Exam 2 Flashcards
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
D-
All of the elements listed in the answer are correct statements.
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
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.
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
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).
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
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.
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
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.
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.
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.
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
B-
Broker-dealers who do not carry customer accounts must file the reports as indicated in this question.
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-
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.
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 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.
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
D-
The due bill evidences that the buyer has rights to the distribution and the seller has the obligation.
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-
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.
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
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.
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
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.
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
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.
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
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.
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
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.
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
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.
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
B-
Uncovered options must be executed in a margin account. If the client has not previously established a margin account, she must do so.
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
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.
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-
Temporary subordination agreements, which may not exceed 45 days in duration, are limited to underwritings only.
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
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.
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
B-
Bank loans secured by customer securities do not contribute to the beginning capital of the broker dealer.
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
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.
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-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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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).
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.
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.
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.
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.
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.
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.
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.
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.
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
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
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.
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.
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.
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.
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.
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).
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).
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.
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.
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.
