Exam 4 Flashcards
A broker-dealer is required to disclose which TWO of the following items in the Financial and Operational Data of FOCUS Part II?
I. Corporate fails to deliver 5 business days or older
II. Corporate fails to deliver 11 business days or older
III. Municipal fails to deliver 15 business days or older
IV. Municipal security fails to deliver 21 business days or older
a. I and III
b. I and IV
c. II and III
d. II and IV
D- Under the Financial and Operational Data for the broker dealer, fails to deliver 11 business days or older for corporate securities, and 21 business days for municipal securities are disclosed.
Persons required to sign the FOCUS Report include the: I. Principal Executive Officer II. Principal Financial Officer III. Principal Operations Officer a. I only b. I and II only c. II and II only d. I, II, and III
D- All three of these designated officers are required to sign the FOCUS Report.
A broker-dealer calculating net capital under the alternative method has aggregate debit items of $12,600,000. According to Rule 17a-11, a report must be filed if the firm’s net capital falls below:
a. $250,000
b. $300,000
c. $302,400
d. $630,000
D- Under the alternative computation, if the net capital falls below 5% of the aggregate debits, an early warning notice must be sent to the appropriate regulatory authorities. In this case, 5% of $12,600,000 is $630,000
A broker-dealer computes net capital under the alternative method. It has aggregate debit items of $15,000,000. Which of the following would represent its minimum net capital requirement?
a. $250,000
b. $300,000
c. $325,000
d. $625,000
B- Under the alternative computation, minimum net capital is 2% of the aggregate debit items, as found in the reserve calculation. 2% of $15,000,000 is $300,000.
Engulf Securities has acquired Lethargic Investments Inc. on November 5. Lethargic had filed FOCUS Part II on October 17. Engulf is required to file FOCUS Part II no later than November 17. Which of the following statements is/are TRUE?
I. An audited statement of financial conditions will be required for the November 17 filing.
II. The November FOCUS Part II filing will not include Lethargic Investments.
III. The November FOCUS Part II filing must include Lethargic Investments.
IV. The auditor’s statement will be required based on the earliest fiscal year end of Engulf or Lethargic.
a. I and III only
b. II only
c. III and IV only
d. II and IV only
D- Engulf Securities’ required FOCUS Part II filing date is 17 calendar days after the quarter’s end (October 31). Engulf acquired Lethargic Investments on November 5. Engulf would not include Lethargic in the FOCUS Part II filing. When a broker-dealer acquires or succeeds another broker-dealer, the annual audited financial statement is required based on the earliest fiscal year-end of either broker-dealer.
Visigoth LLC is an introducing broker-dealer and has a minimum net capital requirement of $5,000. Visigoth clears through Charlemagne Securities Inc. A customer has made a payment for a security transaction. The check has been made payable to Visigoth LLC. Which of the following statements indicates the proper course of action?
a. Visigoth may accept the check and forward it to Charlemagne Securities, but must inform its customer, in writing, of the correct payment procedure.
b. Visigoth must return the check to the customer and instruct him to make payment directly to Charlemagne Securities.
c. Visigoth may accept and deposit the check provided it promptly transmits the funds to Charlemagne Securities.
d. Visigoth must notify Charlemagne Securities while the clearing member will decide whether the check must be returned or may be forwarded.
A- The net capital requirement of a broker-dealer that receives, but does not hold, customer funds or securities is $50,000. However, an allowance for the unusual cases (such as described in this question) permits a broker-dealer maintaining less than $50,000 net capital to accept customer’s checks for payment, which have erroneously been sent to the introducing broker-dealer. The broker-dealer who accepts the customer’s check is required to provide written instructions to its customer indicating the proper method of future payments.
Wireless Security Trading (WST) has begun an investor education campaign by purchasing a recreational vehicle and outfitting it as a working trading floor. The cost of the vehicle and equipment is $450,000. WST paid $150,000 and obtained a loan on the RV for $300,000. How will WST account for this investment?
I. A $150,000 nonallowable asset
II. A $450,000 nonallowable asset
III. No increase to aggregate indebtedness
IV. A $450,000 increase to aggregate indebtedness
a. I and III only
b. I and IV only
c. II and III only
d. II and IV only
C- Automobiles, boats, and aircraft are 100% nonallowable assets. Any broker-dealer liability secured by these assets will not be part of the broker-dealer’s aggregate indebtedness.
Flint, Stone & Sparks Investments is a general securities broker-dealer. Its most recent inventory revealed a short securities difference of $75,000 and a long securities difference of $10,000. It is now 30 days after the securities count. The securities representing the short difference are now valued at $80,000. The value of the long securities difference is now $7,000. Which of the following statements is TRUE?
a. The firm’s aggregate indebtedness has increased by $65,000.
b. The firm’s aggregate indebtedness is unchanged.
c. The firm’s net capital must be reduced by $73,000.
d. The record breaks must be reported to the broker-dealer’s DEA within 24 hours.
B- Unresolved short securities differences do not become part of a broker-dealer’s aggregate indebtedness after 30 days. The broker-dealer is required to establish a reserve to replace the missing securities. Replacement is required within 45 calendar days of the inventory.
All of the following statements regarding filing requests for extensions of a broker-dealer’s audited financial statements are TRUE EXCEPT:
a. The request must include a letter from the broker-dealer’s independent auditor
b. A request must be made at least three business days preceding the due date of the report
c. The request must state the amount of additional time requested, but may not exceed 45 days
d. The request must describe the measures to be implemented to assure there will be no further delay recurrences
C- A request for an extension may not exceed 30 days from the due date of the report. The report containing the audited financial statements is due within 60 days of fiscal year-end. An extension could extend the filing period to a maximum of 90 days past year-end. A broker-dealer is required to send a copy of its audited statement of financial condition to its customers no later than 45 days after the filing of its annual report
A broker-dealer must retain all of the following records for 6 years, EXCEPT:
a. Currency Transaction Report
b. Municipal securities customer complaints
c. Daybooks
d. Margin agreements
A- Currency Transaction Reports (CTRs) (reports for currency transactions exceeding $10,000) must be retained for 5 years. Municipal securities broker-dealers must retain customer complaints for 6 years, while under FINRA rules, records of written customer complaints must be retained for 4 years. Daybooks (also known as blotters, diaries, or journals) and customer agreements (which include margin agreements) are 6-year records
Which of the following actions, conditions, or verifications are required during a broker-dealer’s inventory count as specified in SEC Rule 17a-13?
I. A physical examination and count of all securities held
II. A verification of all securities in transit
III. An accounting of all securities held in approved depositories
IV. A verification of all securities subject to repurchase agreements
a. I only
b. I and II only
c. I, II and III only
d. I, II, III, and IV
D- The broker-dealer’s quarterly inventory (box count) according to Rule 17a-13 requires a physical count of all securities held by the broker-dealer. It also requires the verification of securities in transfer or transit, as well as securities held in a control location. This would include depositories. A fail to deliver, a fail to receive, and securities subject to repurchase or reverse repurchase agreements must be verified. Securities loaned, pledged, and borrowed must also be verified during the box count.
Which of the following forms is used for reporting to the SIC?
a. Form X-17f-1A
b. Form 17a-11
c. Form 15c3-3
d. Form X-17A-5
A- According to SEC Rule 17-f-1, reports to the Securities Information Center are required on Form X -17f-1A. Choices (b) and (c) relate to important SEC Rules. 17a-11 requires reporting for net capital violations, early warning and supplemental reporting for noncurrent books and records, and material deficiencies in the method of a broker-dealer’s accounting. Rule 15c3-3 is the Customer Protection Rule. There are numerous X-17A-5 forms. They are more commonly referred to as FOCUS reports.
Which of the following points are NOT associated with a minor rule violation (MRV)?
a. A maximum fine of $2,500
b. Egregious misconduct involving customers
c. Record-keeping irregularities
d. Technical deficiencies
B- Minor Rule Violations (MRVs) include technical violations of rules such as reporting and record-keeping deficiencies. The maximum fine is $2,500. Actions of an egregious nature involving customers are not minor violations and would begin with a prehearing conference followed by a hearing, decisions, and (possible) sanctions. It is also worth noting that FINRA does not issue injunctions, nor may its sanctions include imprisonment.
Half and Nelson Leverage Capital Inc. currently maintain long call positions in the following securities:
120 at-the-money contracts LHVZ Oct 65 @ 3.50
16 in-the-money contracts PLUM Nov 45 @ 12.10
320 out-of-the-money contracts SLIB Nov 70 @ 1.20
What is the broker-dealer’s required haircut on these positions?
a. $14,964
b. $38,400
c. $49,880
d. $99,760
C- Haircuts on long option positions are 50% of the market value of the premium.
120 contracts x $350 = $42,000 x 50% = $21,000
16 contract x $1,210 = $19,360 x 50% = $9,680
320 contracts x $120 = $38,400 x 50% = $19,200
Total haircut = $49,880
Andrews, Lowell, Barbican & Co., a registered broker-dealer has the following positions in J. Verne Publishing (JVP):
5,000 shares of JVP, current market value 67.50
50 short JVP covered calls, exercise price 65 @ 4.75
What is the total haircut on this stock and option position?
a. $11,250
b. $26,875
c. $38,125
d. $50,625
C- Covered calls require a 15% haircut on the stock position, which is reduced by the amount that the options are in-the-money. In this case the option contracts are in the money by 2.50 points, which amounts to $250 per contract. The calculations for the haircuts are:
5,000 x $67.50 = $337,500 x 15% = $50,625
$50,625 - ($250 x 50) =
$50,625 - $12,500 = $38,125
Total Haircut = $38,125
Stallion, Trotter and Gelding Investments have the following proprietary positions:
Long 1,000 shares of Horsefeathers Mattresses Inc. (HFM) at 42
Long 10 HFM Apr 40 puts @ 1.75
What is the required haircut based on this hedged stock position?
a. 0
b. $2,000
c. $6,300
d. $7,175
B- The haircut on a hedged position is the lesser of 15% of the market value of the stock ($42 x 1,000 = $42,000 x 15% = $6,300) not to exceed the out-of-the-money amount of the option. In this example, the maximum loss is 2 points per share. This amounts to a maximum potential loss of $2,000.
Ali, Frazier & Co. is an introducing broker-dealer that has a PAIB with the member firm that conducts its clearing. Ali, Frazier & Co. has the following proprietary positions in Manila Paper and Corrugated Box Co. (MPB): Short 500 shares of MPB at 37 Long 5 MPB Feb 35 calls @ 4.75 What is the required haircut for this stock and option position? a. 0 b. $1,000 c. $2,300 d. $2,775
A- A short stock and long call create a hedged position. The haircut is based on the lesser of 15% of the contract value of the stock position ($37 x 500 = $18,500 x 15% = $2,775) or the maximum potential loss for the position. Since the call option can be exercised at 35, the stock can be acquired at a price lower than the contract sale value of the stock (37). The position would result in a gain upon exercise of the option. As such, the haircut is 0.
Jay Quest is a general securities principal at Race and Banyan Investments. It is brought to his attention that today account G31-5668 deposited $3,000 at the OSJ at 9:35 a.m. At 11:15 a.m., $5,500 was deposited into the account. Finally, at 3:30 p.m., $7,000 was deposited into the account. All deposits were made in cash. Which of the following deposits must be reported?
a. None of the deposits
b. Each deposit over $5,000
c. The third deposit only
d. All of the deposits
D- Deposits of currency exceeding $10,000 on a single day must be reported to the Department of the Treasury on FinCEN Form 104. The deposit of amounts smaller than $10,000 would be aggregated and, in this case, reported as $15,500. The practice of depositing amounts below the reporting threshold is called structuring.
A member firm must review the adequacy of its fidelity bond based on its net capital requirement:
a. Annually, on the anniversary date of the issuance of the bond
b. Quarterly, on the fifteenth day of the last month in the quarter
c. Biannually, on a date set by FINRA
d. Only if the firm falls below its net capital requirement within the year
A- A member firm is required to review its fidelity bond annually on the anniversary date of the issuance of the original bond. The firm must review its highest net capital requirement for the past 12 months and use that amount to determine the fidelity bond requirement for the upcoming 12 months.
A brokerage firm with a net capital requirement of $250,000 must maintain a fidelity bond coverage of:
a. $250,000
b. $5,000,000
c. $12,000,000
d. $600,000
D- A broker-dealer that has a net capital of between $250,000 and $300,000 must maintain a minimum fidelity bond coverage of $600,000. The maximum amount of coverage is $5,000,000 for member firms whose net capital exceeds $12,000,000.
A brokerage firm with a net capital requirement of $50,000 must maintain a fidelity bond of:
a. $60,000
b. $100,000
c. $250,000
d. $600,000
B- A broker-dealer that has a net capital of less than $250,000 must maintain a minimum coverage which is the greater of 120% of the members net capital requirement or $100,000. 120% of $50,000 is $60,000, which is less than $100,000.
Prime Partners Brokerage has a tentative net capital of $2,500,000. In its inventory, Prime Partners is long 8,125 shares of Chester’s Chestnuts Inc. common stock at $40. What is Prime Partners’ obligation when computing its net capital?
a. Use the standard haircut for its inventory.
b. Use a smaller haircut for its inventory.
c. Make an undue concentration deduction.
d. Make a long securities difference record.
C- The standard haircut for common stock held in a broker-dealer’s inventory is 15%. However, if the inventory contains one security that accounts for a significant percentage of the market value of its total inventory, this puts the firm at extra risk if that security suddenly declines in value. Therefore, Rule 15c3-1 assesses an extra net capital charge, which is known as an undue concentration deduction. It applies if any long or short position is greater than 10% of the broker-dealer’s tentative net capital. The undue concentration rule requires an additional deduction on the amount in excess of the 10% threshold. In our example, Prime Partners has a tentative net capital of $2,500,000 and 8,125 shares of Chester’s Chestnuts, Inc., at $40 (a $325,000 value). The value of the common stock is greater than 10% of the tentative net capital.
Which of the following statements is TRUE regarding an introducing broker-dealer with a net capital requirement of $5,000?
a. It may accept customer funds and securities for immediate transfer.
b. It may not receive customer funds or customer securities.
c. It may accept customer funds but not customer securities.
d. It may accept customer securities but not customer funds.
B- An introducing broker-dealer that does not receive customer securities or customer funds is subject to a $5,000 minimum net capital requirement. An introducing broker-dealer that receives customer securities for immediate transfer to a clearing firm is subject to a minimum net capital requirement of $50,000. A broker-dealer that receives customer securities and customer funds is a general securities firm and is subject to a minimum net capital requirement of $250,000.
A fidelity bond does NOT cover which of the following incidents?
a. Forgery
b. Loss of securities
c. Errors and omissions
d. Fraudulent trading
C- FINRA members that are not members of an exchange are required to carry a blanket fidelity bond covering officers and employees that provides against losses (on premises or in transit), misplacement, forgery and alteration (including check forgery), loss of securities (including securities forgery), and fraudulent trading.
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
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.
Linda Holt is a registered representative at Peabody Financials. She has a client who makes transactions in his account that seem contradictory to his financial objectives. She thinks that the transactions may be related to illegal activity. Linda must file a Suspicious Activity Report when a transaction or group of transactions equals or exceeds:
a. $1,000
b. $2,500
c. $3,000
d. $5,000
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.
A broker-dealer must deposit payments associated with a contingency underwriting in an escrow account. Which of the following statements is TRUE?
a. The funds may be deposited in a money-market fund.
b. The funds must be deposited in an account established with a bank.
c. The funds may only be invested in T-bills.
d. The funds must be deposited in the Special Reserve Account.
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.
Leveraged Capital LLC is a general securities broker-dealer. On March 10, its net capital was $560,000 of which $420,000 was debt capital. 50 days later, the broker-dealer has the same debt to equity ratio. A violation of the debt to equity ratio will occur in:
a. 40 days
b. 41 days
c. 90 days
d. 91 days
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.
Broker-dealer Z receives notification from its insurance carrier that its fidelity bond policy is being cancelled. Which of the following statements is TRUE?
a. Z has 30 days to obtain coverage from another carrier in order to continue carrying customer accounts
b. Immediately notify FINRA
c. The CFO of Z must sign a letter distributed to customers of Z informing them of this occurrence
d. Z must take a capital charge on its next FOCUS filing
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.
Volcanic Investments does not have a proprietary trading account. It clears through Magma Securities. Which of the following statements is TRUE?
a. Volcanic Investments does not need to enter into a PAIB agreement in order for its deposits with Magma Securities to be treated as an allowable asset for capital purposes.
b. Magma Securities may never use the deposits made by Volcanic Investments for its own capital calculations.
c. Volcanic Investments must enter into a PAIB agreement in order for it to treat its deposit with Magma Securities as an allowable asset for capital purposes.
d. The deposit with Magma Securities will not be an allowable asset for either Magma Securities or Volcanic Investments if a PAIB agreement is not in place.
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.
Magma Securities clears for Volcanic Investments. Magma Securities does not permit PAIB agreements. Which of the following statements is TRUE?
a. Magma Securities is in violation of 15c3-1.
b. Volcanic Investments must treat its net equity at Magma Securities as a nonallowable asset.
c. Volcanic Investments may treat its net equity as an allowable asset for capital purposes.
d. Volcanic Investments must take a capital charge against all deposits held by Magma Securities.
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.
When a broker-dealer enters into a PAIB agreement with a clearing member, which of the following statements is CORRECT?
a. The introducing broker must notify its DEA five business days before the agreement will become effective.
b. The clearing member must notify its DEA five business days before the agreement becomes effective.
c. The introducing broker must notify its DEA within two business days of the agreement’s effective date.
d. The clearing member must notify its DEA within two business days of the agreement’s effective date.
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
How are deferred tax liabilities treated under the net capital rule?
a. Deferred tax liabilities are excluded from AI.
b. 50% of the liability is added to AI.
c. The deferred tax liability is treated as debt in the debt-equity total for net capital purposes.
d. Deferred tax liabilities are treated as AI if not secured.
A- Deferred tax liabilities are always excluded from aggregate indebtedness.
Frank Thornton is a senior officer of Geneva Capital. He provides $250,000 to Geneva as a subordinated loan, but it is not yet considered by regulators to be satisfactory for net capital purposes. Which of the following statements is/are TRUE?
I. Frank Thornton is considered to be a customer.
II. The loan is AI.
III. Frank Thornton is not considered to be a customer.
IV. The loan is not AI.
a. III only
b. I and II only
c. II and III only
d. III and IV only
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.
A person operates a broker-dealer as a sole proprietor. His personal liabilities exceed his personal assets. How is this treated under the net capital rule?
a. Personal liabilities have no impact on the broker-dealer’s net capital.
b. The amount of liabilities in excess of assets is deducted from net capital.
c. One-half of the excess of liabilities over assets is deducted from net capital.
d. The excess liabilities are included as a footnote in the Statement of Annual Financial Condition.
B- The entire excess of liabilities over assets is deducted from net capital
What is the haircut on cumulative nonconvertible preferred stock?
a. 10% of par value
b. 10% of market value
c. 15% of par value
d. The haircut percentage varies based on maturity
B- Haircuts are based on market value. For nonconvertible preferred stock, the haircut is 10%.
Winchell Brokerage has a long inventory position in Freeport Edison preferred stock shares. The shares have been called for redemption on November 15. In computing Winchell’s net capital as of October 31, the deduction for the preferred shares is:
a. 0
b. 2%
c. 10%
d. 15%
A- Securities called for redemption within 90 days are not subject to any haircut.
The term customer under the net capital rule would include:
a. A municipal broker-dealer
b. General, special, or limited partners
c. Broker-dealers that maintain a special omnibus account
d. Subordinated lenders
C- Other broker-dealers are generally not viewed as customers for regulatory purposes; however, those maintaining a special omnibus account are considered customers.
Promptly forward under the net capital rule means:
a. As soon as possible
b. Within 30 seconds
c. By noon of the next business day
d. By the end of the day
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.
Which of the following statements most accurately describes the activities of a broker-dealer with a $5,000 net capital requirement?
a. The broker-dealer may act as a market maker in bonds.
b. The broker-dealer may act only in the capacity of an agent.
c. The broker-dealer may purchase as principal from another broker-dealer to fill a customer’s order.
d. The broker-dealer may participate in a firm commitment underwriting.
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.
Caldwell Securities has established liability reserves subject to a contractual mutual fund plan. The accounting treatment under the net capital rule is:
a. The reserve is added to net worth
b. The reserve is subtracted from net capital
c. The reserve is excluded from aggregate indebtedness
d. Segregation of the assets in the reserve account according to Rule 15c3-3
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.
Use the following information to answer this question:
Fleming Brokerage is long the following unlisted option: Hightower Corporation April 42 call, purchased for 4, current premium 8.25.
The current market price for Hightower shares is 48. The treatment for capital purposes is:
a. Add $425 to net worth
b. Subtract $400 from net worth
c. Add $600 to net worth
d. Add $825 to net worth
C- The call is in-the-money; the in-the-money ($600 per contract) amount is added to net worth.
Use the following information to answer this question:
Fleming Brokerage is long the following unlisted option: Hightower Corporation April 42 call, purchased for 4, current premium 8.25.
Suppose the strike price of the Hightower unlisted call is 51 and the shares are selling at 48. What is the capital treatment?
a. Add 3 ($300) to net worth
b. Subtract 3 ($300) from net worth
c. No value is given
d. Add 20% of the market value of the shares to net worth
C- This call is out-of-the-money; no value is given, and there is no change to net worth.
When does a firm have to post the receipt of interest and dividends?
a. The day it occurs
b. Once a month
c. By noon of the next business day
d. Within two business days
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.
Z-Trade borrows $400,000 in stock from Quicktrade and lends the shares to Comstock Trading. What portion of the amount payable against securities loaned is a part of Z-Trade’s aggregate indebtedness?
a. 15%
b. 30%
c. 100%
d. Nothing
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.
Churchwell Brokerage had been computing its net capital under the aggregate indebtedness standard. The broker-dealer now elects to calculate net capital under the alternative standard. In order to do so, it must: I. Perform the 15c3-3 computation weekly II. Notify its DEA in writing III. File a FOCUS Part II IV. Maintain a Special Reserve Account for Customer Credit Balances a. III only b. I and II only c. II and III only d. III and IV only
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.
A firm is considered to be a dealer under the net capital rule if it effects:
a. 10 trades in a day
b. 10 trades in a week
c. 10 trades in a month
d. 10 trades in a year
D- A firm conducting 10 proprietary trades in a year is considered a dealer, subject to a minimum net capital requirement of $100,000.
Client Morton sells short 500 shares of Oxford and creates a credit balance. How is this treated according to the net capital rule?
a. It is added to aggregate indebtedness.
b. It is excluded from aggregate indebtedness.
c. The credit balance is subject to a haircut.
d. Cash received by the broker-dealer offsets the credit balance.
A- Customer credit balances attributable to either long or short sales are treated as aggregate indebtedness.
A bond guaranteed by the Canadian government with a 28-year maturity would have a haircut deduction of:
a. 5%
b. 6%
c. 15%
d. 20%
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%.
Worthington Securities provides a $40,000 advance to one of its salespeople. How is this treated according to the net capital rule?
a. It is an allowable asset.
b. It is subject to 100% deduction.
c. It must be added to aggregate indebtedness.
d. It is an allowable asset, subject to a 100% haircut.
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.
Jupiter Trading has a fail to receive of 600 shares of Maywood Industries, which is offset by securities borrowed from Bluestone Brokerage (a broker-dealer). The treatment of the payable is:
a. Added to AI
b. Excluded from AI
c. Added to 15c3-3 computation on credit side
d. Recorded on a subsidiary ledger
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.
If a broker-dealer does not promptly forward securities of customers or broker-dealers, it is considered:
a. Delinquent
b. A clearing firm subject to a $250,000 requirement
c. Subject to disciplinary action
d. Inadequately staffed
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.
Clayton brokerage, an introducing broker-dealer, is participating as a selling group member in a firm commitment underwriting. The minimum net capital requirement of the firm is:
a. $5,000
b. $50,000
c. $150,000
d. $250,000
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.
Caspian Securities is a general securities broker-dealer that intends to obtain a temporary subordination to participate in an underwriting of Chicago Rivet Inc. The broker-dealer’s net capital is $325,000 and AI to NC ratio is 1,100%. The DEA will:
a. Require daily computation of net capital
b. Deny the subordination
c. Grant the subordination
d. Require an amendment to the broker-dealer application
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.
Flanagan Partners recently participated in a municipal securities secondary trading joint account. When do receivables from the joint trading account become nonallowable assets?
a. After 30 calendar days
b. After 30 business days
c. After 60 calendar days
d. After 60 business days
C- After 60 calendar days, receivables associated with a municipal joint trading account become nonallowable assets.
Highridge Securities has recently conducted its quarterly box count. The inventory revealed a long securities difference. If Highridge liquidates the securities, what is the impact on net capital?
a. Net capital will increase.
b. The difference should be deducted from net capital.
c. The difference can be ignored
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.
Myers Capital is participating in a municipal negotiated underwriting for the Morganville VA Water and Sewer Authority. The $25.00 spread consists of: Manager's fee $8.00 Total takedown $17.00 Selling concession $10.00 What must be disclosed to customers? a. The manager's fee and concession b. Disclosure of the spread or its components is not required c. The total takedown d. The spread
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.
Affirmative determination is NOT applicable in the sale of which of the following?
a. Common stock
b. Preferred stock
c. Corporate bonds
d. Convertible preferred stock
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.
Upon receipt of a customer account transfer request, the carrying broker-dealer should first:
a. Liquidate positions to cover the debit balance
b. Freeze the account and cancel orders
c. Directly contact the customer
d. Validate or protest the transfer request within three business days
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.
McCutcheon Securities has sold one of its exchange seats for $1,300,000 dollars. The broker-dealer has a receivable for that amount. Under what conditions will the receivable be treated as an allowable asset?
a. If the seat is on a national exchange
b. Under no circumstances
c. If the buyer has net capital equal to the amount of the receivable
d. Once the buyer’s membership is ratified by the exchange
B- Neither the ownership of the seat nor a receivable created from its sale is treated as an allowable asset.
What is the deduction from net worth if the following positions are held in the proprietary account of a broker-dealer?
Long 1 Thermo May 40 call
Short 1 Thermo May 45 call
Thermo’s stock price is 42
a. 0
b. $500
c. 20% times $4,200 less the out-of-the-money amount
d. 20% times $4,000 plus the in-the-money amount
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.
What is the deduction from net worth in the firm's proprietary account for the following positions? Long Thermo July 50 call @ 2.15 Short Thermo July 45 call @ 4.55 a. 0 b. $500 c. The difference in premiums d. $4,500
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.
Haskins Trading (a broker-dealer) introduces customers to Lionheart Brokerage. The clearing agreement states that deficits in accounts are the liability of the introducing firm. Who must deduct the deficiency?
a. Haskins
b. Lionheart
c. Both
d. Neither
C- FINRA rules require that both firms deduct deficits in customer accounts from net capital.
Which of the following statements is TRUE if the membership of a broker-dealer in a national securities exchange has been discontinued?
a. The broker-dealer must notify its customers within two business days of the event.
b. The SEC must be notified within two calendar days.
c. All customer positions must be transferred to a clearing firm.
d. The broker-dealer is required to file a report with the SEC within two business days.
D- A report must be filed within two business days if membership in an exchange is discontinued.
When an introducing broker-dealer enters into a clearing agreement with a carrying broker-dealer, which of the following statements is NOT TRUE?
a. The agreement must specify if customers are customers of the clearing firm.
b. Any customer complaints received by the clearing firm from customers of the introducing firm must be sent by the clearing firm to the introducing firm.
c. The clearing member must send semiannual reports to the introducing member to assist it in carrying out its responsibilities under the agreement.
d. The agreement may allow the introducing firm to issue negotiable instruments directly to its customers, using instruments for which the clearing firm is the market maker.
C- A clearing broker-dealer must send an annual report to the introducing member. The other statements are correct.
Which of the following would NOT ordinarily be contained in a clearing agreement?
a. The responsibilities of both parties regarding extension of credit and anti-money laundering.
b. Annual reports to be sent by the clearing firm to the introducing firm
c. The procedures for handling any customer complaints that are received by the clearing firm if the complaints relate to customers of the introducing firm
d. A provision that the chief executive officer of each broker-dealer shall meet at least once each year to discuss the clearing agreement
D- There is no requirement that the CEO of the respective broker-dealers have an annual discussion of the clearing agreement.
Which of the following items is included in aggregate indebtedness?
a. Credit balances in noncustomer accounts containing short securities positions
b. Equities in noncustomers accounts that are segregated according to the Commodity Exchange Act
c. Monies payable to the extent funds are required to be on deposit and are on deposit in a special reserve bank account
d. Liabilities on open contractual commitments
A- Credit balances in noncustomer accounts containing short positions are included in aggregate indebtedness.
Which of the following items is excluded from aggregate indebtedness?
a. An accrued expense payable
b. A deferred tax liability
c. Dividends payable
d. Equities in noncustomer’s future commodities accounts
B- Deferred tax liabilities are specifically excluded from AI
A broker-dealer is a mutual fund distribution agent with a $5,000 net capital requirement. How does the firm complete the purchase transaction?
a. It may accept checks made payable to the firm from customers provided it promptly forwards payments to the fund company from the broker-dealer’s distribution account.
b. It will forward the client’s payment directly to the fund.
c. It may deposit the customer’s check in its escrow account and pay the fund from its escrow reserve.
d. It may wire the order to the fund company.
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.
A broker-dealer’s activities are limited to the purchase, sale, and redemption of investment company securities and interests in insurance company separate accounts. Which of the following statements is TRUE?
a. The broker-dealer is defined as a carrying broker-dealer, required to maintain $250,000 net capital.
b. The broker-dealer may make monthly determinations of its deposit requirements under SEC Rule 15c3-3.
c. The broker-dealer is not required to maintain a reserve account under SEC Rule 15c3-3.
d. This firm must file Focus Report Part I on a monthly basis.
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.
Utopia Securities has a trading account containing $200,000 of XYZ common stock and an investment account with $350,000 of XYZ common. In addition, the broker-dealer holds $550,000 of XYZ common stock as collateral for a secured demand note. When determining undue concentration:
a. Only securities in the firm’s trading account are considered
b. A value of $1,100,000 for XYZ common stock will be applied
c. The $550,000 lien on the note is excluded from undue concentration considerations
d. The shares in the investment account and 70% of the value of the securities pledged are aggregated
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.
Most broker-dealers are required to file audited annual financial statements and must designate the name of the accounting firm retained. The statement is identified as Notice Pursuant to Rule 17a5(f)(2). Which of the following items is NOT required on this notice?
a. The CFO of the accounting firm
b. The audit date of the broker-dealer for the year covered by the agreement
c. The name and address of the accounting firm
d. The registration number of the broker-dealer
A- The CFO of the accounting firm is not a disclosure item in the filing.
An exemption from filing an audited financial statement would be available to a broker-dealer who:
a. Introduces all customer accounts to a clearing firm
b. Deals only with broker-dealers who are members of a national securities exchange
c. Has effected fewer than 10 proprietary transactions in a 12-month period
d. Operates under section (k)(2)(i) of Rule 15c3-3
B- Broker-dealers dealing only with other broker-dealers that are members of an exchange do not have to prepare an audited financial statement.
Dotcom Securities has recently sent 30,000 shares of Kashmir Inc. to the Brownstein Transfer Company. It has since been notified that the shares never arrived. Which of the following statements is TRUE?
a. Brownstein should notify the authorities within two business days of Dotcom’s shipment date.
b. Brownstein must notify Kashmir Inc. that it has not received the company’s shares.
c. Dotcom must notify the authorities within two business days of notice of nonreceipt by Brownstein.
d. Dotcom must promptly notify Kashmir, which has two business days to send replacement shares to Brownstein.
C- Dotcom has a reporting responsibility within two business days of a notice of nonreceipt.
The Windsor Clearing Agency sent 5,000 shares of Schleps Inc. to Paramoor Securities. If the shares have not been received, Paramoor Securities:
a. Must notify Windsor. The sending agency must then notify the Commission within one business day
b. Must notify the Commission within one business day of receiving the certificate numbers from the sender
c. Should notify the sender, who must notify the Commission within two business days
d. Should contact the FBI and assist in the investigation
B- Paramoor must notify the SEC within one business day.
JKL Securities has physically delivered 100,000 shares of Matrix Inc. to MNO Securities. JKL was given a receipt for the delivery, but the shares cannot be located. Which of the following statements is TRUE?
a. JKL is required to notify the SEC within one business day of notice of misplacement.
b. MNO should notify the SEC only if they suspect criminal activity.
c. MNO is required to request the certificate numbers from JKL. A report to the SEC must follow within one business day of the receipt of the numbers.
d. JKL must notify the transfer agent within two business days.
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.
DEF Securities has delivered 100,000 shares of Robotic Inc. to PQR Securities. DEF does not have a receipt. PQR now claims the shares were never received. Which of the following statements is TRUE?
a. PQR must notify the SEC within two business days.
b. DEF must notify the SEC within two business days of notice of nonreceipt.
c. DEF must report to the SEC within one business day of notice of nonreceipt.
d. DEF must report to the SEC within two calendar days of notice of nonreceipt.
B- DEF must notify the SEC within two business days of a notice of nonreceipt.
Which of the following events are not reported to the Securities and Exchange Commission on Form X-17F-1A?
a. Counterfeit securities certificates received on premises
b. Recovery of securities certificates previously reported missing
c. Subordinated debentures alleged to have been removed from premises without authorization
d. Certificates of deposit received without proper endorsement
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.
Upon the validation of a customer account transfer request, which of the following securities positions is NOT subject to a freeze?
a. Call options expiring in 30 days
b. Put options having 60 days to expiration
c. A real estate investment trust
d. A put option that will expire at the end of the week
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.
Which of the following would be considered non-control locations under Rule 15c3-3?
a. Fails to receive, open for 25 days
b. Dividends receivable, open for 45 days
c. Securities in transfer for 45 days
d. Customer securities carried in a special omnibus account
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.
A broker-dealer is set up as a limited partnership. If one of the partners dies, what is the capital treatment of shares registered in his name while the decedent’s estate is in probate?
a. No haircut is taken.
b. A 30% haircut is applied.
c. A 100% haircut is applied.
d. The securities are treated as a nonallowable asset.
D- The securities cannot be sold for legal reasons and are treated as a nonallowable asset.
Delphi Securities is a clearing broker with subordinated liabilities of $600,000. What is their minimum net capital requirement?
a. $250,000
b. $857,000
c. $6,000,000
d. $10,000,000
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