Exam 4 Flashcards

Question

If a broker-dealer allows its customers to receive or transmit wire transfers, it must collect information about transfers for: a. $1,000 b. $2,000 c. $2,500 d. $3,000

Answer 1

D- Broker-dealers who transfer or transmit funds (wire transfers) must collect information about any transfer of $3,000 or more, including the names of the transmitter and the recipient. Firms must also verify the identity of the transmitters and recipients who are not established customers.

Answer 2

D- A firm must file a Suspicious Activity Report (SAR) whenever a transaction (or group of transactions) equals or exceeds $5,000 and the firm suspects one of the following actions: • The client is violating federal criminal laws. • The transaction involves funds related to illegal activity. • The transaction is designed to evade the reporting requirements (structured transactions). • The transaction has no apparent business or other legitimate purpose, and the broker-dealer cannot determine any reasonable explanation after examining all the available facts and circumstances surrounding the transaction.

Answer 3

B- The purchase payments associated with a contingency offering must be transmitted promptly to a bank that has agreed in writing to hold all such funds in escrow.

Answer 4

B- A broker-dealer's debt to equity ratio may not exceed 70% debt for a period greater than 90 days. Leveraged Capital's debt to equity ratio has been 75% debt ($420,000 / $560,000) and 25% equity for 50 days. If the debt ratio were not reduced, a violation would occur in 41 days.

Answer 5

B- A member firm must review its fidelity bond coverage annually based on its net capital requirement for the previous 12 months. If, after the review, the firm determines that there must be an adjustment to the amount of its fidelity bond, a change must be made. If the change is substantial, FINRA must be notified immediately.

Answer 6

C- If an introducing firm does not have a proprietary trading account, it must still enter into a PAIB agreement with its clearing firm in order to treat its deposit at the clearing firm as an allowable asset for capital purposes.

Answer 7

B- If a clearing firm will not enter into a PAIB agreement, the introducing broker-dealer would need to take a nonallowable capital charge only on its net equity at the clearing firm.

Answer 8

C- The introducing broker is required to notify its designated examining authority (in writing) no later than two business days following the effective date of a PAIB agreeme

Answer 9

A- Deferred tax liabilities are always excluded from aggregate indebtedness.

Answer 10

D- Under the net capital rule, nonapproved or nonsatisfactory subordinated loans from customers are included in aggregate indebtedness. Mr. Thornton is not treated as a customer because of his position at the firm. The loan is not treated as aggregate indebtedness. Although a nonapproved subordination loan from a customer would be considered aggregate indebtedness, once approved by the regulators, the loan would not be aggregate indebtedness.

Answer 11

B- The entire excess of liabilities over assets is deducted from net capital

Answer 12

B- Haircuts are based on market value. For nonconvertible preferred stock, the haircut is 10%.

Answer 13

A- Securities called for redemption within 90 days are not subject to any haircut.

Answer 14

C- Other broker-dealers are generally not viewed as customers for regulatory purposes; however, those maintaining a special omnibus account are considered customers.

Answer 15

C- The definition is important because a broker-dealer failing to promptly forward securities will be classified as a general securities broker-dealer (a clearing firm). This would change the minimum net capital requirement to $250,000.

Answer 16

C- A firm with a $5,000 net capital requirement may engage in simultaneous principal transactions without being subject to the dealer's minimum capital requirement of $100,000.

Answer 17

C- Firms offering contractual mutual fund plans (also known as wrap around mutual fund plans) must establish reserves for sales charge refunds. Due to the high initial sales charges associated with these plans, customers who cancel the plan (within 45 days of the plan's inception) are entitled to a refund of the sales charge. The reserves established for sales charge refunds are not part of aggregate indebtedness and are separate from the reserves established according to Rule 15c3-3.

Answer 18

C- The call is in-the-money; the in-the-money ($600 per contract) amount is added to net worth.

Answer 19

C- This call is out-of-the-money; no value is given, and there is no change to net worth.

Answer 20

D- Posting of the receipt of dividends and interest is required within two business days. This specific requirement is noted in 17a-3 of the Securities Exchange Act of 1934.

Answer 21

B- The net capital rule (15c3-1) specifies 85% of the amount payable (to Quicktrade) is excluded from aggregate indebtedness; the remaining 15% is treated as aggregate indebtedness.

Answer 22

B- When a change is made from the aggregate indebtedness standard to the alternative method, a broker-dealer is required to notify its designated examining authority and perform the reserve calculation on a weekly basis.

Answer 23

D- A firm conducting 10 proprietary trades in a year is considered a dealer, subject to a minimum net capital requirement of $100,000.

Answer 24

A- Customer credit balances attributable to either long or short sales are treated as aggregate indebtedness.

Answer 25

B- Canadian government bonds are subject to the same haircut schedule as U.S. government securities. For maturities of 25 years or more, the haircut is 6%.

Answer 26

B- The advance is a nonallowable asset and is subject to a 100% deduction rather than a 100% haircut. If the asset had been included as allowable, but subject to a 100% haircut, the tentative net capital of the broker-dealer would be overstated.

Answer 27

B- A firm excludes from aggregate indebtedness a fail to receive offset by a fail to deliver. Another offset to the fail to receive are securities borrowed from a broker-dealer. If securities are borrowed from a customer to effect delivery, aggregate indebtedness increases.

Answer 28

B- If a firm does not promptly forward securities, it is considered a clearing firm with a $250,000 requirement. A broker-dealer that has that specified level of net capital would not be subject to disciplinary action, but will be required to change its reporting structure.

Answer 29

B- The net capital rule permits introducing firms to function as selling group members (in firm commitment or best efforts underwritings) with $50,000 net capital. If the broker-dealer's role is that of a syndicate member (requiring a commitment of capital), the requirement increases to $100,000 net capital.

Answer 30

B- A temporary subordination is not available if a firm's AI/NC ratio exceeds 1,000 percent (10:1 ratio) or if net capital is less than 120% of the required minimum. The high percentage of AI to NC in this case will result in a denial for the request of a temporary subordination loan.

Answer 31

C- After 60 calendar days, receivables associated with a municipal joint trading account become nonallowable assets.

Answer 32

B- When a long securities difference exists, the securities held long do not contribute to net capital. When long securities differences are liquidated, the cash received does not contribute to the net capital of the firm. Since cash is an allowable asset, the cash received from the sale of the long securities difference must be subtracted and treated as a nonallowable asset.

Answer 33

D- The MSRB requires the spread to be disclosed. The spread consists of the manager's fee and the total takedown. The selling concession is a part of the total takedown.

Answer 34

C- Affirmative determination relates to a broker-dealer's delivery responsibilities in a short sale (marking order tickets short and determining that the securities are available for borrowing). The requirement is applicable to equity securities and equity equivalents. Affirmative determination does not apply to the sale of nonconvertible debt instruments.

Answer 35

D- The carrying firm must validate or take exception to the transfer request within three business days. Once validated, the account is frozen and open orders are cancelled.

Answer 36

B- Neither the ownership of the seat nor a receivable created from its sale is treated as an allowable asset.

Answer 37

A- There is no deduction necessary in this example. If the exercise price of a long call is equal to or less than exercise value of a short call (based on the same underlying security), a deduction is not required.

Answer 38

B- The broker-dealer has a proprietary position in a spread. In this case, the deduction required is based on the level of risk associated with the difference in strike prices. The stock can be called away from the broker-dealer at $45 per share. The broker-dealer may exercise its long call at $50 per share. The 5-point difference in strike prices amounts to a deduction of $500.

Answer 39

C- FINRA rules require that both firms deduct deficits in customer accounts from net capital.

Answer 40

D- A report must be filed within two business days if membership in an exchange is discontinued.

Answer 41

C- A clearing broker-dealer must send an annual report to the introducing member. The other statements are correct.

Answer 42

D- There is no requirement that the CEO of the respective broker-dealers have an annual discussion of the clearing agreement.

Answer 43

A- Credit balances in noncustomer accounts containing short positions are included in aggregate indebtedness.

Answer 44

B- Deferred tax liabilities are specifically excluded from AI

Answer 45

B- A broker-dealer with $5,000 net capital may accept mutual fund orders only on a subscription basis. The purchaser fills out an application (subscription) reflecting his intent to purchase and the firm will forward the customer's check to the fund distributor.

Answer 46

C- Under SEC Rule 15c3-3, sections (k)(1)(i) & (ii), a broker-dealer that limits activities to those described does not have to establish a Special Reserve Account.

Answer 47

B- All positions contributing to net capital are subject to undue concentration haircuts if the positions exceed 10% of tentative net capital. In this case, the trading, investment, and secured demand note holdings must be aggregated.

Answer 48

A- The CFO of the accounting firm is not a disclosure item in the filing.

Answer 49

B- Broker-dealers dealing only with other broker-dealers that are members of an exchange do not have to prepare an audited financial statement.

Answer 50

C- Dotcom has a reporting responsibility within two business days of a notice of nonreceipt.

Answer 51

B- Paramoor must notify the SEC within one business day.

Answer 52

C- In order to trace the securities, MNO must contact JKL, obtain the certificate numbers, and file a report with the SEC within one business day of receipt of the numbers.

Answer 53

B- DEF must notify the SEC within two business days of a notice of nonreceipt.

Answer 54

D- Form X-17F-1A is used to report events of theft, forgery, and recovery of securities previously reported missing. Certificates of deposit received without proper endorsement are returned to the sending broker-dealer under reclamation procedures.

Answer 55

D- Ordinarily, the carrying broker-dealer must freeze the account and cancel open orders. There is an exception for option positions expiring within five business days. These positions are not subject to a freeze.

Answer 56

C- If securities are at the transfer agent for more than 40 calendar days, they are not in control of the broker-dealer. The position must be verified.

Answer 57

D- The securities cannot be sold for legal reasons and are treated as a nonallowable asset.

Answer 58

B- The net capital (debt equity total) consists of subordinated loans, secured demand notes, and the equity capital of the firm. Subordinated liabilities cannot exceed 70% of the debt equity total. $600,000 / .7 = $857,000

Answer 59

B- Subordinated loans may not exceed 70% of net capital (for a period exceeding 90 days). $300,000 / .7 = $428,571 as a minimum level of net capital. $428,571 - $300,000 = 128,571. This is the minimum level of equity capital to remain in compliance with the net capital rule.

Answer 60

B- The broker-dealer requires approval of its designated examining authority (FINRA). The provision does not apply to withdrawals, advances, or loans of $500,000 or less. A withdrawal is not permitted if the broker-dealer's net capital would be less than 120% of the required minimum.

Answer 61

C- Only securities fully paid and marketable under the Securities Act of 1933 may be pledged as collateral for a secured demand note.

Answer 62

B- The maximum reduction of a secured demand note is 15%; after such reduction, net capital must still be maintained at 120% of the required minimum amount.

Answer 63

B- Broker-dealers that lend pursuant to a revolving subordinated agreement must take a capital charge for the full amount of the loan commitment. The amount actually lent to the borrower is immaterial to the capital charge taken. The capital charge will begin on the effective date of the revolving subordinated loan agreement and continue through the maturity date of the loan.

Answer 64

A- A long stock position plus a long call represents a bullish position. The other positions are examples of hedges for long equity or short equity positions.

Answer 65

B- When a broker has a fiscal year that does not coincide with the calendar year, an additional Focus Report (referred to as the fifth Focus Report) must be filed with the regulators.

Answer 66

C- The representative should document the trade by preparing an order ticket before the order is placed.

Answer 67

C- When three fingerprinting attempts are made without a useful record, additional attempts are not required. The employer must keep the fingerprint cards

Answer 68

C- Six years is the statute of limitations in all arbitration claims.

Answer 69

A- Firms are assessed a small percentage of their revenues to finance the activities of SIPC.

Answer 70

C- When an investor trades on margin, he is using the loan value of his holdings to finance his portfolio.

Answer 71

A- A phone operator directing calls to various personnel is performing a clerical function. The receptionist handing out sales literature is more likely to be asked questions associated with suitability determination. This is only permitted if the individual is registered.

Answer 72

B- GNMAs are subject to haircuts in a manner identical to U.S. government securities.

Answer 73

All firms are given 105 days after their fiscal year-end to provide audited financial statements to customers.

Answer 74

C- General and office maintenance issues are not covered in the clearing agreement; the other items would be found in the clearing agreement.

Answer 75

A- The broker-dealer must maintain a record of wire transfers of $3,000 or more. Wire transfers of $3,000 or more, received or directed outside the U.S., must be reported to the IRS.

Answer 76

B- General securities broker-dealers must maintain at least $250,000 of net capital. It may be higher based on other factors such as market making. Market making has a minimum net capital requirement of $100,000 and a maximum of $1,000,000. The specific net capital requirement is based on the number of issues in which the broker-dealer makes a market. When shares are priced greater than $5, $2,500 must be maintained per issue. 50 x $2,500 = $125,000. Although this is greater than $100,000, $250,000 is required as a general securities broker-dealer.

Answer 77

B- Arrow may withdraw the $11,000 difference between its requirement of $88,000 and the amount on deposit in the account ($99,000).

Answer 78

C- SEC Rule 17a-5 requires that broker-dealers furnish their customers with an unaudited statement of financial condition within 65 days of the date of the financial statement.

Answer 79

D- SEC Rule 17a-5 requires that broker-dealers furnish their customers with an audited statement of financial condition within 105 days of the date of the financial statement.

Answer 80

D- Broker-dealers must provide notice to the SEC when there is a change in the relationship between the broker-dealer and the independent public accountant. Notice must be provided by the broker-dealer within 15 business days of the accountant's notification in a case where the broker-dealer notifies the accountant that his services will no longer be required.

Answer 81

D- SEC Rule 17f-1 requires broker-dealers to make inquiry with the SEC whenever certificates are received from an unidentifiable source. This is conducted as part of the SEC Lost and Stolen Securities Program. The inquiry must be sent to the SEC within five business days of receipt of the certificates by the broker-dealer.

Answer 82

C- Several special accounts are identified and defined according to Regulation T. They include cash, memorandum, arbitrage, and nonpurpose credit accounts.

Answer 83

B- FINRA Rules require that all records and communications pertaining to a broker-dealer's business be retained for a specified period. In general, complaints received from customers, whether a traditional letter or electronic communication, must be preserved for four years in the firm's files. An exception to the four-year rule requirement applies to municipal complaints, which are maintained for six years.

Answer 84

C- A stock power is also known as a Power of Substitution.

Answer 85

B- In the case of proprietary accounts involving short stock positions and protective calls, the haircut is based on the short stock position. A charge of 15% is applied to the current market value of the short position for a haircut of $600 ($4,000 x .15). The haircut applied to the short position may not exceed the out-of-the-money amount of the option. Since the option is out-of-the-money by 10 points or $1,000, a haircut of $600 is appropriate.

Answer 86

C- The records of registered representatives must be preserved for three years following their departure from the broker-dealer firm.

Answer 87

C- In a contingency underwriting, funds received from customers are placed in an escrow account, pending successful completion of the underwriting. The escrow account is typically maintained with a bank or trust company.

Answer 88

C- FINRA rules require broker-dealers to establish and maintain a business continuity plan. This plan must be provided to FINRA upon request and must be reviewed annually by the firm. Modifications to the plan should be made based on changes to the firm's operations, structure, business, or location.

Answer 89

B- When creating a business continuity plan, FINRA provides minimum standards that must be observed. These include regulatory reporting, communications with customers, mission critical systems, and financial and operational assessments. Inspections of an Office of Supervisory Jurisdiction (OSJ) are not specifically indicated as part of the business continuity plan, but are requirements addressed elsewhere in FINRA supervisory rules.

Answer 90

B- Broker-dealers that conduct business with the public on the premises of a financial institution must provide a disclosure statement to customers. This statement indicates that the securities products purchased or sold are not insured by the FDIC, are not deposits or obligations of the financial institution, are not in any way guaranteed by the institution, and are subject to investment risk, including possible loss of principal.

Answer 91

D- FINRA rules pertaining to borrowing from and lending to customers stipulate that such activity must be specifically authorized according to the firm's written procedures. The lending or borrowing arrangement meets one of several criteria. One such criterion is that there must be a personal relationship between the customer and the registered representative, whereby the loan would not have been solicited or offered in the absence of such a relationship.

Answer 92

B- FINRA permits loans between registered representatives and their customers, provided that broker-dealer procedures have written provisions for this activity and one of several other conditions are met. These conditions include a requirement that there is an immediate family relationship between the parties

Answer 93

D- All broker-dealers are required to establish, maintain, and enforce a system of supervisory control procedures that test and verify that the firm's supervisory procedures are sufficient to carry out general oversight of all firm activities. The firm must designate a principal to FINRA whose responsibilities include carrying out this function. These procedures must contain provisions to review and monitor all transmittals of funds or securities between customers and third-party accounts, between customers and outside entities (banks, trust companies, etc.), between customers and locations other than a customer's primary residence (post office box, other address, "in care of" accounts, etc.), and between customers and registered representatives. Other points that should be addressed are changes in customer addresses and changes in customer investment objectives

Answer 94

D- Senior management must receive a report from the designated principal in charge of the firm's supervisory control system at least once each year. This report must provide details of any tests conducted and resulting changes made, based on an analysis of the firm's supervisory systems.

Answer 95

C- Each broker-dealer is required to designate and identify a principal to FINRA who will serve as chief compliance officer. The firm must communicate each year with FINRA that the firm has in place the appropriate procedures to monitor its compliance policies and procedures, and that the chief executive officer has consulted with the chief compliance officer during the past year to review the system.

Answer 96

C- As stipulated by industry rules, broker-dealers must file Focus Report II quarterly, by the 17th business day following the end of the calendar quarter. The broker-dealer must also review and, if necessary, update the executive representative designation within 17 business days after the end of each calendar quarter.

Answer 97

B- Option assignment records prepared by the broker-dealer must be preserved for three years following the date of the original preparation of the records.

Answer 98

A- In general, broker-dealers are required to send financial statements to customers on an annual and semiannual basis. Exceptions are permitted if an introducing broker-dealer forwards all customer transactions to a clearing firm on a fully disclosed basis, or the firm engages exclusively in the sale and redemption of redeemable shares of registered investment companies. There is also a provision that permits the firm to send a financial disclosure statement containing the broker-dealer's net capital and its required net capital, including a statement that customers may obtain the complete financial statements, at no cost, by contacting the broker-dealer's toll-free telephone number or by visiting its Web site. A broker-dealer may follow these procedures as an alternative to incurring the expense associated with sending customers the required financial statements.

Answer 99

D- Under Regulation SHO, Rule 200, a person is determined to own a security if he: • Or his agent has title to it (stock certificate) • Has purchased or entered into an unconditional and binding contract (on both parties) to purchase the security but has not yet received it • Owns a security that is convertible to or can be exchanged for the security and has tendered it for conversion or exchange • Has an option to buy or acquire the security and has exercised it • Has rights or warrants to subscribe to the security and has exercised them • Has a security futures contract to purchase the security and has received notification that the position will be physically settled and he will receive the underlying security • Has a net-long position in the security A nonconvertible security cannot be converted into an equity security, and thus, he cannot be considered an owner of such a security.

Answer 100

D- Under the order marking requirement, a broker-dealer must mark all orders for equity securities, over-the-counter and exchange-listed, as long, short, or short exempt. Orders are marked accordingly, under the following conditions. • Long -- The seller owns the security being sold, and it is either in the possession or control of the broker-dealer or it is reasonably expected that the security will be delivered no later than settlement day. • Short -- The seller owns the security being sold but does not reasonably believe that it will be in the possession or control of the broker-dealer prior to settlement day, or the seller does not own the security being sold or any sale that is effected by the delivery of a borrowed security.

Answer 101

A- There are three instances in which a broker-dealer may use borrowed securities to make delivery. These instances include times during which: • That broker-dealer is lending a security to another broker or dealer • That broker-dealer knows or has been led to believe that the seller owns the security being sold and will deliver the security by the scheduled settlement date, but the seller fails to deliver • Before a loan arrangement for a security to make delivery or before a fail to deliver, an exchange or a securities association discovers that the sale originated from a good-faith mistake, although the broker dealer used due diligence regarding the sale, and the requirement of a buy-in would create an undue hardship or the sale had been effected at an unacceptable price In instances where a broker-dealer knows or has been led to believe that the seller owns the security being sold and will deliver the security by the scheduled settlement date, but the seller fails to deliver, the broker-dealer must borrow securities or close out the short position by buying securities of a like kind and quantity. This close-out must take place within 35 days after trade date

Answer 102

C- In order to aid in the process of locating securities, the Commission has accepted the use of Easy to Borrow lists. These lists, which must be less than 24 hours old, provide reasonable grounds for belief that a security on the list will be available to be borrowed. The securities on the list must be readily available to avoid fails to deliver. Use of an Easy to Borrow list expedites the fulfillment of the locate provision

Answer 103

B- A threshold security is any equity security that is registered in accordance with Section 12 of the Securities Exchange Act of 1934 or for which the issuer must file reports in accordance with section 15(d) of the Act and: • There is an aggregate fail to deliver position for 5 consecutive settlement days at a clearing firm for 10,000 shares or more and equal to at least .5% of the total outstanding shares of the issuer. • A self-regulatory organization has included the security on a threshold securities list sent to its members. A broker-dealer must close out any fail to deliver in a threshold security after 13 settlement days.

Answer 104

D- In instances where a broker-dealer knows or has been led to believe that the seller owns the security being sold but the seller will not be able to deliver the security by the scheduled settlement date, broker-dealer must borrow securities or close out the short position by buying securities of a like kind and quantity. This close-out must take place within 35 days after the trade date.

Answer 105

A- Since the order will liquidate the entire position, it may be accepted even though it is below the minimum denomination.

Answer 106

C- Since the client is living outside the United States, the firm may retransmit the notice, but is not obligated to do so.

Answer 107

C- All of the choices are required on Form RTRS except the denomination of the bonds to be delivered.

Answer 108

A- The RTRS system is in operation each business day from 7:30 a.m. to 6:30 p.m. and members may submit reports to the system beginning 30 minutes prior to opening and continuing 90 minutes after the close of operation on each business day.

Answer 109

A- Under normal circumstances, transactions must be reported within 15 minutes of execution of the trade. On the first day of trading at the offering price of a new issue, the syndicate or selling group member may report trades to RTRS at the end of the business day.

Answer 110

A- An Assistant Representative -- Order Processing (Series 11) registered individual is not permitted to solicit orders or new accounts on behalf of his firm, nor provide investment advice or make recommendations to customers. Activities are restricted to taking orders on an unsolicited basis from customers and doing the necessary processing involved in the transaction. They are also not permitted to effect security transactions on behalf of the member firm (i.e., the firm's proprietary account).

Answer 111

D- There are two SRO rules regarding a broker-dealer's obligation, upon request, to provide its most recent statement of financial condition (balance sheet). One rule concerns other member firms (i.e., other broker-dealers) and states that if a member has an open transaction or a deposit of cash or securities at another member firm, that member is required to furnish its most recent statement of financial condition. The other rule applies to customers of a broker-dealer and defines a customer as a person who has cash or securities held by the broker-dealer. There is no requirement under this rule to provide such financial information to prospective clients.

Answer 112

C- The 5% Policy is a guideline, not a rule. It is possible in certain circumstances to justify higher markups, but conversely, there are times when even 5% is too much. A markup pattern of 5% or even less may be considered unfair or unreasonable under the "5% Policy." There are several factors to consider when determining how much is too much such as: the type of security involved, the availability, the price, the amount of money involved, disclosure to the client, and the pattern of markups. The policy applies to both listed and unlisted securities and any security sold under prospectus or offering circular (an underwriting at a specific public offering price) is exempt from the policy.

Answer 113

B- A municipal finance professional (MFP) is defined as any associated person primarily engaged in the activities of a municipal securities representative. A municipal securities representative's activities might include selling, trading, and underwriting municipal securities, acting as a financial advisor or consultant, providing research or investment advice, and communicating with public investors. It would not include the activities of retail salespersons. A violation occurs if the MFP is not entitled to vote for the official (for example, if the MFP does not live in the official's voting district) and the MFP makes a political contribution. A violation also occurs when contributions exceed $250 per election, even if the MFP was entitled to vote for the official. If a violation occurs, the dealer is prohibited from engaging in negotiated underwriting business with the issuer for two years starting from the date of the contribution.

Answer 114

D- Any associated person who solicits municipal securities business is defined as a municipal finance professional (MFP). (The term municipal securities business means participating in negotiated or competitive underwriting activities, negotiated remarketing services, or providing financial advisory or consultant services to or for an issuer.) Any MFP is subject to the MSRB's political contribution rules.

Answer 115

D- A $5,000 broker-dealer introduces accounts on a fully-disclosed basis to another firm and does not receive customer funds or securities. An introducing broker-dealer that receives customer securities is subject to a $50,000 minimum net capital requirement. With regard to new issues, a $5,000 or $50,000 introducing broker-dealer may engage in a best-efforts or all-or-none underwriting only. The broker-dealer may accept checks made payable to the issuer only, and must forward such checks to the issuer promptly. In order to participate in a firm- commitment underwriting, an introducing broker-dealer needs at least $100,000 of net capital, which would permit it to act as a dealer. Introducing broker-dealers, like those just discussed, may only do occasional trades for their own accounts (no more than ten per calendar year). They may not act as dealers or market makers.

Answer 116

C- Broker-dealers must file special notices with the regulators under Rule 17a-11 if an unusual financial or operational event occurs. This is called supplemental reporting. If a broker-dealer has a ratio of aggregate indebtedness to net capital exceeding 12 to 1, or if the dollar amount of net capital is less than 120% of its minimum net capital requirement, it must notify the SEC and its DEA within 24 hours. 120% of $250,000 is equal to $300,000. If a broker-dealer's net capital falls below its required minimum, it must notify regulators on the day the violation occurs.

Answer 117

B- SEC Rule 17a-3 requires broker-dealers to create specific records, while Rule 17a-4 requires those records to be retained for a number of years after their creation. Records may be divided into those that must be retained for the life of the firm, those that must be retained for six years, and those that must be retained for three years. Note that all records must be kept in an easily accessible place for the first two years of their existence. The list of the offices of a broker-dealer as well as the supervisory personnel responsible for establishing the firm's policies and procedures must be retained for six years. Order tickets and the applications of associated persons of a broker-dealer must be retained for three years. According to industry regulations, all advertising, and sales materials (marketing materials) must be retained for three years.

Answer 118

B- SEC Rule 17a-3 requires broker-dealers to create specific records, while Rule 17a-4 requires those records to be kept for a number of years after their creation. Records may be divided into those that must be retained for the life of the firm, those that must be retained for six years, and those that must be retained for three years. Note that all records must be kept in an easily accessible place for the first two years of their existence. Position records indicating long and short positions must be kept for six years and trial balances and customer complaints must be kept for three years. According to industry regulations, all advertising, and sales materials (marketing materials) must be kept for three years.

Answer 119

D- The regulators apply special rules to margin accounts of pattern day traders. A pattern day trader is any customer who day trades four or more times in a five-business-day period. Day-trading buying power is limited to four times the trader's maintenance margin excess, determined as of the close of the previous day. If a day trader exceeds her buying-power limitations, she must meet a day-trading margin call within five business days. During the time the margin call is outstanding, the account is restricted to buying power of two times maintenance margin excess.

Answer 120

C- When computing net capital, the market value of securities is reduced because of possible illiquidity. This reduction in value for net capital computation purposes is called a haircut. The standard haircut for common stock held in a broker-dealer's inventory is 15%. If the broker-dealer owns securities that are more liquid, such as Treasuries, the haircut is less than 15%. If the securities are less liquid, the haircut is larger than 15%. For example, an OTC equity security (such as a stock found on the OTCBB) with less than three market makers is considered to have a limited market, and is subject to a 40% haircut.

Answer 121

D- A broker-dealer is required to provide 30-day advance written notice of changes to be made to the terms and conditions under which credit charges (i.e., interest) will be made, excluding those changes required by law. This information is found in a broker-dealer's margin agreement.

Answer 122

C- Requirements for arbitration include the records pertaining to the case or issue at hand and filing fees paid by the party initiating the claim. Depositions are not part of the arbitration procedure. There is no requirement that a broker-dealer provide all of its trading/customer records.

Answer 123

A- According to SEC Rule 15c3-1, a self-clearing broker-dealer that acts as an executing broker in a prime brokerage relationship must have minimum net capital of at least $1,000,000. The minimum net capital for a broker-dealer that engages in prime brokerage is $1,500,000. The maximum ratio of aggregate indebtedness (AI) to net capital for a newly established broker- dealer is 8:1 (800% AI) during its first year of operation. A newly established broker-dealer would need $1,500,000 of net capital to support $12,000,000 of AI. An established broker-dealer has a maximum ratio of 15:1. Market makers are required to maintain net capital of $1,000 for each security valued at $5 or less and $2,500 for each security priced above $5, with a maximum net capital requirement of $1,000,000. In choice III, the net capital would reach the maximum of $1,000,000, rather than $1,250,000 (500 x $2,500).

Answer 124

A- The customer account transfer contract rules govern the policies and procedures required when a client of a broker-dealer moves their account to another member firm. Certain assets are defined as nontransferable, and the receiving broker-dealer is not required to accept delivery of these assets. Examples include: firm-specific or proprietary products, an asset of a third party (a mutual fund or annuity) with which the receiving firm does not have a relationship, an asset in bankruptcy, an asset that is an issue for which the proper documentation cannot be obtained (e.g., a foreign security), and limited partnership interests in retail accounts. Common stock of an issuer which is quoted on the OTCBB would not fall into this definition.

Answer 125

D- The customer confirmation must disclose the date and time of the transaction (or the fact that the time of the transaction will be furnished upon written request to such customer), the identity, price, and number of shares or units of such security purchased or sold by such customer; and whether the broker or dealer is acting as agent for the customer, as agent for some other person, as agent for both the customer and some other person, or as principal for its own account. If the broker or dealer is acting as principal, it must disclose whether it is a market maker in the security. The fee must be disclosed if acting as agent, riskless principal, or principal for an NMS security. Whether the order was solicited or unsolicited would be on an order ticket, rather than a confirmation.

Answer 126

D- Whether the order was solicited or unsolicited and do-not-reduce instructions would be recorded on an order ticket. Whether the firm acted as principal or agent and the commission charged would be disclosed on a confirmation.

Answer 127

A- According to SIPC, if a client has a margin account, the net equity is covered (the long market value minus the debit balance). In this example, the client is covered for $400,000 of securities. A client is also permitted (but not required) to pay off the debit balance and receive the full value of the securities. If the client paid $500,000, he would only receive $900,000 of securities.

Answer 128

A- An account title mismatch is a valid reason to protest a transfer. If the basic account information such as tax ID number, account title, or account number does not match the information on record at the carrying firm, the carrying firm may protest the transfer. The instructions can be amended with the necessary corrections, and the account transfer process can again be requested using ACAT (Automated Customer Account Transfer). The transfer may then be rejected or validated within one business day and transferred within three business days following the validation by the carrying firm

Answer 129

B- Eligible securities are transferred by the National Securities Clearing Corporation (NSCC) using the Automated Customer Account Transfer (ACAT). Under SRO rules, the carrying broker-dealer has one business day to either protest or validate a transfer request. If validated, the transfer must take place within three business days.

Answer 130

SROs, such as FINRA, may fine their member firms and employees for violations of their rules. Although FINRA publishes its Sanctions Guidelines publication, there is no limit as to the monetary fine that it may levy against a member firm or its employees.

Answer 131

D- Under SIPC rules, a broker-dealer must display the SIPC logo in a prominent place at its principal office and each branch office. The SIPC logo may, but is not required to, be displayed on customer statements, confirmations, annual reports, office supplies (e.g., stationery), checks, direct mail brochures, telephone market reports, and promotional items.

Answer 132

C- Under SRO rules, there must be a written agreement between a clearing or carrying firm and an introducing firm. The rule specifies the responsibilities of both firms and addresses certain disclosure and reporting requirements. Any customer of an introducing firm (whose account is carried on a fully disclosed basis) is required to be notified in writing of the existence of the agreement and the relationship between the two firms. The agreement must include a provision requiring the carrying firm that receives a written customer complaint regarding the introducing firm to notify the customer that it has received the complaint. In addition, the clearing firm must also submit promptly any written customer complaint it receives regarding the introducing firm or its employees to both the introducing firm and the introducing firm's designated examining authority (DEA).

Answer 133

B- If a client fails to pay for a security prior to its sale, a free-riding violation has occurred. The client may not use the sales proceeds to pay for the purchase since the client has made no payment to the broker-dealer. The broker-dealer is required to place a 90-day freeze on the account. This means that the customer must pay for all purchases in advance for a period of 90 days.

Answer 134

C- A prime brokerage arrangement involves a variety of services offered by a broker-dealer to an active trading firm, such as a hedge fund. Some of the services include securities lending, cash management, leveraged trade execution, and research. In addition to executing transactions for the hedge fund, the prime broker will also provide clearing services for trades executed through other broker-dealers used by the hedge fund.

Answer 135

C- According to SEC Rule 15c3-1, the net capital rule, market makers are required to maintain net capital of $1,000 for each security valued at $5 or less and $2,500 for each security priced above $5, with a maximum

Answer 136

A- Under SEC record-keeping rules, a record of assets and liabilities, income, expenses, and capital accounts must be kept for a minimum of six years. The other records mentioned must be maintained by a broker-dealer for a minimum of three years.

Answer 137

C- Anti-money laundering regulations do not require broker-dealers to file reports with their DEAs.

Answer 138

C- According to FINRA, all member broker-dealers must have an AML compliance program that includes policies and procedures reasonably designed to detect money laundering and to report suspicious transactions. The requirements include the designation of a compliance officer who is responsible for the program, an ongoing employee training program, and an independent audit function to test the program's effectiveness.

Answer 139

C- A broker-dealer is required to prepare a trial balance monthly as part of the process of calculating its net capital.

Answer 140

C- A customer can open a numbered account for reasons of confidentiality. However, the registered representative should open the account only if the customer signs a written statement acknowledging the fact that the account is the customer's account. This must be kept on file at the brokerage firm.

Answer 141

B- Aggregated data is not considered to be nonpublic personal information. Aggregated data is information that is blind and does not contain personal identifiers about a consumer. An example would be names, addresses, and account numbers. The privacy statement is sent by a financial institution to a client indicating how the entity obtains nonpublic personal information from a consumer and how she may opt out of the sharing of this information.

Answer 142

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.

Answer 143

D- Persons who pass on confidential information to others are called tippers. If the information passed on by a tipper is used by the recipient (the tippee), both parties have violated insider trading rules.

Answer 144

A - A Series 11 registered individual may be compensated by way of hourly wage or salary but not on a commission basis. These individuals may receive a bonus based on the firm's profits, but not based upon the number of accounts opened. Accounts may not be opened by a person with a Series 11 license.

Answer 145

C- The Regulatory Element of continuing education begins on the second anniversary after a registered person's initial registration. The Regulatory Element training reoccurs every three years after the first anniversary. Therefore, the registered person in the question has had Regulatory Element training on her second, fifth, and eighth anniversary. The next sitting for the training would be on her eleventh anniversary.

Answer 146

C- FINRA considers the content of its qualification examinations confidential. It is a violation of FINRA rules to: • Remove a portion of an exam from an examination center • Reproduce parts of an exam • Disclose parts of an exam to anyone • Receive parts of an exam from anyone • Compromise the contents of a past or present exam in any way Violators are subject to FINRA sanctions under the Code of Procedure. Sanctions could include the suspension or revocation of an RR's registration.

Answer 147

B- Registered personnel of a member firm are generally prohibited from borrowing money from, or lending money to, any customer. However, if the firm has written rules and procedures that allow borrowing and lending between registered personnel and their customers that meet the following conditions, the activities are permissible. • The customer is an immediate family member of the registered person. • The customer is a financial institution or other entity that engages in the business of providing credit, financing, or loans in the course of its business. • The customer and the registered person are both registered with the same member firm. • The customer has a personal relationship with the registered person wherein the loan would not have been solicited, offered, or given if the relationship did not exist. • The loan is based on a business relationship other than that of a member firm customer. There is no exception based on the type of customer -- for example, an institutional investor

Answer 148

D- If a FINRA member firm is conducting a public offering of its own securities it is required to deposit the funds in an escrow account. The funds may not be released or used by the member until the following conditions. • The member is required to notify FINRA immediately when the public offering has been terminated and settlement effected • The member is required to file with FINRA a net capital computation under the provisions of SEC Rule 15c3-1 as of the settlement date o If at the time of the calculation the firms net capital ratio is more than 10:1 (AI:NC) or, net capital fails to equal 120% of the minimum dollar amount required under SEC Rule 15c3-1 or, if the firm uses the alternative method its net capital is less than 7% of aggregate debit items as computed under SEC Rule 15c3-3, all funds received from the sale of securities must be returned in full to the purchasers and the offering withdrawn. The proceeds of the sale may be used in computing the firm's net capital. The firm is also required to disclose in the registration statement the date by which the offering is expected to be completed and the terms upon which the proceeds will be released from the escrow account.

Answer 149

C- FINRA Rule 5122 relates to a private placement of securities where a member firm issues the securities and conducts the placement on its own behalf. It is also referred to as a Member Private Offering (MPO). Due to potential conflicts of interest, when a member firm attempts to raise capital for itself or for a firm it controls, the member firm is required to provide a term sheet, or a private placement memorandum, or a disclosure document that contains certain disclosures. The rule provides two types of exemptions. One is based on the types of investors, and the other is based on the types of offerings. Types of investors exempt from the rule are: • Institutional investors, such as banks, insurance companies, investment companies (mutual funds), and investors with total assets of at least $50,000,000 • Qualified institutional buyers as defined under Rule 144A • Types of offerings exempt from the rule are: • Exempt securities defined under the Securities Act • Exempt offerings under Regulation S, or Rule 144A • Offerings of variable contracts • Offerings of securities in a commodity pool • Offerings of equity and credit derivatives • Offerings of unregistered, investment-grade debt, or preferred securities • Offerings of a member firm's securities sold in a public offering

Answer 150

C- Each office of supervisory jurisdiction (OSJ) and branch office that supervises one or more nonbranch locations (a supervisory branch) must be reviewed on an annual basis. Branch offices that do not supervise one or more nonbranch locations should be reviewed every three years and nonbranch locations should be reviewed periodically.

Answer 151

D- Each branch of a member is not necessarily an OSJ. If final approval of customer accounts or orders occurs in an office, that office must be an OSJ. Orders taken at branches that are not designated as OSJs must be reviewed and approved at an OSJ.

Answer 152

B- A branch office is any location where one or more of a firm's associated personnel regularly conduct the business of effecting transactions in, or inducing or attempting to induce the purchase or sale of, any security. The floor of an exchange is exempt from the registration as a branch office, as are some broker-dealer offices at banks, which may be used as offices of convenience (used occasionally and by appointment only)

Answer 153

A- Each office of supervisory jurisdiction (OSJ) and branch office that supervises one or more nonbranch locations (a supervisory branch) must be reviewed on an annual basis. Branch offices that do not supervise one or more nonbranch locations should be reviewed every three years and nonbranch locations should be reviewed periodically.

Answer 154

C- Registered personnel who pursue outside business interests and who will be compensated, or who participate in private securities transactions, must provide their employers with prior written notification. The employer may then approve or disapprove the participation. A registered person who has an existing account at her firm does not need to provide written notification to her employer for each transaction.

Answer 155

B- Registered representatives must provide written notice to their employing broker-dealer before participating in any business activities outside the scope of that person's normal relationship with the firm. This generally includes any type of outside employment. However, charitable work would not fall under the provisions of the rule.

Answer 156

B- Registered representatives who wish to participate in transactions outside the normal scope of business of their employer (private securities transactions) must notify their employer in writing. If the representative is to be compensated for the transaction, the employer must approve or disapprove in writing. If approved, the transaction must be recorded on the books of the employing broker-dealer. If the representative will not be compensated for the transaction, the employing broker-dealer must provide written acknowledgment of the employee's notice and may place conditions on the participation of the employee in the transaction.

Answer 157

B- If a member firm wishes to give a gift to an employee of another member firm, it may do so provided the amount does not exceed $100. No permission to give the gift is required.

Answer 158

D- Member firm personnel may not give or permit to be given a gift of material value exceeding $100 per recipient per year to personnel employed by another member firm. Exempt from the $100 limit are occasional meals, tickets to sporting and cultural events, reminder advertising (boxes of pens, key chains, etc.), and expenses related to legitimate business travel. In order for the activity to be considered an expense, the RR must attend the event, not give the tickets to another person(s). The value of two tickets ($130) exceeds the $100 limit. An exemption is provided if the gift is given to another family member for an event relation to a family relationship (a wedding).

Answer 159

D- The syndicate settlement date occurs when the issuer delivers (new issue) securities to the account of the underwriting syndicate. According to FINRA rules, the final settlement of the syndicate accounts by the syndicate manager is required no later than 90 days following the syndicate settlement date. Any delay beyond the 90-day settlement date requires the syndicate manager to provide notification to FINRA.

Answer 160

A- An individual who has filed a Form U4 with FINRA is required to update the form if any of the information originally filed has changed. Marital status is not required and therefore no change to the form is required. The other items are required disclosures on Form U4.

Answer 161

C- The stock record at a broker-dealer indicates the name(s) of the owners of shares held in street name, as well as the names of owners of shares held in the firm's vault. The stock record will also indicate the location of the shares (street name shares held by DTC and in the firm's vault in the name of the customer). The issuer's outstanding shares would not be relevant.

Answer 162

D- FINRA supervisory rules indicate that the clearing firm shall make available a list of reports, frequently called exception reports, to the introducing firm's Chief Executive Officer (CEO) and Chief Compliance Officer (CCO). These reports will enable the introducing firm to perform supervisory duties. In addition, the introducing firm's DEA, which is FINRA in most cases, must receive information regarding the availability of these reports. DTC is not involved in this process.

Answer 163

D- All broker-dealers are required to file an annual audit with regulators. A $50,000 broker dealer is an introducing firm with a FOCUS report Part IIA filing requirement. A clearing, or $250,000 broker-dealer, is required to file FOCUS Part I and Part II, as well as the annual audit. Form 10K is the annual report required of SEC reporting companies.

Answer 164

C- Deposits of cash exceeding $10,000 on a single day must be reported to the Department of the Treasury on FinCEN Form 104 (Currency Transaction Report (CTR) by the 15th calendar day after the transaction. There is no requirement to notify the customer or any other securities regulator.

Answer 165

B- The firm is not required to take a capital charge as an extension has been requested. Without the request, a $2,000 charge should be taken.

Answer 166

C- SEC Rule 17a-3 requires broker-dealers to create specific records, while Rule 17a-4 requires those records to be retained for a number of years after their creation. Records may be divided into those that must be retained for the life of the firm, those that must be retained for six years, and those that must be retained for three years. Note that all records must be kept in an easily accessible place for the first two years of their existence. New account records must be kept for six years after account closing. The fact that the client has moved is immaterial regarding record retention.

Answer 167

B- Under SEC Rule 17a-5, a broker-dealer that wants to change its fiscal year is required to file notice (not approval) with the SEC. The firm must also provide a detailed explanation of the reasons for the change and the firm's DEA (the designated examining authority which is usually FINRA) must approve the change in fiscal year.

Answer 168

B- A market maker is required to maintain a minimum dollar amount of net capital for each stock in which it makes a market. The amount required is $2,500 for each stock selling above $5 a share, and $1,000 for each stock selling for $5 per share or less, not to exceed $1,000,000. The Net Capital Rule states that in determining the number of markets made for net capital requirement purposes, the firm should determine the average number of such markets made in the 30-day period immediately preceding the computation period which is 350.

Answer 169

C- Under the Net Capital Rule, a firm may reduce its aggregate indebtedness for the amount on deposit in the Special Reserve Account, to the extent that it is required to be on deposit. In this example, AI includes customer credits, fails to receive for customers and taxes payable. The total amount of these items is $1.4 million. Then, subtract the amount on deposit in the Special Reserve Account of $900,000, which equals $500,000. The $400,000 of cash is not relevant.

Answer 170

A- The broker-dealer is obligated to notify its DEA in writing in order to operate under the Alternative Standard of determining its minimum net capital. SEC or DEA approval is not required and the minimum dollar amount required to operate under this provision is $250,000.

Answer 171

C- Under SEC Rule 15c3-1, the Net Capital Rule, a broker-dealer that is exempt from the provisions of SEC Rule 15c3-3 pursuant to paragraph (k)(2)(i) must maintain a minimum net capital of $100,000. This exemption is applicable for firms which carry no margin accounts, promptly transmit all customer funds and deliver all securities, does not otherwise hold funds or securities for, or owe money or securities to, customers and effects all financial transactions for customers through one or more bank accounts maintained exclusively for this purpose.

Answer 172

D- Introducing broker-dealers with a minimum net capital requirement may only do occasional trades for their own accounts (no more than 10 per calendar year). Clay is allowed 10 proprietary transactions at the $5,000 minimum net capital require. Once 11 transactions are reached, the capital requirement for a broker-dealer increase to $100,000, as the firm is now defined as a dealer.

Answer 173

D- Introducing broker-dealers with a minimum net capital requirement may only do occasional trades for their own accounts (no more than 10 per calendar year). Clay is allowed 10 proprietary transactions at the $5,000 minimum net capital require. Once 11 transactions are reached, the capital requirement for a broker-dealer increase to $100,000, as the firm is now defined as a dealer.

Answer 174

A- This type of activity may be conducted by a $5,000 broker-dealer. There is no limit as to the number of trades that may be conducted in this manner. These trades are referred to as riskless principal transactions.

Answer 175

A- Under SEC Rule 15c3-1, the Net Capital Rule, a broker-dealer that is defined as a municipal securities broker's broker is required to maintain a minimum net capital of $150,000. The firm may only transact business in municipal (not government) securities, and it may not maintain a proprietary account.

Answer 176

B- Net capital is computed by starting with net worth (equity) and making certain deductions based on the liquidity of the broker-dealer's assets. These adjustments can generally be classified into two general groups -- (1) haircuts on securities positions and (2) any other reductions, which are usually referred to as deductions. Insurance claims which after 7 business days from the date of the loss that are not covered by an opinion of outside counsel that the claim is valid, are deducted when calculating the firms net capital.

Answer 177

C- The haircut on a money-market fund is 2% of the market value.

Answer 178

B- Leveraged ETFs have maintenance requirements in excess of the typical SRO thresholds of 25% on long positions and 30% on short positions. The margin requirement on these securities can be computed by multiplying the portfolio leverage factor by the standard SRO maintenance requirement. In this case, the standard long requirement is 25% multiplied by a factor of 2, so the client must maintain a 50% margin.

Answer 179

B- Leveraged ETFs have maintenance requirements in excess of the typical SRO thresholds of 25% on long positions and 30% on short positions. The margin requirement on these securities can be computed by multiplying the portfolio leverage factor by the standard SRO maintenance requirement. In this case, the standard long requirement is 25% multiplied by a factor of 2, so the client must maintain a 50% margin.

Answer 180

B- In general, aggregate indebtedness (AI) includes liabilities that are not secured by a specific asset of the broker-dealer. Liabilities that are secured by a broker-dealer's assets are usually excluded from AI. Credit balances in customers' and noncustomers' accounts having short positions in securities, as well as credit balances in customers' and noncustomers' accounts are both defined as aggregate indebtedness. Amounts payable against securities loaned which have not been sold, as well as fixed liabilities adequately secured by assets used in the ordinary course of business are both excluded from the definition of AI. The following chart summarizes what is included and excluded from the definition of aggregate indebtedness. Included in Aggregate Indebtedness NOT Included in Aggregate Indebtedness • Fails to receive for the accounts of customers • Fails to receive for the account of the firm, resold • Fails to receive for the account of the firm • Loans collateralized by customer securities • Loans collateralized by firm securities • Securities loaned for the accounts of customers • Securities loaned for the account of the firm • Customer credit balances • Accounts payable • Taxes payable • Trading account of the firm - sold to customers (short trading account) • Short security difference over 30 days old • Subordinated loans • Fixed liabilities adequately secured by assets used in the BD's business • Liabilities on open contractual commitments

Answer 181

C- Leveraged ETFs have maintenance requirements in excess of the typical SRO thresholds of 25% on long positions and 30% on short positions. The margin requirement on these securities can be computed by multiplying the portfolio leverage factor by the standard SRO maintenance requirement. In this case, the standard short requirement is 30% multiplied by a factor of 3, so the client must maintain a 90% margin. $1,000,000 x 30% = $300,000. $300,000 x 3 = $900,000.