any crime involving the purchase, sale, or delivery of securities
a. I and II only
b. I, II, and IV only
c. II, III, and IV only
d. I, II, III, and IV
D- All the items indicated in this question are included in the questionnaire that the broker-dealer must obtain from its partners, officers, and employees who handle cash or securities.
105
On a loan of stock, the lender:
a. Forfeits all rights of ownership to the borrower
b. Retains all rights of ownership
c. Retains all rights of ownership except the right to receive dividends
d. Retains all rights of ownership except the right to vote the stock
D- On a loan of stock between broker-dealers, the customer lending the stock retains all rights of ownership, such as collecting dividends, but does not retain the right to vote. This right goes to the new owner of the stock.
106
Which of the following statements is TRUE regarding all municipal securities dealers (excluding dealer banks)?
a. There must be one financial and operations principal for every five municipal securities professionals.
b. There must be one financial and operations principal for every ten municipal securities professionals.
c. There must be one financial and operations principal for every eleven municipal securities professionals.
d. There must be one financial and operations principal regardless of the number of municipal securities professionals employed.
D- Municipal securities broker-dealers must have at least one financial and operations principal. The number of municipal securities professionals employed by the firm is not relevant. Dealer banks are exempt from this rule.
107
In regard to the Reserve Bank Account pursuant to Rule 15c3-3, which of the following statements are CORRECT?
I. The account must be maintained separately from any other account of the broker-dealer.
II. The broker-dealer may use the amounts labeled as Total Credits under the Reserve Formula only for the specific purposes indicated under Total Debits.
III. Computations under the Reserve Formula must be made daily.
IV. Deposits required in the Reserve Bank Account must be made on the business day following the computation.
a. I and II only
b. I, II and III only
c. II, III, and IV only
d. I, II, III, and IV
A- Choice (I) is a correct statement. The Reserve Bank Account must be a separate account maintained by the broker-dealer distinct from any other account of the broker-dealer.
Choice (II) is a correct statement and describes the Reserve Formula. The Reserve Formula requires the listing of the credit items. The total value of the credit items must be on deposit at the bank unless the member firm has offsetting debit items. In this case, the amount of the debit items may be deducted from the credit items and the net amount deposited into the Reserve Bank Account. For example, let's assume that the amounts labeled under Total Credits is $100,000. If there were no Total Debits listed, the full amount of $100,000 would have to be deposited. However, the firm may use the Total Credits to apply against the Total Debits and thereby reduce its required deposit. If the Total Debits were $20,000, the firm would be required to deposit only $80,000 in the Reserve Bank Account.
Choice (III) is incorrect as computations must be made either monthly or weekly. If the broker-dealer makes monthly calculations, it must maintain 105% of the required amount on deposit.
Choice (IV) is incorrect as deposits must be made into the account on the second business day following the calculation.
108
The annual audited report of a broker is required to contain all the following EXCEPT the:
a. Statement of Income
b. Statement of Fails to Receive and Fails to Deliver
c. Statement of Changes in Stockholders' Equity
d. Statement of Changes in Liabilities Subordinated to Claims of General Creditors
B- There is no requirement that a Statement of Fails to Receive and Fails to Deliver be reported to the SEC or other regulatory bodies.
109
Fail to receive and fail to deliver ledgers must be posted no later than:
a. The trade date
b. The settlement date
c. The day after the settlement date
d. Two days after the settlement date
D- The fail to receive ledger and the fail to deliver ledger are posted no later than two business days following the settlement date.
110
On March 1, a broker-dealer observes that its total capital is $1,000,000, consisting of $250,000 of equity and $750,000 of subordinated loans. Assuming no changes in the ratio of its debt and equity, the broker-dealer would be required to send notice to its Designated Examining Authority and the SEC:
a. March 1
b. March 2
c. 30 days after March 1
d. 90 days after March 1
D- Rule 15c3-1 requires a broker-dealer's equity to be no less than 30% of its debt-equity total. If the equity falls below 30%, the broker-dealer has 90 days to correct the situation by either increasing its percentage of equity or reducing its percentage of debt. If the broker-dealer has not corrected the situation in 90 days, its is required to send telegraphic or facsimile notice to the SEC and its examining authority the following day.
111
A registered representative has written an article addressing the impact of the Internet on individual investors. The article will appear in a national business newspaper. This article must be:
I. Approved by the Advertising Department of FINRA
II. Approved by a firm principal only if specific recommendations are made
III. Retained for three years
IV. Approved by a firm principal
a. I and III only
b. I and IV only
c. II and III only
d. III and IV only
C- Retail communications generally require internal approval before use. In this scenario, no specific recommendation of a product or service is made, therefore, no internal approval is required. The record retention requirement for communications is three years.
112
A carrying broker-dealer has been in business for nine months and has aggregate indebtedness of $1,700,000. It computes its net capital under the standard method outlined in SEC Rule 15c3-1. What is the minimum net capital requirement for the broker-dealer?
a. $212,500
b. $113,333
c. $250,000
d. $100,000
C- During its first year of business, the maximum A.I. to N.C. ratio for a broker-dealer is 8:1. However, under no circumstance may its net capital be less than the regulatory minimum for a carrying firm, which is $250,000
113
A clearing agreement should specify the responsibilities of each party with regard to all the following actions EXCEPT:
a. Opening, approving, and monitoring customer accounts
b. Extension of credit
c. Frequency of the net capital computation
d. Safeguarding customer funds
C- A broker-dealer would have to calculate its net capital whether it was a clearing firm or not. This is not a requirement for the purposes of a clearing agreement, which is specified under FINRA rules.
114
Which of the following statements is TRUE regarding aged fail to deliver haircuts?
a. Only customer positions are considered.
b. Market values are ignored.
c. They are offset by aged fails to receive.
d. They begin on the fifth business day after settlement.
D- A fail to deliver becomes aged and is subject to a charge on the fifth business day after settlement. Both firm and customer fails are subject to the charge.
115
Which TWO of the following pieces of information would NOT need to be disclosed on a customer confirmation?
I. The CUSIP numbers assigne
II. d to the securities
III. The capacity in which the firm acted
IV. The contra-dealer in the transaction
V. The broker-dealer's tax identification number
a. I and II
b. I and IV
c. II and III
d. III and IV
D- CUSIP numbers and the capacity in which the firm acted must be disclosed on customer confirmations. Contra-dealers are only disclosed on dealer-to-dealer confirmations. A broker-dealer's tax identification number need not be disclosed on any type of confirmation.
116
Convertible bonds that are selling at par or higher are subject to a haircut of:
a. 7%
b. 15%
c. 30%
d. 50%
B- Convertible bonds that are selling at par or higher are subject to the same haircut that is applied to common stock.
117
Records must be kept for three years for all of the following documents EXCEPT for:
a. Trial balances
b. A fail to deliver ledger
c. A securities in transfer ledger
d. A general ledger
D- The general ledger must be retained for six years.
118
Which of the following orders are considered discretionary under the FINRA Conduct Rules?
I. A customer instructs a registered representative to purchase as many shares of XYZ Corporation as the representative feels is appropriate whenever the price is right.
II. A customer instructs a registered representative to sell 300 shares of ABC Company that are long in the customer's account when the representative thinks the time and price is appropriate.
III. A customer gives a member firm a check for $25,000 and instructs the firm to purchase bank stocks and insurance company stocks when the price appears to be favorable.
IV. A customer instructs a registered representative to buy 1,000 shares of ACME Corporation at a time and price that the registered representative determines.
a. III only
b. I and III only
c. II and IV only
d. I, II, III, and IV
B- If the customer order specifies the security, the number of shares, and whether it should be purchased or sold, the broker-dealer may determine price and/or time without having discretionary authorization on the account.
119
A broker-dealer computing its reserve requirement under Rule 15c3-3 may:
a. Net short securities differences against long securities differences if they are less than 60 days old
b. Net short securities differences against long securities differences if they are less than 30 days old
c. Net the market value of securities in transfer more than 40 days old with the market value of securities in transfer less than 40 days old
d. Not net any items in computing its Reserve Formula
D- No items may be netted in determining the Reserve Formula
120
The Reserve Bank Account established pursuant to Rule 15c3-3 may contain:
I. Cash
II. Securities issued by or guaranteed by the U.S.
III. Municipal securities whose interest is paid from the general taxing power of the municipality
IV. Corporate bonds rated A or higher
a. I only
b. I and II only
c. I, II, and III only
d. I, II, III, and IV
B- Rule 15c3-3 is the Customer Protection Rule and requires, among other things, that a broker-dealer establish a Reserve Bank Account and segregate certain sums of money relating to customer positions. The Reserve Bank Account that must be established pursuant to Rule 15c3-3 may contain only cash and U.S. government-backed securities. No other type of securities is acceptable for deposit in the account.
121
On Tuesday, April 9, Bridgewater Securities conducts a securities count. Bridgewater is missing 1,000 shares of Rigamarole Corp. valued at $50 per share. The impact on its financial statements at the end of April would be a:
a. $50,000 charge to capital
b. $25,000 charge to capital
c. $50,000 credit item in the reserve formula
d. $50,000 debit item in the reserve formula
B- Bridgewater must deduct $25,000 from its capital to recognize the short difference. After 14 business days from the time it occurred, the charge is 50% of the market value of the securities. April 30 is 15 business days after April 9. The short securities difference does not affect the reserve formula until more than 30 calendar days have passed.
122
FINRA members pay an annual assessment based on:
a. Annual gross revenue from municipal securities, over-the-counter securities, U.S. government securities, and exchange transactions
b. Interest and dividends received on investment accounts
c. A percentage of the face value of all corporate bonds underwritten by the member
d. All of the above
A- FINRA assesses members based on their gross revenue from transactions in municipal securities, over-the-counter securities, and transactions executed on an exchange. The last fee mentioned is assessed only on those members for whom FINRA is the Designated Examining Authority.
123
If a new customer opens an account and wishes to sell $25,000 of bearer bonds, the broker-dealer:
a. Must check with the Securities Information Center
b. Need not check with the Securities Information Center because the sale involves $25,000 of bonds
c. Need not check with the Securities Information Center because the sale involves bearer bonds
d. Need not check with the Securities Information Center because the sale involves a new customer
A- Member firms are required to make inquiry of the Securities Information Center to determine the status of securities that customers wish to sell unless the security is received from the issuer, from another member firm, or from a customer of the member firm for stock registered in the name of the customer. If securities are registered in street name or are in bearer form, inquiry must be made unless the amount involved is less than $10,000.
124
An agency order memorandum is prepared:
a. On the same day the order is received
b. Before the order is executed
c. At the time the order is received
d. At the time the trade blotter is posted
B- The agency order memorandum, or trade ticket, should be written prior to the execution of the order
125
On Tuesday, July 14, a customer purchases the stock of a company that declared a 10% stock dividend on July 7 that is payable to holders of record on Thursday, July 16. In this case:
a. The buyer will receive a due bill
b. The seller will be required to deliver additional shares
c. The seller will receive the additional shares
d. The seller will receive a due bill
C- In order to be entitled to the dividend, the customer would have had to purchase the stock prior to the ex-dividend date. For cash dividends and for stock dividends of less than 25%, the ex-dividend date is two business days prior to the record date. If the record date is Thursday, July 16, the ex-dividend date would be July 14. A purchase on July 14 would be made on the ex-dividend date and therefore the seller, not the buyer, would be entitled to the dividend.
126
Which of the following statements are TRUE regarding a broker-dealer's annual report?
I. It must be filed by March 15 each year.
II. The report must be filed on a fixed or determinable date each year.
III. It must be prepared by an independent public accountant with Series 27 Registration.
IV. Notification must be given to the SEC if a broker-dealer changes its fiscal year.
a. I and III only
b. I and IV only
c. II and IV only
d. I, III, and IV only
C- A broker-dealer must hire an independent public accountant to conduct the annual audit and prepare the annual report, which must be filed on a fixed or determinable date each year. If a broker-dealer changes its fiscal year, notification must be given to the SEC. The basic rule is that the annual report must be filed no later than 60 calendar days after the date of the financial statements. A broker-dealer may seek an extension by applying through its DEA (Designated Examination Authority).
127
Which of the following statements are TRUE regarding a broker-dealer's annual report?
I. It must be filed by March 15 each year.
II. The report must be filed on a fixed or determinable date each year.
III. It must be prepared by an independent public accountant with Series 27 Registration.
IV. Notification must be given to the SEC if a broker-dealer changes its fiscal year.
a. I and III only
b. I and IV only
c. II and IV only
d. I, III, and IV only
C- A broker-dealer must hire an independent public accountant to conduct the annual audit and prepare the annual report, which must be filed on a fixed or determinable date each year. If a broker-dealer changes its fiscal year, notification must be given to the SEC. The basic rule is that the annual report must be filed no later than 60 calendar days after the date of the financial statements. A broker-dealer may seek an extension by applying through its DEA (Designated Examination Authority).
128
Which of the following statements is TRUE of a FINRA member that has failed to pay required fees or assessments?
a. The member may be suspended or expelled upon 15 days written notice from FINRA.
b. The member may continue to do business if the assessment is in arbitration.
c. The member may appeal the assessment to the SEC.
d. The fees and assessments in dispute must be deposited in the Reserve Bank Account.
A- FINRA members who have failed to pay required fees and assessments may have their memberships suspended or cancelled upon 15 days written notice from FINRA.
129
A broker-dealer has a short contractual commitment for $6,000 in ABC common stock, a non-exchange-listed OTC security. The current market value is $7,000. The haircut would be:
a. $3,100
b. $2,800
c. $2,100
d. $1,800
A- The haircut is 30%, since ABC is not a Nasdaq or NYSE listed security. There is also a loss of $1,000. The broker-dealer will receive $6,000 when it delivers the stock, which currently has a market value of $7,000. Therefore, the net haircut is $3,100 (30% of $7,000, plus the $1,000 unrealized loss).
130
Which TWO of the following statements are TRUE concerning the delivery of municipal securities?
I. Bearer bonds are delivered in units of $5,000 or $10,000 par value.
II. Delivery may be made to an agent designated by the purchaser.
III. A legal opinion need not accompany the securities unless specifically called for in the terms of the transaction.
IV. Securities issuable in both bearer and registered form may be delivered in either form.
a. I and III
b. I and IV
c. II and III
d. II and IV
D- Delivery of municipal securities may be made to an agent designated by the purchaser. Deliveries of securities issuable in both bearer and registered form may be delivered in either form.
Clarifying the other choices, bearer bonds are deliverable in units of $1,000 or $5,000 par value, and a legal opinion must always accompany a municipal security unless the terms of the transactions are ex-legal.
131
A firm conducting a box count must do which of the following?
I. Verify securities pledged where such securities have been pledged for more than 30 days.
II. Count all securities subject to repurchase and reverse repurchase agreements.
III. Conduct another count within 30 days if there are discrepancies.
IV. Record on the books and records all unresolved differences by the time the next FOCUS report is prepared.
a. IV only
b. I and II only
c. II and IV only
d. III and IV only
B- The firm is not required to conduct another box count within 30 days. It must record unresolved differences no later than 7 business days after the count was conducted.
132
If a broker-dealer becomes insolvent, SIPC will provide coverage for:
a. Customers of the broker-dealer
b. Another broker-dealer that has securities in the possession of the failed broker-dealer
c. A subordinated lender
d. All of the above
A- SIPC covers customers of the broker-dealer. It does not cover other broker-dealers that have securities in the possession of the failed broker-dealer (unless the securities belong to its customers), and it does not cover subordinated lenders.
133
The long side of the stock record maintained by a broker-dealer pursuant to Rule 17a-3 indicates:
a. The ownership of stock maintained by the broker-dealer
b. The location of stock maintained by the broker-dealer
c. The number of shares owned by the broker-dealer in a beneficial capacity
d. The number of shares owned by the broker-dealer in a beneficial or nominal capacity
A- The long side of the stock record book reflects ownership of securities.
134
If a member firm has pledged its stock at a bank, and it subsequently sells part of the stock to a customer, the member firm must take the stock out of its account and place it in a segregated account:
a. Immediately
b. Before the end of the business day the trade was made
c. Within 30 minutes after the opening of banking hours on the business day following settlement
d. Before the end of the business day following the trade
C- A member firm is required to segregate stock belonging to customers. If a customer has a cash account, the member firm must segregate all of the customer's stock. If a customer has a margin account, the member firm may use stock with a value of 140% of the customer's debit balance and must segregate the balance.
If a member firm owns stock, it need not take any special measures regarding that stock. If the member firm subsequently sells part of the stock to a customer, it must at some point segregate this stock from the balance of its own stock. This segregation must take place at the time indicated in Choice (c).
135
A broker-dealer determines that its aggregate indebtedness is $6,000,000 and its net capital is $300,000. What action must the broker-dealer take?
a. Send immediate telegraphic notice to the SEC.
b. Close all customer accounts promptly
c. File Part I of the FOCUS Report within 24 hours.
d. File Part II of the FOCUS Report within 24 hours.
A- If a broker-dealer's aggregate indebtedness exceeds 15 times its net capital, or the dollar amount of net capital is below the minimum requirement, it must immediately send notice to the SEC and its Designed Examining Authority.
136
When the securities subject to a fail to deliver haircut are finally delivered:
a. Net capital increases
b. Cash falls
c. Inventory decreases
d. All of the above
A- Because the firm is no longer taking haircuts on the fail, net capital would increase. Cash would increase upon the delivery of securities.
137
Dealer-to-dealer when-issued confirmations must be sent to a contra-party within:
a. 1 business day of the trade date
b. 2 business days of the trade date
c. 3 business days of the trade date
d. 5 business days of the trade date
A- Dealer-to-dealer confirmations for when-issued transactions must be sent to the contra-party within one business day of the trade date.
138
Notices required by Rule 17a-11 must be filed with all of the following regulators EXCEPT:
a. The Securities Investor Protection Corporation
b. The SEC's main office in Washington, D.C.
c. The SEC regional office where the broker-dealer has its principal place of business
d. The self-regulatory organization primarily responsible for supervising and examining the broker-dealer
A- Notices under Rule 17a-11 are filed with the SEC's main and regional offices and with the broker-dealer's Designated Examining Authority.
139
A FINRA member dealing with a firm that is not a member of FINRA:
a. Must deal with the firm in the same manner as it deals with other FINRA members
b. Must deal with the firm in the same manner as it deals with customers
c. May not transact any business with the firm
d. May deal with the firm in any manner it deems appropriate
B- FINRA Conduct Rules require members to deal with nonmember broker-dealers on the same terms and conditions that they afford to the general public. A broker-dealer who is not a member of FINRA may not be granted discounts that are given to FINRA members and must be treated in the same manner as other public customers.
140
The notice pursuant to SEC Rule 17a-5(f)(2) addresses:
a. The accuracy of a firm's books and records
b. The amount of excess net capital a firm has
c. The designation of an independent public account
d. Year 2000 problems
C- By December 10 of each year, a broker-dealer must provide a statement indicating an agreement with an independent public accountant to conduct the broker-dealer's annual audit for the following calendar year.
141
A registered representative at Megamerger Securities discovers that one of the beneficiaries of a trust account is on the Office of Foreign Assets Control (OFAC) list. The rep or someone else at her firm must immediately notify the:
a. Trustee listed on the account documents
b. Federal law enforcement authorities
c. SEC
d. FINRA
B- Firms are prohibited from transacting business with individuals and entities on the Office of Foreign Assets Control (OFAC) list. If a registered representative discovers that one of the owners or beneficiaries of an account is on the OFAC list (or if someone on the list tries to open an account with his firm), the rep or someone else from her firm should immediately contact the federal law enforcement authorities.
142
Gross revenues for FINRA assessment purposes would NOT include:
a. Secondary market profits on municipal bond trades
b. Interest received
c. Secondary market profits on US bond trades
d. Sales charges on mutual funds
B- Interest is not assessable by FINRA.
143
On a stock loan between broker-dealers to facilitate delivery on a short sale, which of the following statements are CORRECT?
I. The lender may call the stock at any time.
II. The borrower must deposit the Regulation T minimum margin.
III. The stock will be marked to the market periodically.
IV. The lender retains all rights except voting rights.
a. I and III only
b. II and III only
c. I, II, and III only
d. I, III, and IV only
D- When stock is loaned from one broker-dealer to another, the lender has the right to recall the stock at any time. The borrower will deposit the full market value of the stock at the time of the loan, not the Regulation T requirement. Both the lender and the borrower will periodically mark the stock to the market and if either party is unsecured, the unsecured party would have the right to demand cash payment. The lender of the stock retains all rights to the stock, except the right to vote
144
ABC & Company, a municipal securities broker-dealer, acts as financial adviser to an issuer. If the issuer conducts a competitive offering for a new issue, ABC & Company must:
I. Resign as financial adviser if it wishes to bid on the offering
II. Ensure that an application for a CUSIP number has been made
III. Ask the issuer for permission if it wishes to bid on the offering
IV. Inform its enforcement authority it wishes to bid on the offering
a. I and III only
b. I and IV only
c. II and III only
d. II and IV only
C- A financial adviser must ensure that the application has been filed for a CUSIP number if the issuer conducts a competitive offering. The financial advisor must receive permission from an issuer to enter a bid on a competitive sale of the issuer's securities. A financial advisory relationship must be terminated only if the advisor wishes to engage in a negotiated underwriting for the issuer's securities.
145
An account sells short 1 uncovered Rapunzel May 65 call for 2 when the Stock is 62. The margin requirement is:
a. $1,440
b. $1,140
c. $1,740
d. $2,000
B- 20% of the market value of the stock = $1,240 (20% x 6,200) = $ 1,240
Add the premium $ 200
Subtract the out-of-the-money amount $ 300
Total margin requirement $ 1,140
146
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The following list shows the aggregate indebtedness and net capital of four broker-dealers that clear and carry customer accounts.
Net Capital Aggregate Indebtedness
Broker A $500,000 $6,500,000
Broker B $800,000 $8,300,000
Broker C $320,000 $3,100,000
Broker D $250,000 $1,500,000
Which of the broker-dealers would be allowed to withdraw equity without violating Rule 15c3-1?
I. Broker A
II. Broker B
III. Broker C
IV. Broker D
a. III only
b. IV only
c. II, III, and IV only
d. I, II, III, and IV
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A- A broker-dealer may not withdraw equity if the withdrawal would cause aggregate indebtedness to exceed net capital by more than 10 times, or would cause net capital to drop below 120% of the minimum requirement.
Broker A: 1/10th of aggregate indebtedness of $6,500,000 is $650,000. Since the broker-dealer only has $500,000 of net capital, none may be withdrawn.
Broker B: 1/10th of aggregate indebtedness of $8,300,000 is $830,000. This is greater than the current net capital of $800,000. Therefore, no withdrawals may be made.
Broker C: Withdrawals may not drop net capital below 120% of the minimum requirement of $250,000, or $300,000. The withdrawal is also limited to the amount that would reduce net capital to 1/10th of $3,100,000, or $310,000. Therefore, the broker-dealer could withdraw $10,000 ($320,000 - $310,000).
Broker D: Withdrawal of equity capital may not occur if it would reduce net capital to less than 120% of the minimum requirement of $250,000. Since the net capital of the broker-dealer is already less than $300,000, no withdrawals are allowed.
147
A broker-dealer is required under Rule 15c3-3 to obtain from the bank where it maintains its Reserve Bank Account a written notification affirming which of the following?
I. The bank acknowledges that the funds and securities are maintained separately from all other accounts of the broker-dealer.
II. The bank acknowledges that the funds and securities will not be used directly or indirectly as collateral for a loan to the broker-dealer.
III. The bank acknowledges that the funds and securities are not subject to a lien or claim of any kind by the bank.
IV. The bank acknowledges that funds and securities may not be withdrawn from the account without the written consent of the broker-dealer's Designated 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
B- The Reserve Bank Account maintained under the provisions of Rule 15c3-3 must be separate from all other accounts of the broker-dealer. The bank must acknowledge that the account is maintained separately from other accounts of the broker-dealer and that the account may not be used as collateral for a loan to the broker-dealer and is not subject to any lien or other encumbrance.
The broker-dealer does not require any permission from the Designed Examining Authority to withdraw funds from the account and the bank does not require written consent from the Designed Examining Authority for such withdrawals.
