Final tests Flashcards
What are minimum requirements for the business continuity plan (5)
Regulatory reporting
communications with customers
Mission critical systems
financial and operational assessments
Order entry, execution, and comparison
A broker-dealer has two open fail to deliver contracts. In one case the market value is higher than the contract value, and in the second situation the contract value is higher than the market value. If both fail to deliver positions are aged (at least five days old).
What statement is true regarding the haircut on these positions
Each position is evaluated separately, taking into account both the market value and the contract value.
The long side of the stock record indicates what
The ownership of the stock maintained by the BD
When is a broker-dealer required to provide its unaudited statement to its customers?
Within 65 days of the date the statement is prepared
For when issued transactions, what is true about the settlement date and confirmations (3)
Settlement date is set by mutual agreement of the parties to the trade
Dealer-to-dealer confirmations must be sent one business day following the trade date
Confirmations need not contain a settlement date
If a BD loans customer stock to another BD, how much of the amount payable is included in AI?
15%
What is the minimum required coverage for fidelity bonds
If NC < 250k, then greater of 100k or 120% of required NC
What are the first three NC brackets of the fidelity bond coverage and the max bracket
250k-300k = 600k coverage
300.01k-500k = 700k coverage
500.01k-1mil = 800k coverage
Max 12.01mil and above = 5mil coverage
Registration with the Public Company Accounting Oversight Board (PCAOB) is required for:
A broker-dealer’s independent accountant
Currency transaction reports must be kept for how many years
5 years
Which decision is there no appeal for
Arbitration panel
what items are exempt from the 100 dollar gift rule
occasional meals, tickets to sporting and cultural events, swag, business travel
If a broker-dealer does NOT carry customer funds or securities, but receives a customer check that’s made out to a third party, it should be forwarded to the third party:
By noon on the following business day
If the National Uniform Practice Committee has not determined a settlement date, settlement on when, as, and if issued transactions is settled on:
The business day following the day the seller gives the buyer written notice of intention to deliver the securities
When must the FOCUS report part 1 & 2 must be filed for clearing firms
Part 1 - within 10 business days of the end of the month
Part 2 - within 17 business days of the end of the quarter
Non-clearing firms only need to file part 2
How often do branch office procedures need to be reviewed by BD (4)
Supervisory branch: Annual
OSJ: Annual
Non-supervisory branches: 3 years
Non-branch locations: periodically
What are the following forms used for
X-17f-1A
17a-11
X-17A-5
X-17f-1A - for reporting to the SIC
17a-11 - reporting NC violations, early warning & noncurrent books and material deficiencies
X-17A-5 - FOCUS reports
Who can apply to the Commission to compute deductions for market and credit risk?
Firms that engage in derivatives transactions
When is a subordinated loan capital and when is it considered equity for the D/E ratio
A satisfactory subordinated loan is always part of capital (NC). To be satisfactory:
-in writing for specified amount, and BD will be used for business and subject to business risk
-lender must agree to subordinate to all other creditors
-min 1 year duration (no prepayments in first year)
-must be filed with FINRA 30 days and SEC 10 days prior
For a subloan to be part of equity for D/E ratio it must:
-lender must be partner or stockholder
-initial term of 3 years and have 12 months remaining
-no accelerated maturity
Converted wording debits for reserve calc
Customer debits: debit balances in customer cash and margin accounts, excluded unsecured accounts
Customer stock borrowed: Securities borrowed to execute short sales by customers and to make delivery on fail to delivers
Customer fail to deliver: Fail to deliver of customer securities not older than 30 days
Converted wording credits for reserve calc
Customer credits: Free credit balances and other credit balances in customer securities accounts
Bank loans - customer: Monies borrowed collateralized by securities carried for the accounts of customers
Stock loaned - customer: Monies payable against customers securities loaned
Fail to receive - customer: Customers failed to receive
MV’s of short security count differences over 30 days: same
Credit balances in firm accounts arising from short sales to customers: credit balances in firm accounts which are attributable to principal sales to customers
Additional credits:
MV of stock dividends, etc over 30 days
MV of securities in transit over 40 days
How often must a BD advise customers of its free credit balance under rule 15c3-3
Quarterly but must be advised every time a statement is sent.
If send monthly statements then must send monthly
If the firm segregates customer funds they do not need to send this notice
How often does a carrying firm have to send a customer margin balance form and what is included under FINRA 4521
Last business day of the month
All debit balances in margin accounts
all free credit balances in all cash and margin accounts
What is the maximum permitted deductible by FINRA on a fidelity bond policy
25% of the coverage amount
When must a fidelity bond be reviewed and for what period
Must review annually, for the highest NC in the preceding 12 months
Who is exempt from a fidelity bond
Floor brokers, floor traders, market makers
What is a reverse repurchase agreement deficit
The difference between the contract price and MV of the securities = the haircut (Total deficit)
Reverse: Contract > MV = deficit
What is the percentage deductions for a repurchase agreement deficit (3)
US treasuries: 5%
Agency or mortgage related: 10%
All others: 20%
What is required of the carrying firm when there is a carrying agreement between an carrying firm and introducing firm (4)
customers must be notified in writing of the existence of the agreement
Must provide list of all available reports to introducing
July 1 - must notify CEO and CCO in writing, list of all available reports (and send notice to FINRA)
must provide receipt of customer complaint in writing, and send complaint to introducing & SRO
Minimum contents of a clearing agreement include the responsibility for: (9)
Opening and approving accounts
Acceptance of orders
Transmission of orders
Execution of orders
Extension of credit
Receipt and delivery
Confirmations
Maintenance of books and records
Monitoring of accounts
In what situations can a transfer be protested (4)
- if there is no record of the account on the books
- If the transfer instructions are incomplete
- If the transfer instructions contain an invalid signature
- If the account title from carrying to receiving changes (ex: personal to joint)
In what cases are an asset non-transferable (4)
- the asset is a proprietary product of the carrying member
-The asset is a mutual fund and the receiving firm doesn’t maintain the relationship to receive the asset (selling agreement)
-The asset of a bankrupt issuer and the carrying firm does not possess the proper denominations, cannot re-register - The asset is a limited partnership interest
How is the haircut treated on US government securities that are transacted on the Federal reserve system
U.S. government securities positions are reduced by 25%.
Only for firms that maintain a min NC of 50mil
In what case is a BD not required to prepare records under 17a-3
- it clears all trades on a fully disclosed basis with a bank
- the bank provides a written agreement that the records are property of BD
-Bank notifies SEC with written notification that the records are available upon inspection
If BD does not have a fiscal year that aligns with the calendar year, what additional FOCUS must it file
The fifth FOCUS report must be filed with regulators
An OSJ includes any location where at least one of these activities occur
Market making and/or order execution
Structuring of public offerings or private placements
Maintaining custody of funds or securities
Final acceptance of new accounts
Review and endorsement of customer orders
Final approval of retail comms
Responsibility for supervising other branches
What is the examination cadence for the quarterly box count
A physical examination and count of all securities in its possession, including repo and reverse repo’s, at least once in each calendar quarter
What must be included in a quarterly box count
All securities that have been in the following situations:
in transfer, in transit
securities pledged, loaned
fail to receive and fail to deliver
and all other situations in the BD’s control but not possession
Must verify status where these situations have existed for over 30 days
What is the Reg T payment date
S+2
What is a BD supposed to do when a margin is not paid by S+2
Cancel the transaction, sell out the securities and freeze the account for a 90 day period
What is freeriding
When a customer makes a purchase and tires to meet the payment through the sale of the shares.
Customers are prohibited from paying for shares with the same stock
Not considered freeriding if the customer pays for the stock by S+2
What are the rules for COD transactions
Cash on delivery (DVP, deliver vs payment)
Securities are delivered to a customer’s custodian bank and are paid on delivery
35 calendar days are allowed to deliver and receive payment
When a customer opens a margin account, what is included in the margin risk disclosure (6)
Customer could lose more funds than deposited
Firm can force sale
Firm can sell securities without contacting the customer
Customer is not entitled to choose securities that are liquidated
Firm can increase its house margin requirements and is not required to provide advance notice
Customer is not entitled to extension of time on margin calls
What are the terms of an arbitration case (5)
The party that initiates the case is required to pay the fee
The arbitration panel will decide what evidence is required
The arbitration panel is not required to follow state or federal laws
Any awards granted must be paid in 30 days or penalties may be assessed
The determination by the arbitrators is final and binding
What are the conditions that FINRA considers when a firm is approaching financial or operational difficulty (6)
NC is less than 150% for more than 15 business days
AI ratio exceeds 10:1 for 15 business days
A reduction in excess NC of 25% in the preceding 2 months OR 30% in the 3 month period preceding a computation
Substantial change in the manner it processes business, which FINRA deems increases the risk of loss to customers
Books and records are not maintained
Inability to clear and settle transactions promptly
What is the rule if a firm wants to withdraw its excess net capital
It is required to obtain FINRA’s permission to withdraw capital, pay a dividend, or provide an unsecured advance that exceeds 10% of it’s excess NC
What is the Maintaining Qualifications Program
When an unregistered person under this program remains current with continuing education and becomes registered within 5 years
The then would not have to retake a qualifying exam
What if a unregistered person does not participate in the maintaining qualifications program
They have 2 years to re-register without having to retake a qualifying exam
How often is a general ledger account reviewed by a supervisor
As frequently as necessary, but at lease monthly
What happens if a RR does not complete the continuing education by dec 31
The registration will become inactive
The RR will be prohibited from performing any activity or receiving compensation
when must the close out of a fail to deliver on the threshold list occur under Reg SHO
No later than the trading day after the 13th consecutive settlement day (the morning of the 14th day)
In a best efforts, all-or-none underwriting, an escrow account is established with a
Trust company or bank
a self-clearing broker-dealer that acts as an executing broker in a prime brokerage relationship must have minimum net capital of
1,000,000
What are the three main suitability obligations under FINRA
Reasonable basis obligation - recommendation is suitable
Customer specific obligation - based on customer investment profile
Quantitative obligation - is series of transactions excessive
When orders need to be allocated across multiple accounts, when must the order allocation be received
By noon the next business day
If a 5k or 50k BD executes more than 10 trades for its own account, what is its required NC
100,000
When can a 5k BD participate in principal transactions and not increase it’s NC
Riskless principal transactions
When the principal transaction is in name only. The BD is purchasing from another BD on behalf of its customer.
The stock only passes through inventory briefly and the BD is never exposed to market risk
What are the requirements if a firm makes monthly reserve computations
AI: 8:1
Deposit 105%
Customer free credits do not exceed 1,000,000
What is a discretionary account (5)
A customer account where the RR is the authorized third party.
Needs signed power of attorney
each order must be approved by a principal
Each account must be reviewed frequently
A managers primary focus should be the investment objectives of the customer
What must a carrying firm do after the have received an account transfer request
Validate the request within 1 business day
Freeze the account
Must complete the transfer within 3 business days following the validation
What security order does not get cancelled when completing an account transfer
Options expiring within 7 business days
What are some requirements for an account transfer
Receiving firm must notify the carrying firm immediately of an account transfer request
The account must be free from liens to transfer
The customer must be informed if any assets cannot be readily transferred
If assets are non-transferable what does a carrying firm do
Wait for instruction from customer regarding disposition which may include:
Liquidation
Retention
Transfer and delivery to customer or third party
Distribution must be completed within 5 business days
Is a carrying firm permitted to contact the customer in the case of an account transfer
Yes
What is a negative consent letter
is a notification that alerts customers that there is a change. The client needs to respond within a specific time frame or else they have been deemed to accept the change
In what cases are negative consent letters allowed (5)
There is a merger or acquisition and the firm wants to transfer accounts to the new entity
BD seeks to enter into a clearing arrangement and wants to transfer customer accounts
BD is no longer in business and the clearing firm wants to transfer accounts to another member firm
BD is experiencing financial or operational difficulties and wants to transfer the accounts to another member
A financial institution has terminated it networking arrangement and BD wants to transfer accounts
What are information barrier procedures
A set of procedures for preventing transmission of confidential information across departments
Can be physical or procedural
Burden is on firm to show they are adequate
Insider trading violation consequences
Civil penalties: three times the amount gained or loss avoided.
Criminal penalties:
Individuals: Up to 5mil and imprisonment up to 20 years
Corporations: 25mil
How long must customer complaints be retained
4 years after resolution
Items that must be retained for 6 years (8)
Botters - purchase and sales, diary, journal, day book, original entry, receipts and deliveries
General ledger
Customer account ledgers
Stock record - position record, where securities are located and who owns
Listing of each office - name and title of each person and who can explain without delay
Listing of each principal
Account record - terms and conditions for customer accounts, new account form
Discretionary account form
Items that must be retained for 3 years (13)
Securities in transfer
Dividends and interest received
Borrowed and loaned
Fail to receive and fail to deliver
Long and short stock record differences
Agency and principal order tickets
Advertising and sales materials
Confirmations and comparisons
Options records
Trial balances
Customer communication
U4 - after termination date
Reserve account computations
Items that are retained for neither 3 or 6 years
4 years
Customer complaints
5 years
Currency transaction reports
When does an amount have to be deducted from net worth in the case of a fidelity bond coverage
When the deductible elected is greater than 10% of the coverage
How are asset and liability fair values measured using market data (3)
Level 1 - contemporaneous market prices in active market with observable inputs, not adjusted for liquidity factors
Level 2 - Less active market, quotes obtained from multiple sources. Adjustments may be made for liquidity factors
Level 3 - unobservable inputs. Need valuation models using assumptions. Adjustments made for liquidity
What is a CMIR
Currency and monetary instrument transportation report
Must be filed when cash is being physically transported into USA from abroad (above 10k)
What happens to the haircut if there is a concession on a open contractual commitment
The haircut is reduced by the amount of the selling concession
Contract value x concession percentage
When are equity partners unable to withdraw equity
Within 1 year of contribution without FINRA’s permission
If net capital falls below 5% of aggregate debit items in reserve formula
Net capital below 120% of minimum
AI ratio exceeds 10:1
Customer notifications and their required dates
Customer confirmation - on or before completion date
Customer statement: Quarterly
Customer margin balance form - Monthly
If no transactions on the account - quarterly
Free credit balances - Quarterly but needs to be on each statement sent
Customer free credit is payable on demand- Quarterly
Interest statement: account opening and quarterly
Margin risk disclosure statement: account opening
Annual report - 105 days after year end
Semi-annual Balance sheet - 65 days after period end
Customer SP statement - account opening and annually
Information regarding SIPC - account opening and annually
What is the purpose of a reserve bank account under 15c3-3
For the protection of customer funds
Additional capital requirements on reverse repo agreements (3)
10% of one of the below:
- excess MV of US treasury over 105% of contract price
- Excess MV of US agency or mortgage securities over 110% of contract price
- Excess MV of all others over 120% of contract price
All are including accrued interest
The exceptions that allow a BD to forgo the SHO locate requirements regarding acceptance of short sales are (3)
Short sales effected by a market maker in connection with a bona fide market making activities
Short sales accepted from another BD in which that BD accepts responsibility
Short sales of restricted securities under rule 144 in which the person intends to deliver as soon as the restrictions are removed (in 35 days)
If for more than 15 business days, NC is less than150% or AI ratio is more than 10:1 or NC falls below 5% of alternative NC what is the action FINRA can take
Financial difficulty
Limit expansion activities:
Increasing RR’s
Opening new branches
entering new lines of business
Exceeding average market making commitments
Block positioning or underwriting
If for more than 15 business days, NC is less than 125% or AI ratio is more than 12:1, or NC falls below 4% of Alternate NC what is the action FINRA can take
Reduction in business
Return all free credit balances
Deliver all fully paid securities
decrease inventory
close branches
no new customer accounts
restrict salary payments
accept unsolicited customer order only
what is the dollar threshold for reporting a SAR
Suspicious activity report
equals or exceeds 5k
What is the minimum net capital for a broker dealer participating as a selling group member in a firm commitment underwriting
50,000
What is the minimum net capital for a broker dealer participating as a syndicate member in a firm commitment underwriting
100,000
What activities does a fidelity bond cover (4)
Theft of customer funds on premises or in transit
Forgery and alterations
Security loss
Counterfeit currency
What is the haircut on securities that are called for redemption within 90 days
0%
In how many days after receiving securities must a firm make inquiries to the SIC to ensure they are not lost or stolen
5 business days
