Exam 3 Flashcards
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
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.
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
C- Commission expenses is an item of expense, not a balance sheet asset.
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
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
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
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.
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
D- If a security is not acceptable to a transfer agent, it will not be acceptable to a buying broker.
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
B-
A Suspicious Activity Report (SAR) should be filed for most suspicious transactions depending on the facts and circumstances surrounding the transaction
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
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.
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
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.
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
A- The Code of Arbitration does not provide for appeals by any party.
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
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.
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
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.
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.
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.
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
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.
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
A-
Commercial paper with less than 30 days to maturity is not subject to a haircut.
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
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.
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
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.
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
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.
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.
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.
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
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.
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
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.
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
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.
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
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.
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
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.
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
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.
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
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.
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
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.
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
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
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
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.
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
A- Fails to Deliver and the Trading Account – Long represent balance sheet assets.
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
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.
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
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.
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
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.
A broker-dealer must provide its clients with an updated privacy notice at least:
a. Monthly
b. Quarterly
c. Annually
d. Biannually
C- A broker-dealer must send an updated copy of its privacy policies to all its customers at least once a year.
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
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.
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
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.
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.
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.
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
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.
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
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.
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.
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.
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
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.
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
B- There is an exclusion to the undue concentration rule for debt positions that do not exceed $25,000.
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
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.
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
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.)
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
D- The discretionary account agreement must be retained by the broker-dealer for three years after the discretionary arrangement ceases to exist.
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
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.
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
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.
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
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.
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
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.
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.
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.
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
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.
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
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.
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
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.
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
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.
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.
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.
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
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.
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
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.
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.
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.
