Exam 3

Question 1

Broker-dealers that carry customer accounts must maintain a minimum dollar amount of net capital of:

a. $25,000
b. $100,000
c. $175,000
d. $250,000

Answer 1

D- Firms that (1) carry customer accounts or broker or dealer accounts; or (2) receive or hold funds or securities for customers, brokers, or dealers must maintain minimum net capital of $250,000.

Question 2

All the following accounts would be included in total assets EXCEPT:

a. Trading account – Long
b. Prepaid expenses
c. Commission expenses
d. Furniture and fixtures

Answer 2

C- Commission expenses is an item of expense, not a balance sheet asset.

Question 3

Liabilities that are subordinated to the claims of creditors under a satisfactory subordination agreement in accordance with the provisions of Rule 15c3-1 are:

a. Included in aggregate indebtedness
b. Excluded from aggregate indebtedness
c. Deducted from net capital
d. None of the above

Answer 3

B- In accordance with the provisions of Rule 15c3-1, liabilities that are subordinated to the claims of creditors under a satisfactory subordination agreement are excluded from aggregate indebtedness

Question 4

A broker-dealer borrows from a bank using customer and firm securities as collateral. The bank may:

a. Have a lien on firm securities to support customer indebtedness
b. Have a lien on customer securities to support firm indebtedness
c. Commingle customer and firm securities with the written permission of the customers
d. Rehypothecate the securities with the permission of the customer

Answer 4

A-
A broker-dealer may never commingle stock of customers with stock belonging to noncustomers, including the broker-dealer’s own stock. If a broker-dealer wishes to borrow against stock that it owns and stock belonging to its customers, the broker-dealer must borrow in two separate loan accounts.
It is possible that one or both accounts may have excess equity. For example, let’s assume that a broker-dealer takes $100,000 of its own stock to the bank and borrows $50,000. It also takes $100,000 of stock belonging to customers and borrows $50,000. The bank notifies the broker-dealer that it would be willing to lend an additional $20,000 in each account, and therefore, there is excess collateral value in each account. The bank inquires of the broker-dealer if it should use the excess collateral in each account as a guarantee of the loan in the other account.
For example, if the market value of the broker-dealer’s stock remains at $100,000 and the market value of the customer’s stock drops to $80,000, the bank would apply the excess collateral in the broker-dealer’s account as a guarantee of the customer account. If the market value of the customer’s stock remains at $100,000 and the market value of the broker-dealer’s stock drops to $80,000, the bank would apply the excess collateral in the customer’s account as a guarantee of the broker-dealer’s account. The broker-dealer could allow a cross-lien on its account to support the customer’s account, but could not grant a cross-lien on the customer’s account to support the broker-dealer’s account.

Question 5

All the following statements regarding assignments of securities are CORRECT EXCEPT:

a. Separate stock powers must be used for each security that is delivered by a seller to a buyer
b. The transfer agent is the final judge as to whether a security is a good delivery
c. Assignments must be guaranteed by a bank or broker that is acceptable to the transfer agent
d. A security with an assignment that is not acceptable to the transfer agent is a good delivery if acceptable to the buying broker

Answer 5

D- If a security is not acceptable to a transfer agent, it will not be acceptable to a buying broker.

Question 6

A Suspicious Activity Report (SAR) should be filed:

a. Only in the event that the firm has actual knowledge that the client is laundering money
b. For most types of suspicious activity depending on the facts and circumstances
c. Only for transactions of more than $10,000
d. Only for transactions with individuals or entities on the OFAC list

Answer 6

B-
A Suspicious Activity Report (SAR) should be filed for most suspicious transactions depending on the facts and circumstances surrounding the transaction

Question 7

A SIPC trustee determines that customers have valid claims for securities in the possession of a broker-dealer that has become insolvent, but there are no specifically identifiable securities available. In this case:

a. All securities will be sold and the proceeds distributed to the customers
b. The securities will be distributed to the customers on the basis of when they were purchased on a first-in, first-out basis
c. The securities will be distributed on a proportionate basis
d. The trustee will purchase sufficient additional securities to enable a full distribution consistent with the limits of SIPC protection

Answer 7

C-
If securities are in the possession of a failed broker-dealer, and such securities are not specifically identifiable as belonging to a particular customer, the SIPC trustee will distribute such securities to customers of the broker-dealer on a proportionate basis.

Question 8

Use the following information to answer this question.
Pearless brokerage is a market maker in Thornapple securities. Current inventory positions show the following.
Firm trading account long:
100,000 common shares – @ $22.10
$2,210,000
400 6% convertible bonds due 6/1/08 market value @ 104 $416,000
The total haircut on its inventory positions is:
a. $221,000
b. $331,500
c. $368,940
d. $393,900

Answer 8

D- Since the bonds are convertible and the market is at a premium to their par value, they are subject to the same haircut as the stock into which they are convertible. The total haircut would be 15% on the stock position ($2,210,000 x 15% = $331,500) plus 15% on the market value of the bonds ($416,000 x 15% = $62,400). The total haircut would be $393,900.

Question 9

All the following statements are TRUE under the Code of Arbitration EXCEPT:

a. Customers, but not member firms, may appeal arbitration decisions to a court
b. A person may initiate arbitration by filing a Submission Agreement, a Statement of Claim, and the required deposit fee
c. Respondents may file a counterclaim against the person initiating the arbitration
d. If a customer is involved in an arbitration, a majority of the arbitrators must be from outside the securities industry

Answer 9

A- The Code of Arbitration does not provide for appeals by any party.

Question 10

A broker-dealer is computing the deposit required in its Reserve Bank Account. In regard to its short securities differences, which of the following statements are CORRECT?
I. Short securities differences are posted as credits if they are more than 30 days old.
II. Short securities differences are posted as debits if they are more than 30 days old.
III. Short securities differences are marked to the market.
IV. Short securities differences may be netted against long securities differences.
a. I and III only
b. II and IV only
c. I, III, and IV only
d. II, III, and IV only

Answer 10

A-
Under the Reserve Bank Account, short security differences are marked to the market and posted as credit items if they are over 30 days old.

Question 11

Consider the following information from Shepherd Brokerage in answering this question.
Net customer debits $1,000,000
Loans collateralized by customer securities $600,000
Cash in Reserve Bank Account $300,000
Assume customers liquidate $600,000 of their holdings and the loans collateralized by customer securities are retired. The effect of these transactions would be a(n):
a. Reduction of net customer debits
b. Increase in cash
c. Increase in cash in the Reserve Bank Account
d. Increase capital

Answer 11

A-
Net customer debits would fall by the amount of the securities liquidated. The loans collateralized by customer securities would fall to zero. There is no impact on net capital.

Question 12

Paradite Partners, a registered broker-dealer, has extended a loan to James Copis, its senior executive partner in the amount of $600,000. During the year, Mr. Copis paid back $120,000 of the loan. What effect will the payment on the loan have on the year-to-date retained earnings?

a. Retained earnings will be increased by $120,000.
b. Retained earnings will be decreased by $120,000.
c. Retained earnings will not be affected.
d. Retained earnings will be reduced by $480,000.

Answer 12

C-
Payments on the loan will increase the cash position of the company and reduce the loan outstanding. Since both are balance sheet items and not revenue and expense items, the year-to-date retained earnings will not be affected.

Question 13

During a routine audit, an examiner for a self-regulatory organization has found what she believes is a pattern of excessive corporate underwriting fees charged by the firm’s investment banking department. Disciplinary actions for such violations would be imposed under:

a. State blue-sky laws
b. FINRA’s Code of Procedure
c. FINRA’s Code of Arbitration
d. SEC Corporate Finance Department

Answer 13

B- The underwriting of corporate securities is governed by FINRA rules. Disciplinary actions for violations of FINRA rules are imposed under FINRA’s Code of Procedure.

Question 14

Your firm is holding an inventory of short-term corporate debt (commercial paper) maturing in 28 days. The current market value of this position is $186,000. When computing the net capital of the firm, the haircut on this inventory position would be:

a. No haircut since there are only 28 days to maturity
b. A 6.0% haircut since it is commercial paper
c. A 15% haircut because it is a corporate security
d. A 40% haircut since commercial paper has a limited market

Answer 14

A-

Commercial paper with less than 30 days to maturity is not subject to a haircut.

Question 15

A member firm is requested to open an account by a partner of another member firm. Which of the following statements is/are TRUE?
I. The account may be opened, but the partner may not engage in any transactions in securities recommended by the partner’s firm.
II. The account may not be opened under any circumstances.
III. The member firm is required to give notice to the other member firm.
IV. The member firm must send duplicate confirmations or statements to the other member firm if requested.
a. I only
b. II only
c. III only
d. III and IV only

Answer 15

D- A member firm that wishes to open an account for an employee or principal of another member firm is required to notify that person’s employer. The employer must be sent duplicate statements and confirmations in regard to the account if requested. The member firm opening the account is required to notify the employee that notice will be sent to the employer.

Question 16

At the beginning of the year, the firm pays its annual errors and omissions insurance premium in the amount of $24,000. This amount will be amortized at $2,000 per month throughout the year. When closing the books at the end of June, year-to-date retained earnings will reflect which of the following items?

a. Expenses of $12,000 which reduce year-to-date-retained earnings
b. Prepayments of $12,000 which increase year-to-date retained earnings
c. Expenses of $24,000 which reduce year-to-date-retained earnings
d. Assets of $24,000 which increase year-to-date retained earnings

Answer 16

A- As the prepaid amounts are amortized over the year, the monthly amounts will reduce the prepaid balance and become expenses. The expenses will reduce year-to-date retained earnings. Since the prepaid expense has been amortized for six months at $2,000 per month, the expenses of $12,000 will reduce year-to-date retained earnings.

Question 17

Which of the following activities by a municipal securities broker-dealer that has a financial advisory relationship with municipal securities issuer would be improper?
I. Selling a new security of that issuer as a syndicate member in a competitive underwriting without revealing the firm’s advisory capacity to each purchasing customer
II. Purchasing a new security of that issuer as principal in a negotiated underwriting
III. Acting as agent for a customer in purchasing a new security of that issuer from a syndicate in a competitive underwriting
IV. Disseminating nonpublic information to a customer about a prospective exchange offer by that issuer
a. I and III only
b. II and IV only
c. III and IV only
d. I, II, and IV only

Answer 17

D- When a broker-dealer has a financial advisory relationship with an issuer, it should not disseminate nonpublic information in connection with a purchase, sale, or exchange of securities of that issuer. It is also improper to sell a new issue of that issuer as a syndicate member in a competitive underwriting without revealing the firm’s advisory capacity to purchasers.
Also prohibited is the purchase of a new security of that issuer as principal in a negotiated underwriting while the financial advisory relationship exists. Purchases as agent are permitted, unless made to contravene the purpose and intent of the rules.

Question 18

The inventory records of your firm indicate that 12,200 shares of Nitsy should be in inventory. When the quarterly box count is completed, the actual inventory is 12,500. The market value of Nitsy is $11.85. As the financial principal of the firm, how will you handle this long securities difference when computing the firm’s net capital?

a. Deduct $3,555 from the net capital of the firm.
b. Add $3,555 to the net capital of the firm.
c. Ignore the overage resulting from the box count.
d. Sell the overage and record the proceeds as operating income.

Answer 18

C- Long securities differences for stock that has not been sold have no effect on the net capital of the firm. The broker-dealer will neither add nor deduct the value when computing its net capital. If, however, the securities have been sold, the sale proceeds will be recorded as a special item of revenue and a deduction from net capital is required.

Question 19

A new broker-dealer with $50,000 of net capital can support aggregate indebtedness of:

a. $3,333
b. $6,250
c. $400,000
d. $750,000

Answer 19

C- The net capital rules require that aggregate indebtedness not exceed net capital by more than 8 times for a broker-dealer in its first year of operation. Since the net capital is $50,000, a new broker-dealer could not have aggregate indebtedness exceeding $400,000.

Question 20

If a broker-dealer holds a position in a security with a market value that exceeds 10% of its tentative net capital, this creates a(n):

a. Special reserve requirement
b. Limited market
c. Undue concentration
d. Fail to deliver

Answer 20

C- When a broker-dealer holds a position in a security market value with a market value that exceeds 10% of its tentative net capital, this creates an undue concentration and an additional haircut is required.

Question 21

When a customer pledges stock at a bank in order to obtain a loan to purchase other stock, the amount that may be lent is determined by:

a. Regulation X
b. Regulation U
c. Regulation T
d. The bank’s loan officer

Answer 21

B- Regulation U of the Federal Reserve Board regulates the amount that a bank (or any other lender that is not a broker-dealer) may lend to an individual who wishes to borrow from the bank, using stock as collateral, for the purpose of buying more stock. If an individual goes to a bank with $10,000 worth of fully paid stock, and wishes to use the stock as collateral for a loan, the bank must determine if the loan is for the purchase of additional stock. If the loan is for that purpose, the bank is restricted by Regulation U as to the maximum amount of credit that it may extend. The amount that may be lent under Regulation U is the same amount that may be lent under Regulation T, which regulates credit advanced by broker-dealers.

Question 22

Therite Brokerage has the following information in its trial balance as of September 30, 20XX.
Retained earnings, beginning	$700,000
Office expenses	$110,000
Loan collateralized by firm assets	$600,000
Salaries	$120,000
Mutual Fund commissions	$200,000
Customer credit balances	$185,000
The year-to-date retained earnings figure for Therite Brokerage is:
a.	$1,915,000
b.	$1,085,000
c.	$985,000
d.	$670,000

Answer 22

D- When calculating year-to-date retained earnings, start with the beginning balance carried over from the previous period, add in revenue items and deduct expense items. The calculation should be: $700,000 plus Commission income of $200,000 less Salaries of $120,000 less Office expenses of $110,000. The net amount is $670,000. The other items, the loan of $600,000 and Customer Credits of $185,000, are balance sheet items and not used in calculating retained earnings.

Question 23

A client buys 1,000 shares of Wellman Brothers for a total cost of $30,000. He does not pay for the trade, and his position is liquidated for $26,000. The difference is a(n):

a. An unsecured credit
b. An unsecured debit
c. Haircut at 10%
d. Part of the firm’s tentative net capital

Answer 23

B- This is an unsecured debit. The broker-dealer cannot be sure it can collect this from the client. The net effect is to lower the firm’s capital.

Question 24

In which of the following cases would a financial advisory relationship exist according to the MSRB?
I. A broker-dealer, while acting as an underwriter for a municipal offering, gives advice to the issuer regarding the structure of the issue.
II. A broker-dealer gives a municipal issuer advice about a new issue with respect to the issue’s timing and terms and is compensated for this advice under a written agreement.
III. A broker-dealer not involved in a new municipal offering informally gives advice to the issuer regarding the timing of the issue for no charge.
a. I only
b. II only
c. I and II only
d. I, II, and III

Answer 24

B- A financial advisory relationship is deemed to exist when a broker-dealer or dealer bank, for compensation or the expectation of compensation, gives an issuer advice about a new issue with respect to the issue’s structure, timing, or terms of the offering. However, this does not include situations in which a municipal securities firm gives such advice to an issuer in its role as an underwriter, which is why Choice (I) is not correct. Choice (III) is incorrect because there is no charge.

Question 25

Metcalf Brokerage has calculated its tentative net capital at $2,400,000. Within its common stock trading account is a position consisting of 10,000 shares of Fordham, Inc. stock valued at $34 a share. The additional haircut because of undue concentration would be: a. $51,000 b. $15,000 c. $13,500 d. $12,450

Answer 25

When a broker-dealer has a common stock position whose market value exceeds 10% of its tentative net capital, an undue concentration haircut must be applied. In the example given, the tentative net capital was $2,400,000 of which 10% would be $240,000. The security position has a value of $340,000, 10,000 shares x $34. There is $100,000 excess, $340,000 - $240,000. There is an exclusion from the undue concentration rule for the market value of 500 shares, or $10,000, whichever is greater. The market value of 500 shares equals $17,000, subtracted from the $100,000 excess equals $83,000. 15% of $83,000 equals $12,450.

Question 26

The sale of 3 Java Shop July 50 uncovered calls for a premium of 4 when the stock is 52 would produce a margin requirement of: a. $1,200 b. $4,320 c. $2,000 d. $3,720

Answer 26

B- The margin requirement for an uncovered call is 20% of the market value of the stock plus the premium minus the out-of-the-money amount. 20% of $5,200 = $1,040 Add the premium of 400 = $1,440. Multiply by 3 contracts = $4,320.

Question 27

A broker-dealer has total assets on its trial balance in the amount of $8,395,000. When calculating allowable assets for net capital purposes, all the following would be included EXCEPT: a. Fails to deliver, 3 days old b. Syndicate receivables, 4 days old c. Good faith deposit, underwriting settled for 62 days d. Commissions receivable, 8 days old

Answer 27

C- Good-faith deposits for an underwriting that has been settled for more than 60 days are not allowable assets. The other receivables are within the appropriate time frames for consideration as allowable assets

Question 28

Which TWO of the following statements are CORRECT regarding maintenance of records required under Rule 17a-4? I. In an omnibus account, records must be kept by the carrying member. II. In an omnibus account, records must be kept by the introducing member. III. In a fully-disclosed account, records must be kept by the carrying member. IV. In a fully-disclosed account, records must be kept by the introducing member. a. I and III b. I and IV c. II and III d. II and IV

Answer 28

C- There are two types of clearing accounts that a nonclearing broker-dealer may maintain with a clearing broker-dealer. They are fully disclosed accounts and omnibus accounts. In a fully disclosed account, the clearing broker-dealer will maintain all the records for the customer. The nonclearing firm will introduce the customer's account to the clearing firm, and the clearing firm will execute the orders, send the customer confirmations and statements, and take care of all the other required record keeping. In an omnibus account, the nonclearing (introducing) firm will maintain all its own records. The clearing firm will only execute orders and clear them. All other details will be handled by the introducing firm.

Question 29

Which of the following entries are assets? I. Fails to Deliver II. Fails to Receive III. Trading Account of Firm -- Common Stock -- Long IV. Trading Account of Firm -- Common Stock -- Short, Sold to Customers a. I and III only b. II and III only c. I, II, and III only d. II, III, and IV only

Answer 29

A- Fails to Deliver and the Trading Account -- Long represent balance sheet assets.

Question 30

Disbrow Securities sells $1,400,000 face amount of municipal securities to Elger Securities. Upon settlement, there is a $300 difference in the amounts computed by the firms. According to the MSRB: I. Elger can reject the bonds II. Elger must accept and the parties must reconcile any money differences within 10 business days following settlement III. The trade can be cancelled if one party objects IV. The calculation of the seller determines the amount of payment to be made a. IV only b. I and III only c. II and III only d. II and IV only

Answer 30

D- The MSRB has published a table indicating the maximum differences per transaction that would be sufficient to cause rejection of a delivery. For transactions of $1,000,000 and over, the minimum difference is $500. If the difference is $300, Elger may not reject the delivery. Both firms should attempt to reconcile any money differences within 10 business days of settlement. Ultimately, calculation of the selling party is used to determine monetary amounts. The trade could only be canceled if both parties mutually agree.

Question 31

A broker-dealer is required under the provisions of Rule 15c3-3 to determine the quantity of fully paid or excess securities in its possession and control on a: a. Daily basis b. Weekly basis c. Biweekly basis d. Monthly basis

Answer 31

A- Rule 15c3-3 requires a broker-dealer to determine the status of fully paid and excess securities in its possession or control on a daily basis.

Question 32

A municipal bond maturing on May 1, 2020 has a 7% coupon rate. The issue is callable @ 104 beginning on May 1, 2005, scaled down one point every three years thereafter. From May 1, 2017 until maturity it is callable at par. On a transaction executed at a 6.25% yield, the dollar price shown on the confirmation will be the: a. Price to the call date of May 1, 2005 b. Price to the maturity date of May 1, 2020 c. Higher of price to call or price to maturity d. Lower of price to call or price to maturity

Answer 32

D- MSRB rules require that for transactions in callable securities effected on a yield basis, a dollar price must be shown, and the calculation of that dollar price should be the lower of price to call or price to maturity.

Question 33

A broker-dealer must provide its clients with an updated privacy notice at least: a. Monthly b. Quarterly c. Annually d. Biannually

Answer 33

C- A broker-dealer must send an updated copy of its privacy policies to all its customers at least once a year.

Question 34

Rule 17a-3 requires a broker-dealer to prepare which of the following records? I. A memorandum of each order showing the time of the order, the account for which the order was entered, the time of entry, and the time of execution II. Copies of all confirmations of purchases and sales for customers III. A record of each cash and margin account containing the name and address of each customer IV. A record of each customer's securities position for the past 5 years, or for the life of the account if less than 5 years, showing a profit or loss on each position a. II and IV only b. I, II, and III only c. II, III, and IV only d. I, II, III, and IV

Answer 34

B- The items indicated in Choices (I), (II), and (III) must be prepared and maintained by the broker-dealer. Records must be kept regarding customer accounts, but there is no requirement that a separate record be kept showing a customer's security position for 5 years and the profit or loss in the account.

Question 35

Once interest and commissions receivable are more than 30 days old: a. These items are not included in the reserve Formula b. They are treated as deductions from net worth c. There is a 50% haircut d. The broker-dealer must eliminate them from its books and records

Answer 35

B- Once more than 30 days old, commissions receivable and interest receivable are deducted from net worth. The net effect is that capital is reduced.

Question 36

When calculating allowable assets for net capital purposes, which of the following statements is TRUE? a. Cash in the customer Reserve Bank Account is not an allowable asset. b. Unsecured customer debit balances are allowable assets. c. Fails to deliver for customer accounts are not allowable at any time. d. Securities borrowed for customer short sales are allowable assets.

Answer 36

D- Securities borrowed for customer short sales are allowable assets for net capital purposes since broker-dealer assets collateralize the borrowing. Cash in the reserve account is an allowable asset, while unsecured debit items are not allowable. Fails to deliver are allowable assets.

Question 37

An employee of a member firm wishes to open an account at another member firm. The firm opening the account: a. Need not notify the employee's firm that the account is being opened b. Need not notify the employee's firm that the account is being opened if it is a cash account, but must send notice if it is a margin account c. Is required to give notice to the employee's member firm and to inform the employee that such notice will be given d. Is required to give notice to the employee's member firm, but need not inform the employee that such notice will be given

Answer 37

C- The member firm opening the account is required to notify the employer and notify the employee that notice will be sent to the employer.

Question 38

Regarding the undue concentration rule, a broker-dealer may exclude common stock positions that do not exceed: a. $10,000 or the market value of 500 shares, whichever is greater b. $25,000 or the market value of 1,000 shares, whichever is less c. $10,000 or the market value of 500 shares, whichever is less d. $25,000 or the market value of 500 shares, whichever is greater

Answer 38

A- There is an exclusion to the undue concentration rule for equity positions that do not exceed the greater of $10,000 or the market value of 500 shares.

Question 39

Exeter Brokerage has free credit balances of $700,000. It is currently in SIPC liquidation. Which of the following statements is TRUE regarding the payment of cash to customers? a. Customers will receive cash payments based upon the free credit balance in their account. b. An amount of $200,000 will be subject to general creditor provisions. c. Separately identifiable cash is covered without limit. d. SIPC will make cash payments based upon the size of the customer account.

Answer 39

A- Each customer's account has SIPC coverage which is limited to a maximum of $500,000 in securities of which no more than $250,000 may be for cash. The trustee appointed by SIPC would review the individual balance of each customer to determine eligibility.

Question 40

If a secured demand note is collateralized by listed stock, the stock is valued at: a. 100% of market value b. 85% of market value c. 70% of market value d. 15% of market value

Answer 40

C- The value of securities that collateralize a secured demand note depends on the type of security. Securities that have specific haircut rules, such as governments and municipals, are reduced in value by the amount of those haircuts. Equity securities subject to a general haircut are instead reduced in value by 30% when they back a secured demand note. Therefore, the stock is valued at 70% for net capital purposes.

Question 41

Regarding the undue concentration rule, a broker-dealer may exclude debt securities that do not exceed: a. $10,000 b. $25,000 c. $40,000 d. $100,000

Answer 41

B- There is an exclusion to the undue concentration rule for debt positions that do not exceed $25,000.

Question 42

When stock is purchased in a restricted margin account the customer must: a. Pay the full purchase price on the settlement date b. Pay the full purchase price prior to the entry of the order c. Deposit sufficient cash to remove the restriction d. Deposit the initial Regulation T margin requirement within two business days of the settlement date

Answer 42

D- A restricted account is a margin account in which the equity is less than the minimum requirement of Regulation T. There are no penalties associated with a restricted margin account. Customers who wish to purchase stock in a restricted margin account may do so on normal credit terms, by paying for the purchase within two business days of the settlement date. This would be five business days after the trade date, based on a regular-way settlement of three business days.

Question 43

A broker-dealer owns real estate with a market value of $1,500,000. There is a mortgage on the property in the amount of $1,200,000. When calculating allowable assets for net capital, the amount that would NOT be allowed is: a. $1,500,000 b. $1,200,000 c. $300,000 d. $0

Answer 43

C- The deduction on a fixed asset for net capital purposes is the amount by which the asset value exceeds the liability. (In this case, $1,500,000 - $1,200,000 = $300,000.)

Question 44

Neva Simms opened a brokerage account at Broadhurst Securities in 1985. In 1998, she signed a discretionary account agreement allowing Sissi Pahars, her registered representative, to exercise discretionary authority. The discretionary account agreement needs to be retained by Broadhurst for three years after: a. The last trade b. The date of the discretionary agreement c. Sissi leaves the firm d. The discretionary arrangement ceases to exist

Answer 44

D- The discretionary account agreement must be retained by the broker-dealer for three years after the discretionary arrangement ceases to exist.

Question 45

All the following statements are true with respect to the initial fee that all municipal securities firms must pay to the MSRB EXCEPT: a. It must be paid each year by October 31 b. The fee is $100 c. It is only paid when a firm registers with the MSRB d. The MSRB uses the money to defray its expenses

Answer 45

A- An initial fee of $100 must be paid to the MSRB when a municipal securities firm registers with the MSRB. The regulator uses the money to defray its expenses. The annual fee of $500 is due by October 31 each year.

Question 46

A broker-dealer has an open contractual commitment for $100,000 of municipal bonds maturing in 2025. The current market value of the bonds is $102,000. The haircut that would be applied is: a. $7,140 b. $7,000 c. $5,140 d. $5,000

Answer 46

C- The haircut on open contractual commitments is based on the current market value minus any unrealized profit or plus any unrealized loss. Note that the haircut is based on the market value, not the contractual value. In this question, the broker-dealer has a commitment for $100,000. The current market price of the bonds is $102,000. Therefore, the broker-dealer has an unrealized profit of $2,000. The haircut is 7% of the market value of $102,000 ($7,140) minus the unrealized profit of $2,000, for a net haircut of $5,140.

Question 47

Which of the following statements are TRUE regarding the Code of Procedure? I. The Department of Enforcement may issue a complaint if they believe a registered person has violated a FINRA rule. II. The respondent to a complaint must provide a response within 25 days of receiving it. III. Within 60 days after the Hearing Panel has stopped accepting evidence, it must render a decision. IV. Expulsions of members go into effect no sooner than 30 days after the respondents have received notice of a final disciplinary action. a. I and II only b. II and III only c. I, II, and III only d. I, II, III, and IV

Answer 47

C- Complaints handled under the Code of Procedure are often initiated by public customers. However, if the Office of Disciplinary Affairs believes as a result of its own surveillance that a registered person has violated FINRA rules it may instruct the Department of Enforcement to issue a complaint. Respondents have 25 days to answer a complaint once received, and the Hearing Panel, which has original jurisdiction in Code of Procedure matters, must render a decision within 60 days after all evidence has been received. When FINRA expels a member, it is effective as soon as the decision is served on the respondent.

Question 48

A firm has extended loans to its senior officers in the amount of $600,000 in order to purchase stock in the company. The company will hold the stock until the loan balances are paid off at which time the stock will be delivered to the officers. The current market value of the stock that it is holding is $540,000. When calculating allowable assets for net capital purposes, what portion of the loan may be included? a. $600,000 b. $540,000 c. $60,000 d. $0

Answer 48

B- Since the company is holding the stock as collateral for the loans outstanding, it could sell the stock for $540,000 if there is a default by the officers. This amount would be an allowable asset for net capital purposes; however, the $60,000 difference between the value of the stock and the loans outstanding is unsecured and would not be included for net capital purposes.

Question 49

A general securities broker-dealer has aggregate indebtedness of $4,000,000 and net capital of $300,000. Regarding SEC reporting requirements, which of the following statements is TRUE? a. There is no need for the firm to notify the SEC since the minimum net capital requirement for this firm is $250,000. b. The broker-dealer must send notification to the SEC within 24 hours. c. The broker-dealer must send notification to the SEC on the same day. d. The chief financial officer of the broker-dealer must alert the SEC about this.

Answer 49

B- When the A.I. to N.C. ratio exceeds 12:1, the SEC must be notified in an acceptable manner within 24 hours of this discovery. Should this ratio exceed 15:1, this notification must be made on the same day.

Question 50

Which of the following items are subject to FINRA filing requirements? I. Investment company tombstones II. Material that is marked "not to be used with the public" III. Communications between an underwriter and an issuer IV. Advertisements on television a. IV only b. I and II only c. III and IV only d. I, III, and IV only

Answer 50

A- FINRA requires that advertisements be approved by a principal and be retained for three years in an advertisement file. Tombstone ads are exempt from the requirement, as are internal memorandums that are not disseminated to the public and communications between underwriters and issuers.

Question 51

The Reserve Bank Account established pursuant to Rule 15c3-3 may be used by a broker-dealer: a. For any valid purpose relating to customer accounts b. Only for receipt and disbursement of customer funds c. As collateral for a bank loan to finance customer debit balances d. None of the above

Answer 51

D- The Reserve Bank Account is used for the protection of customer funds only. The broker-dealer may not use the assets in the account for any purpose other than as a reserve for customer protection.

Question 52

When a broker-dealer accepts cash payments from a customer for a securities transaction, it: I. Must file a report with the Internal Revenue Service if it receives more than $10,000 II. Must file a report with the Internal Revenue Service regardless of the dollar amount III. Must identify the individual who delivered the cash payment on a report to the federal government IV. Is not required to identify the client by name a. I and III only b. I and IV only c. II and III only d. II and IV only

Answer 52

A- Broker-dealers are allowed to accept cash from a customer to pay for a securities transaction. However, if the transaction is for more than $10,000, the broker-dealer is required to file a report (Form 4789) with the Internal Revenue Service within 15 days of the transaction. In the report, the broker-dealer must identify the client by name. This filing requirement applies to most financial institutions when cash/currency is exchanged with another person, and there are penalties associated with a failure to file a report.

Question 53

Aggregate indebtedness is generally a measure of obligations of the broker-dealer that are not collateralized by its own assets. When calculating the AI of the firm, the financial principal will include all the following credit items from the trial balance EXCEPT: a. Customer credit balances b. Fails to receive, accounts of customers c. Fails to receive, firm account -- unsold d. Fails to receive, firm account -- sold with no offset

Answer 53

C- Liabilities for fails to receive for the trading account of the firm that have not been resold are collateralized by the cash which the firm is holding. When the securities are finally delivered to the firm, the payment will be sent to the contra-party and the liability will be eliminated. Choices (a) and (b) are liabilities owed to customers or collateralized by customer assets and would be included in aggregate indebtedness. If the firm resells securities that are failed to receive without a satisfactory offset, an unsecured liability is created which would be included when calculating aggregate indebtedness.

Question 54

Which of the following situations would NOT be an example of a structured transaction? a. A client deposits a cashier's check for $9,999 in her account. b. A client deposits $6,000 in cash in his account and one hour later deposits an additional $5,000. c. A client deposits four money orders for $2,500 all with sequential numbers. d. A client with a cash business deposits $7,000 in cash in his account.

Answer 54

D- The first three choices are examples of transactions that may have been structured to avoid the currency reporting requirements. The single transaction in choice (d) involves less than $10,000.

Question 55

Metcalf Brokerage has calculated its tentative net capital at $1,200,000. Within its common stock trading account is a position consisting of 450 shares of Eastland Corporation stock valued at $400 a share. The additional haircut because of undue concentration would be: a. $0 b. $9,000 c. $18,000 d. $27,000

Answer 55

A- There is an exclusion to the undue concentration rule for positions which do not exceed the market value of 500 shares or $10,000 ($25,000 for debt securities). As this position consists of only 450 shares, the undue concentration rule does not apply.

Question 56

A broker-dealer changes from an introducing firm to a clearing firm. The item that would NOT be affected by this change would be: a. Net capital requirement b. Calculation of reserve requirement c. Frequency of FOCUS filing d. Subordinated loan eligibility for capital

Answer 56

D- Whether a firm is a clearing broker or introducing broker would have no bearing as to whether a subordinated loan is or is not eligible for capital purposes.

Question 57

Which of the following statements is NOT TRUE regarding continuing education for an associated person of a broker-dealer? a. The person will be required to retake her registration examination to meet FINRA requirements regarding continuing education. b. A person who was previously grandfathered will be required to complete the Regulatory Element if the person is subject to a significant disciplinary action. c. There is both a regulatory and a firm requirement. d. The person will have all registrations deemed inactive if the associated person fails to complete the Regulatory Element of the continuing education program.

Answer 57

A- All registered persons are subject to continuing education requirements, as adopted by the securities industry. The program consists of a regulatory element and a firm element. Certain persons may qualify for an exemption from the regulatory portion. However, all registered reps who have contact with the public are subject to the firm element. Persons subject to the regulatory element who do not complete it within specified periods are subject to having their registrations deemed inactive. A person who is Series 7 registered is not required to take that regulatory exam again as part of the continuing education requirement.

Question 58

``` Answer this question based on the following data for Winthrop Associates. Cash in Reserve Bank Account $250,000 Long stock inventory (Nasdaq) $200,000 Furniture and fixtures $100,000 Fails to receive $75,000 Bank loans $50,000 Retained earnings $300,000 Common stock $125,000 The net capital for Winthrop Associates is: a. $425,000 b. $325,000 c. $295,000 d. $250,000 ```

Answer 58

C- Add the retained earnings and common stock: $300,000 plus $125,000 = $425,000. This is the beginning equity. Subtract nonallowable assets of $100,000 (furniture and fixtures) to equal $325,000 of tentative net capital. Then deduct haircuts of $30,000 on the long stock position. The net capital of the broker-dealer would be $295,000.

Question 59

``` Answer this question based on the following data for Winthrop Associates. Cash in Reserve Bank Account $250,000 Long stock inventory (Nasdaq) $200,000 Furniture and fixtures $100,000 Fails to receive $75,000 Bank loans $50,000 Retained earnings $300,000 Common stock $125,000 Based on your net capital calculation in question 69, what would Winthrop Associates be required to do? a. Notify their DEA b. Liquidate inventory c. Introduce another broker-dealer d. Make an additional deposit to the Reserve Bank Account ```

Answer 59

A- Winthrop is a clearing broker dealer with a $250,000 net capital requirement. If they do not have at least 20% more than $250,000, they are required to notify their DEA within 24 hours under SEC rules. If they had $300,000 net capital, they would not be required to notify their DEA.

Question 60

Interest on municipal securities: I. Is calculated on a 360-day year basis with each month containing 30 days II. Is calculated on a calendar-year basis III. Accrues up to and including the settlement date IV. Accrues up to but not including the settlement date a. I and III only b. I and IV only c. II and III only d. II and IV only

Answer 60

B- Interest paid on municipal securities is calculated on the basis of a 360-day year with each month containing 30 days. Interest accrues up to but not including the settlement date.

Question 61

A customer opens a margin account at a broker-dealer with a purchase of $40,000 and meets the Regulation T requirement by depositing a $20,000 check in her account. The firm obtains a loan from a bank for the remaining portion of the purchase and pledges the customer's securities as collateral for the loan. What portion of this transaction would be included when calculating aggregate indebtedness? a. $40,000 b. $20,000 c. $10,000 d. $0

Answer 61

B- The firm has incurred a liability to the lending institution in the amount of $20,000 and has secured this loan by pledging customer securities as collateral. If the firm defaults on the loan, the lender will sell $20,000 of the securities in order to recover the loan which it has extended. This amount would need to be included when calculating the aggregate indebtedness of the firm.

Question 62

A broker-dealer only needs to give a privacy notice to a consumer if it: a. Shares nonpublic client information with nonaffialiated third parties b. Sells nonpublic client information to nonaffiliated third parties c. Shares nonpublic client information with its affiliates d. Discloses nonpublic client information to any insurance companies or banks with which it is affiliated.

Answer 62

A- A broker-dealer only needs to give a privacy notice to a consumer (someone with whom it does not have an ongoing relationship) if it discloses any nonpublic information about the consumer to third parties that are not affiliated with the firm.

Question 63

A broker-dealer has two open fail to deliver contracts. In one case the market value is higher than the contract value, and in the second situation the contract value is higher than the market value. If both fail to deliver positions are aged (at least five days old), which of the following statements is TRUE regarding the haircut? a. Only the market value is considered b. The positions are netted against one another to determine the amount subject to an aged fail charge c. Only the contract value is considered d. Each position is evaluated separately, taking into account both the market value and the contract value.

Answer 63

D- Each position is evaluated separately, using the haircut percentage for the security, based on the market value of the security with an adjustment for the differential between the market value and the contract value. If the market value is greater than the contract value, the haircut is reduced. If the contract value is greater than market value, the haircut is increased.

Question 64

A broker-dealer whose ratio of aggregate indebteness to net capital is 3 to 1 and who carries customer funds of $100,000 elects to compute the reserve requirement under Rule 15c3-3 using the alternate method. It must maintain a Reserve Bank Account balance equal to: a. 5% of the amount computed under the Reserve Formula b. 100% of the amount computed under the Reserve Formula c. 105% of the amount computed under the Reserve Formula d. 110% of the amount under the Reserve Formula

Answer 64

C- If a broker-dealer computes its Reserve Bank Account on a monthly basis, it must maintain 105% of the difference between total credits and total debits. For example, if total credits are $500,000 and total debits are $400,000, the broker-dealer would be required to maintain $105,000 in the account.

Question 65

Goldstar Brokerage is carrying a qualified subordinated loan on its books in the amount of $700,000. The loan matures in three months. The minimum net capital requirement for the firm is $250,000. When calculating the aggregate indebtedness of the firm, what portion of the loan will be included? a. $700,000 b. $350,000 c. $250,000 d. $0

Answer 65

D- Subordinated loans are not considered aggregate indebtedness and are not included in the AI calculation.

Question 66

``` Use the following information to answer this question. The records of a broker-dealer indicate the following debit balances of customers and indicate the use that the broker-dealer has made of the customers' securities. Debit Balance Amount of Stock Hypothecated Customer A $10,000 $14,000 Customer B $42,000 $56,000 Customer C $180,000 $300,000 Customer D $20,000 $27,000 Which accounts has the broker-dealer handled improperly? a. All the accounts b. Customer C only c. Customers B and C d. Customers C and D ```

Answer 66

B- A broker-dealer may use a customer's stock as collateral for a bank loan to an amount that does not exceed 140% of the customer's debit balance. In the account of Customer C, the debit balance is $180,000. The maximum amount of stock that could be used as collateral is $252,000. The balance of the customer's stock would need to be segregated. As $300,000 of stock was used, this would constitute a violation

Question 67

Municipal syndicate account records must show all the following information EXCEPT: a. The terms and conditions governing the operation of the syndicate account b. A reconciliation of the profits and expenses of the syndicate c. The names and addresses of each customer purchasing those securities from a syndicate member d. All allotments of securities to syndicate members and the price at which they were sold

Answer 67

C- The syndicate manager must keep certain records on behalf of the syndicate, including: • Description and aggregate par value of the securities • Name and percentage participation of each member • Terms and conditions governing formation and operation of the syndicate • All orders received for the purchase of securities from the syndicate (except bids at other than the syndicate price) • All allotments of securities and the price at which sold • The date and amount of any good-faith deposits • Date of settlement with the issuer • Date of closing of the account • A reconciliation of profits and expenses Names and addresses of customers buying the securities from syndicate members do not need to be recorded.

Question 68

Zarepath Brokerage has conducted a securities count and is missing 200 shares of Angelica Corp., value at $50 per share. Which of the following statements is TRUE regarding the short securities difference? a. The position is subject to a 15% haircut. b. There is an immediate entry to the Reserve Formula. c. There is a $10,000 charge to capital after 28 business days. d. It can be offset if an equivalent long securities difference is found.

Answer 68

C- After 28 business days, the full value of $10,000 would have been charged to capital if the market price had remained at $50. This occurs in four steps at seven business day intervals. 7 business days 25% 14 business days 50% 21 business days 75% 28 business days 100% The short securities difference is not reflected in the Reserve Formula until 30 calendar days have passed.

Question 69

Your firm has 1,000 shares of XYZ in its trading inventory. The stock is quoted by two market makers in the Pink Sheets. When computing net capital, XYZ would be considered to be: a. Not allowable as a current asset b. A limited market security c. Aggregate indebtedness d. Nonmarketable

Answer 69

B- Where a security is quoted by fewer than three market makers it is considered a limited market security and is subject to a 40% haircut.

Question 70

The disciplinary history of a registered representative: a. Can be retrieved by contacting the disclosure files of the SEC b. Is available through the Central Registration Depository of FINRA c. Is not made available to the public until the disciplinary period has expired d. Is only available if the disciplinary history includes a felony conviction

Answer 70

B- FINRA makes disciplinary information about registered individuals available to the public from the CRD through a toll-free number and through the Internet (BrokerCheck).

Question 71

Your firm is a market maker in Jet-X transportation common stock. The margin department of Hottrade Brokerage, one of your competitors, requests a loan of 2,000 shares of Jet-X in order to facilitate a short sale by one of its customers. There are currently 1,200 shares in your market-making inventory. You complete the loan by using 800 of your customers' shares. What portion of the loan would be included in aggregate indebtedness? a. None of the loan is aggregate indebtedness. b. 800 shares are aggregate indebtedness. c. 1,200 shares are aggregate indebtedness. d. 2,000 shares are aggregate indebtedness

Answer 71

B- Since 1,200 of the shares belong to the firm as a market maker, they would not be considered part of the AI of the firm. The other 800 shares that belong to the customers would be included in its aggregate indebtedness.

Question 72

Mr. Harris sells 300 shares of Dunkirk Industries at 60. He has physical possession of the securities but does not bring them into the firm by the settlement date. The firms records will indicate: a. Mr. Harris has a fail to deliver b. The firm is failing to receive from Mr. Harris c. The firm has a fail to deliver d. Mr. Harris has a credit balance of $18,000

Answer 72

D- Mr. Harris's account is credited for $18,000 on the settlement date. He would not get paid until he brought in the securities. If the broker-dealer sold the securities to another broker-dealer, the selling broker-dealer would have a fail to deliver.

Question 73

Which of the following persons must be registered as an associated person under MSRB rules? a. A municipal securities salesperson who also trades for her own account b. A senior officer at a bank who makes policy decisions that have an indirect impact on the day-to-day conduct of the bank's municipal securities dealer activities c. A person who computes only details of pricing on municipal transactions d. A person who is licensed to sell investment company products and variable contracts

Answer 73

A- A municipal securities salesperson who also trades for her own account must be registered as an associated person. Choice (b) is wrong because the senior officer's policy decisions have only an indirect impact on day-to-day operations. If the decisions had a direct impact, then she would be considered an associated person. Choice (c) is wrong because this is a clerical position, and in Choice (d), being registered by FINRA to sell investment company products and variable contracts has no connection with being registered as an associated person under MSRB rules.

Question 74

Steadfast Brokerage has 5,000 shares of Fenom, Inc. in its trading inventory. The stock is quoted at 10 - 11.50 by two market makers in the Pink Sheets. The value of Fenom, Inc., after applying the appropriate regulatory haircut, would be: a. $42,500 b. $30,000 c. $20,000 d. $0

Answer 74

B- When a security is quoted by fewer than three market makers, it is considered a limited market security and is subject to a 40% haircut. As the position has a current market value of $50,000, the haircut would be $20,000, leaving a value for net capital purposes of $30,000.

Question 75

When calculating the markup on an over-the-counter transaction in a security for which there is no inside market, the calculation should be based on the dealer's contemporaneous cost, which is the: a. Dealer's average cost basis b. Highest price at which the dealer purchased any stock in inventory c. Average price of the stock during the last month d. Price paid to other dealers for the security at the time of the trade

Answer 75

D- According to FINRA rules, a dealer's contemporaneous cost is the price paid to other dealers for the security at or about the time it made retail sales to customers. If there are no recent transactions with other dealers, contemporaneous cost is based on transactions with other customers at or about the time of the sale, adjusted for an assumed markup based on the 5% Policy.

Question 76

Which of the following items would be included in the firm's aggregate indebtedness? a. Fails to deliver more than 5 days old b. Fails to receive for customer accounts c. Customer debit balances d. Firm trading, sold short to customers

Answer 76

B- Fails to receive for customer accounts is part of the AI of the firm. Fails to deliver and customer debits are debit items on the trial balance and not part of AI. Firm trading, sold short to customers, is a credit item that is collateralized by the firm's own assets, and therefore, is not part of aggregate indebtedness.

Question 77

Which of the following positions would be subject to the greatest haircut? a. A T-bill with 6 months to maturity b. A zero-coupon corporate bond having 30 years to maturity c. A state G.O. bond maturing in 15 years d. A $2,000,000 commercial paper issue

Answer 77

B- Haircuts are assessed according to product type, based on maturity. In general, the greater the time to maturity, the higher the haircut will be. Corporate bonds carry the largest haircuts, which is 9% for bonds with 25 year maturities.

Question 78

Which TWO of the following accounts are discretionary under MSRB rules? I. An account in which the dealer has a standing order to buy a specific security whenever the dealer finds it II. An account in which the dealer sometimes, but not always, makes the investment decisions III. An account in which the professional's discretion is limited to the price at which a customer's order for a definite amount of a specified security is executed IV. An account in which the dealer selects a particular security to be bought or sold based on general customer criteria a. I and II b. I and III c. II and III d. II and IV

Answer 78

D- Under MSRB rules, a discretionary account is the account of a customer in which the municipal securities firm is authorized to determine what municipal securities will be purchased, sold, or exchanged by or for the account.

Question 79

``` The trial balance of the firm indicates the following credit balance items. Use this information to answer this question. Mortgage on real estate $1,200,000 Customer credit balances $185,000 Fails to receive: Customer accounts $700,000 Firm trading, unsold $250,000 Firm trading, sold -- no offset $150,000 Loans outstanding: Customer accounts $375,000 Firm accounts $600,000 Securities loaned: Customer accounts $250,000 Firm accounts $900,000 Short securities differences -- 32 days old $135,000 What is the aggregate indebtedness of the firm? a. $4,645,000 b. $1,660,000 c. $2,985,000 d. $2,100,000 ```

Answer 79

B- The following items would be included as AI. Customer credit balances $ 185,000 Fails to receive customers $ 700,000 Fails to receive firm -- sold $ 150,000 Loans outstanding -- customers $ 375,000 Securities loaned -- customers $ 250,000 $ 1,660,000 The summary table on page 5-3 of the text provides a list in of AI items as well as exclusions from the definitions of AI. The fail to receive of the firm unsold is also included in AI.

Question 80

A broker-dealer that changed its status from introducing broker-dealer to clearing broker-dealer would need to: a. Compute the Reserve Formula weekly instead of monthly b. Resubmit any subordinated loans currently outstanding for reapproval c. Take a higher haircut percentage d. Send financial statements to customers

Answer 80

D- An introducing broker-dealer is not considered to have customers and does not have the obligation to send semiannual and annual reports. It would assume this obligation once becoming a clearing firm. An introducing broker-dealer would not compute the Reserve Formula at all.

Question 81

Your firm is carrying convertible bonds that have a market value of 120% of par. For net capital purposes the haircut applied would be: a. 0, as there is no haircut on bonds b. 2% to 9% of the face amount c. 15% of the face amount d. 15% of the market value

Answer 81

D- If a convertible bond is trading for 100% or more of par value, the haircut is the same as if it were common stock, which is 15% of market value.

Question 82

A dealer who is a member of an underwriting syndicate may publish information or recommendations regarding a security in registration: a. If such information or recommendation appears in a publication that has been distributed with reasonable regularity b. If earnings projections do not go beyond the issuer's current fiscal year c. If an opinion or recommendation at least as favorable was contained in the previous issue of such publication d. All of the above

Answer 82

D- This situation is covered by SEC Rule 139. A broker-dealer is allowed to publish information or recommendations regarding a security that is being registered with the SEC in the normal course of the broker-dealer's business if it complies with certain requirements. The recommendation must be made only in a publication that has been distributed with reasonable regularity. Any projection of earnings may not extend beyond the current fiscal year. In addition, an opinion or recommendation regarding the issue that was at least as favorable as the current one had to have been made in the previous issue of such publication.

Question 83

When calculating the net capital of a broker-dealer, certain assets would be allowed, others are disallowed, and still others must be adjusted for their liquidity factors. Which of the following assets would be considered nonallowable assets for net capital purposes? a. Cash in the Reserve Bank Account b. Secured customer debit balances c. Securities borrowed to facilitate customer short sales d. Syndicate receivables -- common stock, 15 days old

Answer 83

D- Syndicate receivables for underwritings that have settled are allowable for certain periods. If the underwriting relates to common stock, the receivable would not be allowable after 11 days; however, for a municipal underwriting, the syndicate receivable becomes nonallowable after 60 days.

Question 84

A client sells 5 Microdata November 60 calls for a premium of 3.40 when the stock is 58.70. The margin requirement for this is established by: a. The OCC b. Regulation U c. The firm's Registered Options Principal d. The Federal Reserve Board

Answer 84

D- The Federal Reserve board sets initial margin for stock, bonds, and options under Regulation T.

Question 85

Your firm is carrying convertible bonds that are currently trading at a price of 92% of par. For net capital purposes, the haircut applied would be: a. 0, as there is no haircut on bonds b. 2% to 9% of the face amount c. 15% of the face amount d. 15% of the market value

Answer 85

B- If a convertible bond is trading for 100% or more of par value, the haircut is the same as it were common stock; however, if the bond is trading at a discount to par, the haircut is the same as if the bond were a nonconvertible bond. The haircuts for nonconvertible bonds vary from 2% to 9% depending on maturity.

Question 86

``` Mutilated certificates do NOT constitute a good delivery between municipal securities dealers UNLESS they are validated by the: I. Delivering dealer II. Registered owner III. Paying agent IV. Trustee a. I or II only b. I or IV only c. II or III only d. III or IV only ```

Answer 86

D- Mutilated certificates do not constitute good delivery unless validated by the trustee, registrar, transfer agent, paying agent, issuer, or an authorized agent or official of the issuer.

Question 87

A broker-dealer is permitted to enter into temporary subordination agreements for purposes of engaging in underwriting activities if the duration of the agreement does NOT exceed: a. Six months b. Three months c. 45 days d. 30 days

Answer 87

C- Subordination agreements must have a duration of one year. There is, however, an exception to this requirement. A broker-dealer is allowed to enter into a temporary subordination agreement for purposes of engaging in underwriting activities. Temporary subordination agreements may not exceed 45 days in duration.

Question 88

The haircut on readily marketable equity securities is 15%; however, if there is a limited market for the security, with only two market makers providing quotes, the haircut required would be: a. 25% b. 30% c. 40% d. 100%

Answer 88

C- The haircut on an equity position with a limited market, where fewer than three market are makers providing quotes, is increased from 15% to 40%.

Question 89

``` The Reserve Bank Account maintained by a broker-dealer may contain which of the following securities? I. Cash II. U.S. government securities III. AA corporate bonds on a specifically approved list IV. Municipal Bonds a. I only b. I and II only c. I, II, and IV only d. II, III, and IV only ```

Answer 89

B- Broker-dealers may deposit only cash and U.S. government securities in the Reserve Bank Account.

Question 90

A broker-dealer must give a description of its policies regarding client privacy to: a. Anyone who requests it in writing b. All consumers at the time that they first transact business with the firm c. All customers at the time that they first establish a relationship with the firm d. All nonaffiliated third parties that have access to nonpublic client information Explanation:

Answer 90

C- Regulation S-P divides clients into customers and consumers. A customer is someone who has a continuing relationship with the firm. A firm must furnish all customers with a notice regarding its client privacy policies at the time the relationship with the firm is first established

Question 91

Which of the following statements is/are TRUE about when-issued transactions? I. Settlement date is set by mutual agreement of the parties to the trade II. Settlement date is the 5th business day following the trade date III. Dealer-to-dealer confirmations must be sent one business day following the trade date IV. Confirmations need not contain a settlement date a. I only b. I and III only c. I, III, and IV only d. II, III, and IV only

Answer 91

C- For when-issued transactions, settlement is the date agreed upon by the parties. Confirmations must be sent one business day following the trade date but need not contain a settlement date.

Question 92

If a broker-dealer has an entry on its books, short securities differences more than 30 days old for $90,000: a. Aggregate indebtedness increases b. Capital has already been charged c. The stock has already been bought in d. The broker-dealer will recall stock loaned to cover the shortfall

Answer 92

B- Capital has already been charged through a reduction in the retained earnings account. The fact that this entry is on the books of the firm means it has not yet been bought in, which the firm must do after 45 days under the Customer Protection Rule.

Question 93

Recommendations made by a member firm must disclose which of the following? I. The price at the time the recommendation is made II. Ownership by the firm of any options or warrants for the same stock III. Any gains or losses from trading the security for its own account within the last year IV. The size of any position it holds in the security a. I only b. I and II only c. II, III, and IV only d. I, II, III, and IV

Answer 93

B- When making recommendations to customers, a member firm must disclose the price at the time the recommendation is made. The firm must also disclose the fact that it makes a market in the particular security and that it owns warrants to purchase the stock, if such is the case. If the firm wishes to make a recommendation, it must disclose the basis for its recommendation or provide it upon request.

Question 94

You are the financial principal for Badaxe Brokerage and are closing the books for the second quarter of the year. Which of the following items would be added to last year's retained earnings when calculating the year-to-date retained earnings for this period? a. Commissions paid to salespersons b. Commission income for the period c. Prepaid expenses for the period d. Cash in the Reserve Bank Account

Answer 94

B- Commission income for the period is a revenue item that increases year-to-date retained earnings. Commissions paid to salespersons are expenses, which reduce year-to-date retained earnings. Prepaid expenses and cash in the Reserve Bank Account are balance sheet items that do not affect retained earnings.

Question 95

Which TWO of the following items would NOT need to be disclosed on a customer confirmation? I. CUSIP numbers assigned to the securities II. The capacity in which the firm acted III. The contra-dealer in the transaction IV. The broker-dealer's tax identification number a. I and II b. I and IV c. II and III d. III and IV

Answer 95

D- CUSIP numbers and the capacity in which the firm acted must be disclosed on customer onfirmations. 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.

Question 96

With regard to the haircuts on U.S. government securities and municipal securities, which TWO of the following statements are TRUE? I. The haircut on governments applies only to the net position. II. Longer maturities will have smaller haircuts than shorter maturities. III. Municipal securities haircuts are only on the greater of the long or short position. IV. Governments are subject to a maximum haircut of 15%. a. I and II b. I and III c. II and III

Answer 96

D- Haircuts on government securities are applied to the net position only. The haircuts range from 0% for maturities of less than 3 months to 6.0% for maturities of more than 25 years. Municipal securities are subject to a haircut on either the long or short position, whichever is greater. There is no deduction for the other side, even if it is more than 25% of the position that is subject to the haircut

Question 97

Which of the following percentages is not a published haircut value for equity securities according to SEC Rule 15c3-1? a. 15% b. 30% c. 40% d. 50%

Answer 97

D- According to SEC Rule 15c3-1, the haircut for an equity security with a ready market is 15%. If a limited market is deemed to exist for the security, the haircut is 40%. Where there is no ready market for the security, the haircut is 100%. In the case of equity securities being pledged as collateral on a secured demand note, the applicable haircut on those securities is 30%.

Question 98

In regard to common stock, fails to deliver are considered to be aged if they are: a. 4 days or more old b. 5 days or more old c. 15 days or more old d. 21 days or more old

Answer 98

B- Fails to deliver for common stock are considered to be aged, and therefore subject to a deduction in the computation of net capital, if they are 5 days or more old.

Question 99

What information need NOT be recorded by a municipal securities broker-dealer prior to settlement of the first transaction with a customer? a. Signatures of the representative and the principal introducing and accepting the account b. The customer's name and residence or principal business address c. Tax identification or Social Security number d. Written authorization from a customer with respect to discretionary accounts

Answer 99

C- MSRB rules require municipal securities brokers and dealers to obtain certain information from each customer. With the exception of the tax identification or Social Security number, this information must be obtained prior to the settlement of the first transaction.

Question 100

If the broker dealer transferred cash from the Reserve Bank Account into its operating account, the impact would be : a. Increase net capital b. No effect on net capital c. Increase aggregate indebtedness d. Decrease aggregate indebtedness

Answer 100

B- There would be no impact on net capital if a broker-dealer transferred cash from the Reserve Bank Account into the general operating account. The reason to make this transfer would be that the Reserve Formula indicated more debits than credits or that there was an excess on deposit from the prior period's calculation.

Question 101

Your firm has just recorded a fail to deliver on its books for an equity security with a contract price of $64,000. At the end of the day, the market value of the stock that is failed to deliver has dropped to $58,000. The required haircut would be: a. $6,000 b. $8,700 c. $9,600 d. $14,700

Answer 101

D- The haircut required would be the normal 15% of the market value (15% x $58,000 = $8,700) plus the amount that the market value of the position is less than the contract value ($6,000) $8,700 + $6,000 = $14,700.

Question 102

A restricted margin account can be described as an account: a. In which no purchases may be made b. In which the equity is below the required equity, according to Regulation T c. In which SMA may not be withdrawn d. Which is below the SRO minimum maintenance requirement

Answer 102

B- A restricted account is one in which the equity is below the equity requirement stated in Regulation T. For example, an individual purchases $10,000 of stock on 50% margin. The client deposits $5,000 and borrows the balance from the broker-dealer. The market price of the stock drops to $9,000. The equity is now $4,000 (market price of $9,000 minus debit balance of $5,000). The Reg T requirement on the current market value of $9,000 is $4,500 ($9,000 x 50%). The account is considered restricted since the current equity, $4,000, is below the current Reg T requirement, $4,500.

Question 103

A firm made a loan to an officer for $20,000 secured by 1,000 shares of stock. The current market value of the stock is 14.50. How is this loan treated in the firm's net capital calculation? a. $20,000 is an allowable asset. b. There is take a 15% haircut on the $20,000. c. $14,500 is an allowable asset. d. None of the above.

Answer 103

C- The Net Capital Rule provides that partially secured loans are allowable to the extent of the alue of the collateral. $14,500 of the loan would be allowable; the remaining $5,500 would be a deduction from net capital.

Question 104

Brighton Brokerage owns 5 unlisted call options on Chamberlain Corp. The strike price is 65. The stock is currently 63, and Brighton paid $3,000 to establish the position. The treatment of the calls for net capital purposes is: a. There is a haircut of 15% b. There is a 50% haircut c. No value is given d. The firm will deduct 20% of the value of the shares, less the out-of-money amount

Answer 104

D- This topic is addressed under adjustments to net worth in the Net Capital Rule. If an unlisted call or put is out of the money, it is given no value. In this case the value of the stock is less than the exercise price, therefore the calls are given no value.

Question 105

The State of New York has just sold $100 million of general obligation bonds that mature in 2010 to a syndicate managed by Thomas and Company, a municipal securities broker-dealer. Who is responsible for maintaining the books and records for the syndicate? a. Each syndicate member b. Thomas and Company, the manager of the syndicate c. The State of New York, the issuer of the bonds d. The National Securities Clearing Corporation

Answer 105

B- The managing underwriter of the syndicate is responsible for maintaining the books and records of the syndicate. These records, which must be preserved for six years, should reflect a description and aggregate par value of the bonds, the name and percentage of participation for each member of the syndicate, and the terms covering the information and operation of the syndicate. In addition, all orders for securities received by the syndicate, all allotments of securities and the price at which it was sold, the date and amount of any good-faith deposit made to the issuer, the settlement date with the issuer, the date of closing of the syndicate, and a reconciliation of profits and expenses of the account must also be recorded.

Question 106

In regard to subordination agreements under Rule 15c3-1, which of the following statements are CORRECT? I. Secured demand notes are collateralized by the pledging of cash and/or securities by the lender. II. Subordinated loans are agreements for the borrowing of cash. III. The collateral value of securities pledged on a secured demand note is the market value less the percentage deduction prescribed by Rule 15c3-1. IV. The minimum duration of a subordination agreement is three years. a. I and II only b. II and III only c. I, II, and III only d. I, II, and IV only

Answer 106

C- Secured demand notes may be collateralized by either cash, securities, or a combination of cash and securities. Subordinated loans are borrowings of cash only. In the case of the secured demand note, the value assigned to the securities that are pledged as collateral is the market value of the securities minus the appropriate haircut. The minimum duration of a subordinated loan is normally one year. Properly subordinated loans may be considered to be part of a broker-dealer's capital. If a broker-dealer wishes to consider the proceeds of a subordinated loan to be part of its equity as well as part of its capital, then the lender must be a partner or stockholder, the agreement may not provide for accelerated maturity, and the minimum duration must be three years

Question 107

In January of this year, your firm was a participant in a municipal bond underwriting. The entire issue was sold out by February 12, and the firm has recorded syndicate receivables on its books in the amount of $87,200. When preparing the FOCUS report at the end of April, the haircut on this receivable would be: a. $87,200 b. $34,880 c. $26,160 d. $13,080

Answer 107

A- Syndicate receivables on municipal underwritings that are older than 60 days are nonallowable assets for net capital purposes. Therefore, the haircut would be 100%. If the syndicate receivables were for a common stock underwriting, it would be disallowed after 11 days.

Question 108

Plural Capital is a broker-dealer with several offices throughout the country. At one of its offices, it conducts market-maker activities, as well as maintaining custody of customer securities. This office of Plural Capital: a. Must maintain net capital to protect the customers that are serviced from this location b. Must be designated as an office of supervisory jurisdiction (OSJ) and be inspected at least annually c. May not provide research reports to its customers if they were not previously submitted to FINRA for review d. May not accept new customer accounts if less than three supervisory individuals are registered as principals

Answer 108

B- Any office of a member that conducts market-making functions, or maintains custody of customer securities or funds, must be designated as an office of supervisory jurisdiction (OSJ). Other activities that would require an OSJ designation include acceptance of new accounts, final approval of advertisements and sales literature, and the structuring of public offerings.

Question 109

A firm has an open contractual commitment to underwrite stock in the amount of $2,000,000. The current market value of the stock is $2,300,000. The haircut on this position would be: a. $345,000 b. $300,000 c. $45,000 d. $15,000

Answer 109

``` C- The haircut on an open contractual commitment to underwrite stock is 15% of the market value reduced by any concession to the broker-dealer and reduced by any unrealized gain. In the example: 15% of market, $2,300,000 $ 345,000 Less any concession (none indicated) $ 0 Less the unrealized gain $ 300,000 Haircut $ 45,000 ```

Question 110

An individual convicted of insider trading four years ago has served time in jail. She arrives at your office looking for a position on the trading desk. You would inform her that: a. She could be hired but could not talk to the public. b. She may not be hired on a trading desk for at least six more years. c. She may trade munis or governments since these are exempt securities. d. Her order tickets must be approved in advance.

Answer 110

B- A convicted felon is barred from the securities business for 10 years. This type of ban is referred to as a statutory disqualification. However, a disqualified person may apply to an SRO to enter or reenter the securities industry before the 10-year period has elapsed. If the SRO grants the waiver, it must notify the SEC, which can overturn the waiver if it chooses.

Question 111

Bathgate Capital is a municipal broker-dealer active in the secondary market. Its liability regarding transaction assessments would be: I. Calculated on .0005% of the par value of bonds transacted with dealers II. Calculated on .0005% of the market value of bonds transacted with dealers III. Calculated on .005% of the par value of bonds transacted with customers IV. Waived if securities have a final stated maturity of nine months or less and $1,000,000 or less a. I and III only b. I and IV only c. II and III only d. III and IV only

Answer 111

B- In addition to underwriting assessments, MSRB rules provide for assessments in the secondary market, based on .0005% ($.005 per $1,000) of the total par value of interdealer and customer transactions. Transactions fees are not assessed on municipal securities that have a final stated maturity of nine months or less.

Question 112

A firm must give a new customer a copy of its privacy policies: a. By the end of the calendar year in which the relationship is first established b. When the customer first comes into contact with the firm c. At the time that the relationship is first established d. Before it discloses any nonpublic information to unaffiliated third parties

Answer 112

C- A firm must provide a privacy notice to a new customer at the time the relationship is first established.

Question 113

The maximum fine for individuals who are convicted of insider trading violations is: a. Three times the amount gained or loss avoided b. $5,000 fine and/or three years in prison c. $5,000,000 fine and/or 20 years in prison d. Censure and/or $2,500 fine

Answer 113

C- .Maximum criminal penalties under the Securities Exchange Act of 1934, including violations of insider trading rules, are a $5,000,000 fine and/or 20 years in prison for each violation. The maximum civil penalty that can be assessed is three times the amount gained or loss avoided.

Question 114

``` The trial balance of your firm at the end of the month shows the following trading account balances. Firm Trading Account Common stock -- Long $1,350,000 Common stock -- Short $900,000 The total haircut on the firm trading accounts would be: a. $84,375 b. $202,500 c. $286,875 d. $337,500 ```

Answer 114

C- The firm would be subject to a standard 15% haircut on the greater of the two positions ($1,350,000 x 15% = $202,500), plus an additional haircut of 15% on any amount that lesser side exceeds 25% of the value of the greater side. Long trading $1,350,000 25% = $337,500 Short trading $900,000 Excess $562,500 Haircut on the short position: ($562,500 15% = $84,375) Total haircut: $202,500 + $84,375 = $286,875

Question 115

``` What entry would make the following stock record balance? Customer long positions 5,000 shares Fail to receive 3,000 shares Securities borrowed 2,000 shares Bank loans 3,000 shares Securities loaned 600 shares a. A firm long position -- 1,000 shares b. The vault -- 400 shares c. Safekeeping -- 1,200 shares d. The transfer agent -- 800 shares ```

Answer 115

B- The long side of the stock record has 7,000 shares (customer long positions and securities borrowed). The short side has 6,600 shares (bank loans, fail to receive, and securities loaned). The only way to balance the stock record would be the vault (a location) entry of 400 shares.

Question 116

``` Which TWO of the following statements are TRUE concerning the annual fee paid by a municipal securities broker-dealer? I. It is due by December 31. II. It is due by October 31. III. The fee is $100. IV. The fee is $500. a. I and III b. I and IV c. II and III d. II and IV ```

Answer 116

D- The annual fee of $500 is due by October 31. The initial fee is $100.

Question 117

The stock loan department records indicate that the broker-dealer has borrowed $240,000 worth of common stock for delivery against customer short sales. When computing the net capital of the broker-dealer, the haircut on the securities borrowed would be: a. No haircut would be required b. 15% of the market value of the stock c. 50% of the market value of the stock d. 100% of the market value of the stock

Answer 117

A- When borrowing stock from another broker-dealer, the firm is required to deposit 100% of the market value of the borrowing in cash. This deposit will be marked to the market on a daily basis. Since the lending firm is holding the cash equal to the market value of the stock, no haircut would be required.

Question 118

A firm has an open contractual commitment to underwrite stock in the amount of $10,000,000 with a 10% concession. The current market value of the stock is $9,800,000. The haircut on the position would be: a. $1,470,000 b. $1,500,000 c. $1,270,000 d. $670,000

Answer 118

D- The haircut on an open contractual commitment to underwrite stock is 15% of the market value reduced by any concession to the broker-dealer and increased by any unrealized loss. In the example: 15% of $9,800,000 (market value) = $ 1,470,000 Less the concession (10% of $10,000,000) = $ 1,000,000 Plus the unrealized loss = $ 200,000 Haircut = $ 670,000

Question 119

Final settlement of corporate syndicate accounts must be effected by the syndicate manager: a. In a timely and orderly manner b. Within 60 days following the syndicate settlement date c. Within 90 days following the syndicate settlement date d. Based on the terms and conditions specified in the syndicate agreement

Answer 119

C- Corporate syndicate accounts must be settled by the syndicate manager within 90 days following the syndicate settlement date, according to the Uniform Practice Code of FINRA.

Question 120

If a broker-dealer's calculation of its reserve requirement under Rule 15c3-3 indicates a deficit, it must make an additional deposit into its Reserve Bank Account: a. Immediately b. No later than one hour following the opening of banking business on the business day following the computation c. No later than one hour following the opening of banking business on the second business day following the computation d. No later than the close of business on the second business day following the computation

Answer 120

C- Deposits required for the Reserve Bank Account under the provisions of Rule 15c3-3 must be made no later than one hour following the opening of banking business on the second business day following the computation

Question 121

All the following accounts would be included in total liabilities EXCEPT: a. Fails to deliver b. Fails to receive c. Customer credit balances d. Mortgage on real estate

Answer 121

A- Fails to deliver represent the contractual amount due from a buyer on securities that were not delivered on the settlement date. Fails to deliver is a balance sheet asset. The other accounts are all liabilities.

Question 122

At the beginning of each month, your new registered representatives are given a $5,000 draw against their commission production for the month. If commissions produced exceed their draw, they will receive the higher amount. If commissions do not meet the draw, they will receive the $5,000 as their commissions for the month. When calculating haircuts for net capital, the prepaid commissions would be: a. An allowable asset at 100% b. A nonallowable asset c. A subtraction from actual commissions to determine if they are allowable d. An entry not subject to any haircut

Answer 122

B- Prepaid expenses are non-liquid assets and therefore are not allowable when calculating net capital.

Question 123

Regarding the MSRB underwriting assessment for municipal securities dealers, which of the following statements are CORRECT? I. The fee when applicable is $.03 per $1,000 of face value. II. The fee is payable on all maturities underwritten if the final maturity is more than nine months. III. In a syndicate account the manager makes payment on behalf of the participants. IV. The fee is payable not more than 30 calendar days after the invoice is sent by the MSRB. a. II and IV only b. III and IV only c. I, III, and IV only d. I, II, III, and IV

Answer 123

D- Each municipal securities broker-dealer must pay an underwriting fee to the MSRB for issues with final maturities of more than nine months. The fee is equal to .003% ($.03 per $1,000) of the par value (face value). The fee is paid by the manager on behalf of the syndicate within 30 days following the date that the invoice is sent by the MSRB.

Question 124

Jerry is planning to open an account at Garcia Securities. Garcia must furnish him with a privacy notice: a. Only if it plans to disclose any of Jerry's private information to nonaffiliated third parties b. Before Jerry enters his first order in the account c. By the end of the year in which the account is opened and annually thereafter d. At the time he opens the account

Answer 124

D- Garcia must furnish Jerry with a privacy notice at the time that he opens the account. Jerry is establishing an ongoing relationship with Garcia Securities by opening an account with them. Thus, he is considered a customer under Regulation S-P and must receive a privacy notice at the time he opens the account (first establishes that ongoing relationship).

Question 125

Under the provisions of SEC Rule 15c3-3, the Customer Protection Rule, monies due the customer must be segregated in a Reserve Bank Account. The amount of money that is on deposit in this account when calculating net capital will be: a. Added to the aggregate indebtedness b. Deducted from the aggregate indebtedness c. A nonallowable asset d. Subject to a haircut

Answer 125

B- The balance of the cash already on deposit in the Reserve Bank Account will be a deduction from the aggregate indebtedness of the firm.

Question 126

A broker-dealer has liabilities greater than assets. In the stockholders' equity sections of its financial statement, the common stock account has a positive balance. Which of the following statements is TRUE? a. Paid in capital must be negative. b. The firm's assets are illiquid. c. Retained earnings are negative. d. The subordinated loans do not qualify for capital.

Answer 126

C- The fundamental accounting equation is Assets - Liabilities = Stockholders' Equity. This firm would have a negative stockholders' equity. Since the common stock account and the paid-in capital account must be positive, the retained earnings would have to be negative

Question 127

Which of the following statements is TRUE regarding the FINRA Manual? a. A copy of the Manual must be kept in every branch office of the firm b. A copy of the Manual must be made available to customers upon request c. The Manual must be sent to clients upon request d. Customer questions about interpretations of the Manual must be answered by branch managers

Answer 127

B- FINRA rules require members to make available a current copy of the FINRA Manual to customers upon request. The Manual may be maintained and made available in electronic format if the member chooses. There is no requirement to interpret the rules for customers.

Question 128

A broker-dealer has real estate carried on its books for $1,000,000. The market value is $1,800,000. The deduction from net worth is: a. $1,800,000 b. $1,000,000 c. $800,000 d. $0

Answer 128

B- The deduction would be $1,000,000, the carrying value of the real estate. Market value is disregarded. If there is a mortgage, the mortgage liability is deducted from the carrying value to determine the net deduction.

Question 129

``` Your Rule 15c3-3 Reserve Formula at the end of the month shows the following information. Cash in Reserve Bank Account $500,000 Total Customer Credits $2,545,000 Total Customer Debits $1,834,550 The amount that must be deposited in the Reserve Bank Account is: a. $210,450 b. $500,000 c. $710,450 d. $1,210,450 ```

Answer 129

A - The calculation of the reserve deposit is based on the difference between customer credits and debits. In this case $2,545,000 - $1,834,550 = $710,450, the amount required to be in the reserve account. Since the account already has $500,000 on deposit, the firm must deposit an additional $210,450.

Question 130

Of the following individuals who is/are considered a consultant under MSRB rules? I. A municipal finance professional working for the underwriter II. An attorney who has been paid a finder's fee III. An attorney who has been paid for legal advice IV. A lobbyist hired by the dealer to support specific legislation a. I only b. II only c. II and IV only d. III and IV only

Answer 130

B- Municipal finance professionals are excluded from the definition of consultant. Accountants, attorneys, and engineers compensated solely for professional services are also excluded. The lobbyist would be considered a consultant only if hired to retain municipal securities business.

Question 131

When reviewing the debit balances of the firm, your trial balance indicates that $1,045,000 is secured by customer assets. Which TWO of the following statements are TRUE regarding the reserve deposit computation? I. The $1,045,000 will be used to reduce the reserve deposit requirement. II. The $1,045,000 must be reduced by 1% when calculating the reserve deposit. III. The $1,045,000 must take a haircut of 15%. IV. The securities held by the broker-dealer have value greater than $1,045,000. a. I and II b. I and III c. II and III d. II and IV

Answer 131

D- When calculating the reserve deposit requirement, even though customer debit balances are secured, they must still be reduced by 1% to allow for returned checks and NSF payments to the firm. In order to be considered secured debits the firm will hold assets in excess of the amounts owed to it. These extra amounts account for market fluctuation of the securities that it holds.

Question 132

Which of the following transactions would constitute a good delivery? I. A transaction in an account opened under the Uniform Gifts to Minors Act, where the security is signed by the custodian II. A transaction in a guardian account, where the security is signed by the guardian III. A transaction in a third-party account, where the security is signed by an authorized third party IV. A transaction in a corporate account, where the security is signed by any officer a. I only b. II and III only c. I, II, and III only d. I, II, III, and IV

Answer 132

C- Choices (I), (II), and (III) would constitute good delivery. Choice (IV) is incorrect as only an officer specifically designated by the corporation may sign for the corporation.

Question 133

``` The trading account at Stevenson Securities Corporation shows the following positions. Long XYZ common stock, $220,000 Short MNO common stock, $75,000 Assuming a ready market for XYZ and MNO, the haircut for the trading account would be: a. $36,000 b. $33,000 c. $11,250 d. $21,750 ```

Answer 133

A- The haircut is applied to the greater side, which is the long value of $220,000. We use the standard 15% charge, for an initial haircut of $33,000. Since the lower position exceeds 25% of the value of the greater position, an additional charge is applied to the excess amount, which is $20,000. Taking 15% of this excess amount results in an additional haircut of $3,000, for a total trading account haircut of $36,000.

Question 134

``` A broker-dealer trial balance indicates the following: Fails to Receive Customer accounts $700,000 Firm account -- Unsold $250,000 Firm account -- Sold, no offset $150,000 When calculating the reserve deposit, the amount that must be included as a credit item is: a. $700,000 b. $850,000 c. $950,000 d. $1,100,000 ```

Answer 134

A- Only the $700,000 amount due to customers is included in the Reserve Bank Account computation. The other fails to receive relate to firm accounts and are not included in the Reserve Bank Account.

Question 135

Inside information would be considered properly released to the public under which of the following circumstances? I. A corporate executive discusses the information with several broker-dealers. II. A corporate executive discusses the information at a meeting of financial analysts. III. A corporation sends telegrams to all of its shareholders discussing the information. IV. A corporation releases the information to a financial news media, which disseminates the information to the public. a. IV only b. II and III only c. II and IV only d. I, II, III, and IV

Answer 135

A- If a corporation has material information, it must release it to the public before anyone may use the information to execute a transaction. It would not be deemed appropriate to release the information only to broker-dealers, financial analysts, shareholders, or any other limited group. To be considered public information, it must be provided to the financial news media, which must then have a chance to disseminate it.

Question 136

The responsibility for applying for a CUSIP number for a new municipal bond issue usually rests with the: a. Bond counsel b. Issuer c. Transfer agent d. Syndicate manager

Answer 136

D- The responsibility for applying for a CUSIP number for a new municipal bond issue is usually that of the syndicate manager.

Question 137

When conducting the last quarterly box count of securities in your possession, the records indicated a shortage of securities with a market value of $135,000. How will this shortage be treated in the reserve deposit computation? a. It will be ignored since it does not relate to customers. b. It will reduce the deposit requirement after 7 business days. c. The amount must be added to the net capital of the firm. d. The amount must be included in the Reserve Formula after 30 business days.

Answer 137

D- The full value of a short securities difference is included in the Reserve Formula under SEC Rule 15c3-3 after 30 business days.

Question 138

The underwriter of securities that are used to partially refund an outstanding issue is required to: a. Apply for a CUSIP number on the new issue b. Apply for a CUSIP number on the new issue and on any refunded portions of the old issue c. Inform CUSIP to delete any refunded portions of the issue from its system d. Provide all bondholders affected by the refunding with the opportunity to purchase the new issue

Answer 138

B- Underwriters involved in a refunding must apply for a separate CUSIP number for the refunding issue and a separate number for each part of an outstanding issue that is refunded to a particular date or price. There is no requirement to give an existing bondholder priority in a new issue.

Question 139

A broker-dealer's privacy notice must state all the following EXCEPT: a. The kind of personal information that the firm collects b. The names of any other financial institutions with which the firm is affiliated c. The fact that clients may opt out of having their information shared with others d. The types of third parties to which the firm may disclose information

Answer 139

B- A privacy notice must include the information contained in all choices except (b).

Question 140

Breaking up large transactions into smaller amounts in order to avoid federal reporting requirements is referred to as: a. Churning b. Structuring c. Twisting d. Frontrunning

Answer 140

B- Structuring is a technique that money launderers commonly use to avoid the reporting requirements. Large transactions are broken into smaller ones (usually under $10,000) in order to evade the regulations.

Question 141

The firm has pledged $375,000 of stock with a bank as collateral for customer margin accounts. When calculating the reserve deposit according to SEC Rule 15c3-3, this amount is considered: a. A customer secured debit balance b. An exclusion from the deposit calculation c. A customer credit item included in the deposit calculation d. A fail to deliver contract reduced by 1%

Answer 141

C- Loans obtained by the firm that use customer securities as collateral are credit items and are included in the reserve deposit computation.

Question 142

A registered representative has resigned from the firm. The fingerprint card of this employee must be retained for: a. Two years following resignation b. Three years following resignation c. Six years following resignation d. The lifetime of the firm

Answer 142

B- Fingerprint cards, as well as other employee records, including Forms U4 and U5, must be preserved for three years following an employees affiliation with a broker-dealer. This is in accordance with SEC Rule 17a-4, dealing with preservation of books and records.

Question 143

The trial balance of a broker-dealer contains the following information relative to customer accounts. Customer Debit Balances: Secured $720,000 Unsecured $72,000 Customer Credit Balances $126,000 When calculating the SEC Rule 15c3-3 reserve deposit, which TWO of the following statements are TRUE? I. Total customer debits in the computation amount to $792,000. II. The debits and credits will be shown as a single net number. III. The debits and credits are shown individually and are not netted. IV. The unsecured debits balances are not included in the computation. a. I and II b. II and IV c. I and III d. III and IV

Answer 143

D- Customer debits and credits are shown individually on each side of the trial balance and are shown in full, rather than as a single net item. Unsecured debits represent monies owed to the firm whereby there is no collateral available. An example might be customer purchases in a margin account for which a Federal Reg. T extension has been obtained.

Question 144

A broker-dealer may enter an order to sell a stock long if: I. The security is carried in the customer's account at the brokerage firm II. The broker-dealer has reason to believe that the customer owns the stock and will deliver it promptly III. The customer owns a currently effective call option on the stock and will exercise the call promptly IV. The customer owns a bond convertible into the stock and will tender the bond for conversion promptly a. I only b. II only c. I and II only d. I, II, III, and IV

Answer 144

C- A broker may mark an order "long" only if the stock is in the possession of the broker, or if the broker has reason to believe that the customer owns the stock and will deliver it promptly. A customer who owns a call option must have exercised the option prior to selling the stock long. A customer who owns a convertible bond must have tendered the bond for conversion prior to selling long.