FC Chapter 16 Flashcards
What is the net capital requirement for an executing broker in a prime broker relationship?
1,000,000`
FINRA must be notified ____ days prior to the effective date of a satisfactory subordinated loan.
FINRA must be notified 30 days prior to the effective date of a satisfactory subordinated loan.
A subordinated loan may be included in a BD’s equity capital if the loan has an initial term of ______ years.
A subordinated loan may be included in a BD’s equity capital if the loan has a minimum life of 3 years. and a remaining term of at least 1 year
Who is NOT considered a customer of a BD?
Other BDs, officers, directors, general partners, or subordinated lenders of a BD
When retaining a new accounting firm, a BD must notify the SEC within _______________ days.
When retaining a new accounting firm, a BD must notify the SEC within 15 business days.
For underwriting purposes, a BD is allowed up to _______ temporary subordinated loans over ____ months.
For underwriting purposes, a BD is allowed up to three temporary subordinated loans over 12 months.
When is FOCUS Report Part II (for carrying BDs) and FOCUS Report Part IIA (for introducing BDs) required to be filed?
Within 17 business days of the end of the quarter
A temporary subordinated loan for underwriting purposes carries a maximum maturity of ____ days.
A temporary subordinated loan for underwriting purposes carries a maximum maturity of 45 days.
Excess margin securities are those whose value exceeds _____% of the customer’s debit balance.
Excess margin securities are those whose value exceeds 140% of the customer’s debit balance.
Within what period must any required adjustment be made to a firm’s fidelity bond?
Within 60 days of the anniversary of posting the bond
If making a market in securities priced at or below $5, the capital requirement per issue is $______.
If making a market in securities priced at or below $5, the capital requirement per issue is $1,000.
If a securities count is done by a person responsible for care and handling of securities, who supervises the count?
A person who is NOT responsible for the care and handling of securities
Identify two situations that may indicate a firm is experiencing operational difficulty.
Failure to maintain books and records on a timely basis or the inability to clear and settle its transactions promptly
A subordinated loan which may be included in the BD’s net capital computation is a ___________________________.
A subordinated loan which may be included in the BD’s net capital computation is a Satisfactory Subordinated Loan.
True or False: Both the semiannual and annual report must be audited.
False. Only the annual report is required to be audited.
Upon making changes to its fidelity bond, the BD must notify its DEA ________.
Upon making changes to its fidelity bond, the BD must notify its DEA promptly.
A net capital adjustment is required for short securities differences remaining unresolved after _______ business days.
A net capital adjustment is required for short securities differences remaining unresolved after seven business days.
What events will cause a BD’s net capital requirement to change?
A change in the complexity of business activities (non-carrying to carrying or carrying to prime broker) or change in AI
What is the net capital requirement for a BD who maintains client accounts, but does not hold client cash/securities?
100,000
A BD posts a __________ bond to cover the costs of fraud or securities lost in transit or transfer.
A BD posts a fidelity bond to cover the costs of fraud or securities lost in transit or transfer.
Define satisfactory subordinated loan.
A loan made to a BD whereby the lender agrees to subordinate its claim to all other claims on the BD
To begin using a form of electronic storage (other than CD-ROM), the BD’s DEA requires a ___-days advance notice.
To begin using a form of electronic storage (other than CD-ROM), the BD’s DEA requires a 90-days advance notice.
If a BD receives bearer bonds from an unknown source, what should the firm do?
Make an inquiry of the Securities Information Center
A carrying BD must file FOCUS Report Part I within _____ business days of month-end.
A carrying BD must file FOCUS Report Part I within 10 business days of month-end.
What is the net capital requirement for a BD that does not receive or hold customer funds or securities?
5,000
All documents are to be maintained readily accessible for the first ___ years.
All documents are to be maintained readily accessible for the first 2 years.
What items are shown on a securities ledger?
For each security, the ledger shows its physical location and the account that owns it.
What items are included in a BD’s aggregate indebtedness?
Funds payable to customers on demand, accounts payable, taxes payable
A transfer agent, the Securities Information Center (SIC), and FBI are notified together for what probable reason?
Stolen or counterfeit securities have been discovered.
From whom may a firm acquire securities and not be required to inquire of the SIC?
From the issuer or its agent, another BD, the FRB, or an existing client (if registered in her name)
True or False: Customer cash is included in a firm’s aggregate indebtedness.
True
Customer ledgers (account records) are maintained for ____ years.
Customer ledgers (account records) are maintained for six years.
If a BD’s equity is below ____% of its debt-equity total, a violation will occur if not corrected within ____ days.
If a BD’s equity is below 30% of its debt-equity total, a violation will occur if not corrected within 90 days.
The minimum net capital requirement for a market maker is $_________.
The minimum net capital requirement for a market maker is $100,000 (amount is based on the number of issues involved).
List some records that must be maintained for three years.
Trade tickets, confirms, trial balances, retail communication, correspondence, and employee records
Customer confirmations and statements are maintained for ______ years.
Customer confirmations and statements are maintained for three years.
To be considered a ready market stock, it must have at least how many market makers?
three
How often must a physical count of all securities in the firm be conducted?
Inventory counts must be conducted every quarter.
Free credit balance notices must disclose if funds are NOT ___________ and may be used in conducting the BD’s business.
Free credit balance notices must disclose if funds are NOT segregated and may be used in conducting the BD’s business.
When computing net capital, why are some assets carried at no value (deducted in full)?
Because some assets are extremely illiquid, such as fixed assets, pre-paid memberships, and intangibles.
To be assured that a withdrawal from the reserve account is allowed, what step must the BD take?
Compute the account’s required balance to be assured of an excess
A ____% reduction in excess net capital in the preceding three months is a sign of financial difficulty.
A 30% reduction in excess net capital in the preceding three months is a sign of financial difficulty.
Under the Customer Protection Rule, which securities must be segregated from all other BD assets?
All fully-paid and excess margin securities belong to customers
BDs are required to monitor the status of all fully paid and excess margin securities on a _______ basis.
BDs are required to monitor the status of all fully paid and excess margin securities on a daily basis.
True or False: A BD’s Special Reserve Account may include speculative equities of both domestic and foreign companies.
False. The account contains only cash and qualifying U.S. government securities.
Limited market securities are subject to a haircut of ____.
Limited market securities are subject to a haircut of 40%.
Firm-commitment underwriters and dealers must satisfy a minimum net capital requirement of $_________.
Firm-commitment underwriters and dealers must satisfy a minimum net capital requirement of $100,000.
A BD receives stock from an existing client that is registered in his name. Is the BD required to make an SIC inquiry?
No. Since the stock was received from an existing client, no inquiry is required.
On what is a BD’s minimum fidelity bond requirement based?
Its net capital requirement
How frequently do BDs conduct physical counts of securities in their possession?
Quarterly
The SEC must be notified ____ days prior to the effective date of a satisfactory subordinated loan.
The SEC must be notified 10 days prior to the effective date of a satisfactory subordinated loan.
True or False: BDs must account for all securities in its possession as well as those in transit or transfer.
True
What types of records are maintained for the life of the BD?
Documents that create the BD, such as partnership agreements and corporate charters
What types of items may be held in the Special Reserve Account?
Only cash and securities that are guaranteed or issued by the U.S. Government
If a firm’s net capital requirement is $250,000, a net capital violation occurs if its net capital falls below $_______.
If a firm’s net capital requirement is $250,000, a net capital violation occurs if its net capital falls below $250,000.
True or False: Securities in transit between offices of a BD are still considered under the BD’s control.
True
A BD’s outstanding subordinated debt may NOT exceed ____% of its debt-equity total for a period exceeding ____ days.
A BD’s outstanding subordinated debt may NOT exceed 70% of its debt-equity total for a period exceeding 90 days.
If an auditor for a member firm finds a deficiency, when must the BD notify the regulators?
A procedural deficiency is reported within 24 hours of discovery, and a corrective action plan is sent within 48 hours.
The percentage reduction (haircut) for equity securities with a ready market is ____.
The percentage reduction (haircut) for equity securities with a ready market is 15%.
What is the net capital requirement for a Prime Broker?
$1,500,000
What limitations are placed on an introducing BD with a $5,000 minimum net capital requirement?
It must introduce client accounts to another BD and may NOT hold client funds or securities.
True or False: BDs are required to notify clients that customer free credit balances are payable on demand.
True
When computing net capital, a _________ is an inventory adjustment that must be taken on certain assets.
When computing net capital, a haircut is an inventory adjustment that must be taken on certain assets.
True or False: Satisfactory subordinated loans are covered by SIPC.
False
When are BDs required to provide clients with information regarding their free credit balances?
Whenever account statements are provided to clients (at least quarterly)
When must a BD send its audited financial statements to clients?
Within 45 days of filing with the SEC and its SRO
Other than in a BD’s vault, what else is considered a good control location?
An SEC-approved depository (domestic/foreign), at a bank (free of encumbrance), or in transit between BD offices
A loan made to a BD which will be repaid after all other obligations is known as a ___________________.
A loan made to a BD which will be repaid after all other obligations is known as a subordinated loan.
Any required deposit in a BD’s Special Reserve Bank Account must be made within ___ business days after the calculation.
Any required deposit in a BD’s Special Reserve Bank Account must be made within two business days after the calculation.
If computing a BD’s net capital, when is an undue concentration charge assessed to the firm?
When the BD has a single position in excess of 10% of its tentative net capital
What limitation is placed on an investment companies/variable contracts firm with a $5,000 net capital requirement?
It may NOT receive client funds (subscription basis only).
Firms may arrange temporary subordinated loans for underwriting purposes no more than ___ times per year.
Firms may arrange temporary subordinated loans for underwriting purposes no more than 3 times per year.
An introducing broker who receives and forwards customer assets has a net capital requirement of $_______.
An introducing broker who receives and forwards customer assets has a net capital requirement of $50,000.
Assets not readily convertible into cash would receive a haircut of _____.
Assets not readily convertible into cash would receive a haircut of 100%.
If a firm’s net capital requirement is $250,000 and its actual net capital is $280,000, is any notification required?
Yes. Early warning notification is required if net capital is below 120% of the requirement (250,000 x 120% = $300,000).
If securities are discovered missing during a quarterly securities count, what is the reporting period?
No later than 10 business days from discovery
After an account is closed, for how long are customer account records maintained?
For 6 years after the account is closed
For how long is an employee questionnaire (Form U4) and fingerprint cards retained?
For 3 years after the representative leaves the firm
Are subordinated loans and loans collateralized by BD-owned stock included in a firm’s aggregate indebtedness?
No
Annual Report of Financial Condition is filed with SEC no
later than _______ from the date of the financial
statement.
Annual Report of Financial Condition is filed with SEC no later than 60 days from the date of the financial statement.
What is the net capital requirement for a dealer effecting more than ten trades in a calendar year for its own account?
$100,000
Why would an investment companies/variable contracts firm have a $25,000 net capital requirement?
Because it receives client funds (on a wire basis)
Who is not considered a customer of a broker-dealer?
Officers, directors, or partners of the BD, other BBD’ proprietary accounts, and subordinated lenders.
If making a market in securities priced above $5, the capital requirement per issue is $______.
If making a market in securities priced above $5, the capital requirement per issue is $2,500.
For their customers with free credit balances, BDs must provide notification at least ___________.
For their customers with free credit balances, BDs must provide notification at least quarterly.
What is a self-clearing BD’s minimum net capital requirement using either the basic or alternative computation method?
$250,000
If securities are missing and criminal activity is suspected, to whom and when must a firm report?
The firm must report to the FBI, the issuer’s transfer agent, and the SIC within 1 business day of discovery.
An established BD must report a net capital violation if its AI to NC ratio exceeds ______.
An established BD must report a net capital violation if its AI to NC ratio exceeds 15:1.
If a securities count is done by a person NOT responsible for care and handling of securities, who supervises the count?
A person whose responsibilities include the care and handling of securities
What are the three different methods used to determine a BD’s required net capital?
The greater of: minimum amount (based on firm type), amount based on market making, or amount based on AI-to-NC ratio
$_________ is the net capital requirement for a block positioner.
$1 million is the net capital requirement for a block positioner.
A satisfactory subordinated loan has a minimum maturity of ________.
A satisfactory subordinated loan has a minimum maturity of 1 year.
What terms are synonymous with the Daily Purchase and Sales Blotter?
Day book, diary, and book of original entry
If changes to the fidelity bond are necessary, a BD must address these changes within _______ of its annual review.
If changes to the fidelity bond are necessary, a BD must address these changes within 60 days of its annual review.
Short securities differences will have a 100% haircut (reduction) after how many days have elapsed?
28 days
BD 1 opens an omnibus account with BD 2 for the benefit of its clients. Is the account considered a customer of BD 2?
Yes, an omnibus account maintained by a BD on behalf of clients is considered a customer.
Excess margin securities are defined as securities whose value exceeds _____% of a client’s debit balance.
Excess margin securities are defined as securities whose value exceeds 140% of a client’s debit balance.
When must a BD notify the authorities if securities are discovered missing due to a securities count?
Within 10 business days
True or False: An officer or director of a BD is considered a customer.
False
If a BD has $100,000 worth of Regulation D stock, at what value may it be carried for net capital purposes?
$0. Regulation D stock (restricted stock) is deducted in full for calculating net capital.
Carrying BDs using the alternative method must maintain net capital of $________ or ___% of its aggregate debit items.
Carrying BDs using the alternative method must maintain net capital of $250,000 or 2% of their aggregate debit items.
True or False: A fidelity bond covers a BD against errors or omissions and bankruptcy.
False. A fidelity bond covers a BD against the fraudulent or negligent actions of its employees.
Generally, how often will a BD calculate the required deposit in its Special Reserve Bank Account?
On a weekly basis
Form U5 must be retained by member firms for ______ years.
Form U5 must be retained by member firms for three years.
If a securities count was completed on May 1, how soon may the next count be conducted?
Not before July 1 (60 days), or later than September 1 (120 days)
Profits, satisfactory subordinated loans, and liquidating securities for cash will make a BD’s net capital _________.
Profits, satisfactory subordinated loans, and liquidating securities for cash will make a BD’s net capital increase.
A carrying BD must file FOCUS Report Part II within ____ business days of the end of the quarter.
A carrying BD must file FOCUS Report Part II within 17 business days of the end of the quarter.
A BD that does not hold a customer’s cash or securities is known as a _____________.
A BD that does not hold a customer’s cash or securities is known as a non-carrying firm.
True or False: BD records may only be maintained in physical form.
False. Documents may be maintained in any format, but if an electronic media is used, the SRO must be notified.
When determining an asset’s carrying value for net capital purposes, on what is its haircut (reduction) based?
Liquidity
True or False: Assets in the Special Reserve Account are NOT included in a BD’s aggregate indebtedness.
True
When a net capital deficiency report is filed with the SEC and the firm’s SRO, which offices receive it?
The SEC’s Washington, D.C. office, the SEC’s regional office, and the SRO’s local office
A trial balance used to calculate net capital is prepared _________.
A trial balance used to calculate net capital is prepared monthly.
What percentage reduction in a BD’s excess net capital over the last three months would indicate financial difficulty?
30%
To avoid an undue concentration charge, a BD may not have one position exceeding ____% of its tentative net capital.
To avoid an undue concentration charge, a BD may not have one position exceeding 10% of its tentative net capital.
A BD must notify the SEC and its DEA when its net capital is less than _____% of its minimum requirement.
A BD must notify the SEC and their DEA when its net capital is less than 120% of its minimum requirement.
What is the role of the Securities Information Center (SIC)?
To maintain a database of lost, missing, stolen, or counterfeit securities that have been reported
When must clients of a BD receive the firm’s most recent balance sheet?
On request
According to a BD’s annual audited statement, its Statement of Financial Condition may be found in what two locations?
At the SEC and the BD’s office
If a firm discovers it is in violation of capital requirements, when must notification be made?
Immediately on the day of the deficiency
A carrying BD must file Focus Report Part I __________.
A carrying BD must file Focus Report Part I monthly.
List two records that must be maintained by a BD for six years?
Blotters and ledgers
What is the SIC?
Securities Information Center; created to identify and intercept stolen, forged or missing securities
If a fidelity bond is modified or cancelled, when must FINRA be notified?
Promptly
BDs must review their fidelity bond coverage __________.
BDs must review their fidelity bond coverage annually.
A carrying BD must file Focus Report Part II _________.
A carrying BD must file Focus Report Part II quarterly.
What is the percentage haircut (reduction) taken for fixed assets and restricted stock?
100%
A first-year BD must report a net capital violation if its AI to NC ratio exceeds _____.
A first-year BD must report a net capital violation if its AI to NC ratio exceeds 8:1.
How often may a small BD (one with less than $1 million in customer credits) compute its reserve requirement?
On a monthly basis
A net capital violation has occurs when a firm’s AI to NC ratio exceeds ____(established firm) or ____(first year firm).
A net capital violation has occurs when a firm’s AI to NC ratio exceeds 15:1 (established firm) or 8:1 (first year firm)
Copies of confirmations and statements are maintained for ___ years.
Copies of confirmations and statements are maintained for 3 years.
A BD posts a __________ bond to cover the costs of fraudulent or deceitful activities of employees.
A BD posts a fidelity bond to cover the costs of fraudulent or deceitful activities of employees.
Define aggregate indebtedness.
Liabilities of a BD that are NOT secured by its assets
If a firm’s net capital is below 120% of its minimum, or its AI to NC ratio exceeds 12:1, when is notification required?
Within 24 hours of discovery
BDs who do not clear or carry accounts would file __________________ on a quarterly basis.
BDs who do not clear or carry accounts would file Focus Report Part IIA on a quarterly basis.
A carrying BD in business for less than one year has a net capital requirement of $_________ or _____ of its A.I.
A carrying BD in its first year of business has a net capital requirement of $250,000 or 1/8 of its A.I.
For how long after an associated person leaves a BD are employee records maintained?
Three years
A BD is in violation of net capital standards when its net capital is below _____% of its required minimum.
A BD is in violation of net capital standards when its net capital is below 100% of its required minimum.
An ___________________ charge is applied to any position whose value exceeds 10% of the firm’s tentative net capital.
An undue concentration charge is applied to any position whose value exceeds 10% of the firm’s tentative net capital.
According to FINRA, when are member firms required to provide clients with a statement of financial condition?
Upon request
If a security is recovered after having been reported as lost/missing, when must the SIC be notified?
Within one business day of recovery
How often must a BD determine the status of its clients’ fully paid and excess margin securities?
On a daily basis
An introducing BD must file FOCUS Report Part IIA within ____ business days of the end of the quarter.
An introducing BD must file FOCUS Report Part IIA within 17 business days of the end of the quarter.
Market makers are not required to maintain more than $________ in net capital to support their market making activities.
Market makers are not required to maintain more than $1 million in net capital to support market making activities.
True or False: Form U5 is retained for six years following termination of employment.
False, Form U5 is retained for three years.
What is the net capital requirement for a BD that makes a market in 500 stocks priced at more than $5?
$1,000,000. Although 500 stocks times $2,500 = $1,250,000, the maximum net capital for market makers is $1,000,000.
When is a BD required to report operational difficulties?
Within 24 hours
When must a BD provide its clients with an unaudited financial statement?
Six months from the audited statement
To compute total capital for net capital purposes, what two items are included?
Book equity (plus or minus year-to-date results) and satisfactory subordinated loans
When viewing the AI to NC ratio, reporting begins when a firm’s ratio exceeds ______.
When viewing the AI to NC ratio, reporting shall commence when a firm’s ratio exceeds 12:1.
An RR discovers securities are lost/missing, when must she report this fact to the SIC and transfer agent?
Within one business day following a two-day search
Transactions of less than $_______ do not require an inquiry of the SIC.
Transactions of less than $10,000 do not require an inquiry to the SIC.
True or False: A BD’s Special Reserve Bank Account may be commingled with other BD accounts.
False. It must be kept separate from all other BD accounts since it is exclusively for the benefit of its clients.
With whom are FOCUS Reports filed?
The SEC and the BD’s primary regulator
What is the purpose of a fidelity bond?
To protect an employer from loss in the event that its employees cause damages through dishonest or negligent action
A firm may participate in best-efforts underwriting deals with a minimum net capital of $________.
A firm may participate in best-efforts underwriting deals with a minimum net capital of $50,000.
What net capital issues may require a member firm to curtail its business?
If a member’s net capital falls below 125% of its minimum capital requirement or its AI to NC ratio exceeds 12:1
For a subordinated loan to qualify as equity capital, what three provisions must be satisfied?
Made by a BD partner/stockholder, an initial life of three years (one year left), no accelerated maturity provision
In the Net Capital rule, liabilities that are not secured by BD assets are referred to as _________________.
In the Net Capital rule, liabilities that are not secured by BD assets are referred to as Aggregate Indebtedness (AI).
A limited market stock is one with fewer than _______ market makers.
A limited market stock is one with fewer than three market makers.
True or False: A BD’s omnibus account is considered a good control location.
True
When is FOCUS Report Part I required to be filed by a carrying BD and an introducing BD?
For carrying BDs, within 10 business days of month end; for introducing BDs, the report is not required
An established carrying BD has a net capital requirement of the greater of $_________ or _____ of its A.I.
An established carrying BD has a net capital requirement of the greater of $250,000 or 1/15 of its A.I.
What percentage reduction in a BD’s excess net capital over the past two months would indicate financial difficulty?
25%
A BD that has been in business for longer than 12 months is considered to be an ______________ BD.
A BD that has been in business for longer than 12 months is considered to be an established BD.
On what is a haircut on a security position based?
Liquidity. The less liquid the security, the greater the reduction in value used for computing a BD’s net capital.
True or False: A BD’s vault is NOT considered a good control location for client assets.
False. A BD’s vault is considered a good control location.
A ____% reduction in excess net capital in the preceding two months is a sign of financial difficulty.
A 25% reduction in excess net capital in the preceding two months is a sign of financial difficulty.
How often are blotters of all transactions, as well as records of cash and securities movements, created?
On a daily basis
What is the net capital requirement for a block positioner?
$1 million
True or False: The BD’s balance sheet must indicate both its required net capital and actual net capital.
True
If a BD makes a market in 300 stocks priced above $5.00, what is its net capital requirement?
$750,000
Define customer free credit balance.
Customer proceeds resulting from sales, dividends, or interest payments that have not been withdrawn or invested
True or False: A BD’s net capital requirement may be higher depending on its type of business.
True
The Special Reserve Bank account must be evaluated by a carrying firm on a _______ basis.
The Special Reserve Bank account must be evaluated by a carrying firm on a weekly basis.
In the debt-equity ratio, debt may not exceed ____% of the debt-equity total for more than ____ days.
In the debt-equity ratio, debt may not exceed 70% of the debt-equity total for more than 90 days.
Written customer complaints relating to municipal securities are retained for ____ years.
Written customer complaints relating to municipal securities are retained for six years.
A BD’s Special Reserve Account contains 100% of the difference between customer-related _______ and ________.
A BD’s Special Reserve Account contains 100% of the difference between customer-related debits and credits.
