Record-Keeping and Reporting Requirements

Question 1

Rule 17a-3 requires a broker-dealer to prepare which of the following records?
I. A memorandum of each order showing the time of the order, the account for which the order was entered, the time of entry, and the time of execution
II. Copies of all confirmations of purchases and sales for customers
III. A record of each cash and margin account containing the name and address of each customer
IV. A record of each customer’s securities position for the past five years, or for the life of the account if opened for less than five years, showing each purchase and sale
a. II and IV only
b. I, II, and III only
c. II, III, and IV only
d. I, II, III and IV

Answer 1

B- Choices I, II, and III are requirements of Rule 17a-3. There is no requirement to maintain a record of each customer’s securities position for the past five years.

Question 2

A broker-dealer using electronic storage media must:
I. Notify its examining authority at least 90 days prior to employing this media
II. Have the capacity to download records preserved on the electronic storage media
III. Be capable of producing easily readable images of the information
IV. Respond within five business days to any request from the Commission for facsimile enlargement
a. I only
b. I and III only
c. III and IV only
d. I, II, and III only

Answer 2

D- SEC Rule 17a-4 specifies the retention period for records and the form in which they may be held. If a firm is using electronic storage media it must immediately provide a facsimile enlargement to the Commission upon request.

Question 3

If securities reported as stolen or missing are subsequently recovered, a report must be filed:

a. Immediately
b. Within one day of recovery
c. Within two days of recovery
d. Within three days of recovery

Answer 3

B- If a broker-dealer discovers that securities have been stolen, it must report to the Securities Information Center, the appropriate law enforcement agency and the transfer agent. No report is sent to FINRA. The report must be made no later than the day following discovery.
If securities are missing but theft is not suspected, the broker-dealer has two days to find the securities. If they are not recovered in two days, a report of lost securities must be sent on the following day.
If securities previously reported as lost or stolen are recovered, a report must be sent with one day of recovery.

Question 4

Customer X deposits $3,000 in cash in her account at 9:30 a.m. At 5:00 p.m. on the same day, she deposits another $8,000 in money orders. The firm needs to file:

a. A CTR
b. A CMIR
c. A W-9 Form
d. Nothing

Answer 4

A- The firm needs to file a Currency Transaction Report (CTR) FinCEN Form 104 since customer X deposited more than $10,000 in cash and cash equivalents during the course of one business day. ($3,000 plus $8,000 equals $11,000.) A Currency and Monetary Instrument Transportation Report (CMIR) must be filed whenever anyone physically transports or receives currency or monetary instruments in an amount of $10,000 or more into or out of the United States.

Question 5

Which of the following items does NOT have a minimum retention requirement of three years?

a. Correspondence with customers
b. The purchase and sales blotter
c. Securities borrowed and loaned ledger
d. Order tickets

Answer 5

B- The purchase and sales blotter must be retained for six years.

Question 6

All of the following must be maintained for six years EXCEPT:

a. All long and short securities differences
b. Repurchase and reverse repurchase agreements
c. Dividends and interest received
d. The stock record

Answer 6

C- Ledgers reflecting dividends and interest received must be maintained for three years.

Question 7

Which of the following is filed with the greatest frequency?

a. Statement of Financial Condition
b. FOCUS Report Part II
c. Statement pursuant to SEC Rule 17a-5
d. Notice to customers regarding payment for order flow

Answer 7

B- FOCUS Report Part II is filed quarterly, Statement of Financial Condition is filed semiannually, and the statement pursuant to SEC Rule 17a-5 is filed annually (notifying the SEC of the hiring of an outside accountant). The statement regarding payment for order flow is filed twice per year.

Question 8

If an agency order is cancelled by a customer, which of the following statements is FALSE concerning the firm’s record-keeping practices in reflecting the cancellation?

a. Records do not need to reflect any cancelled agency orders.
b. The conditions of the cancellation must be recorded.
c. To the extent feasible, the time of the cancellation must be recorded.
d. The date of the cancellation must be recorded.

Answer 8

A- When a customer cancels an agency order, the date, conditions, and to the extent feasible, the time of the cancellation must be recorded.

Question 9

If a new customer opens an account and wishes to sell $25,000 of bearer bonds, the broker-dealer:

a. Must check with the Securities Information Center
b. Need not check with the Securities Information Center because the sale involves $25,000 of bonds
c. Need not check with the Securities Information Center because the sale involves bearer bonds
d. Need not check with the Securities Information Center because the sale involves a new customer

Answer 9

A- Member firms are required to make inquiry of the Securities Information Center to determine the status of securities that customers wish to sell unless the security is received from the issuer, from another member firm, or from a customer of the member firm for stock registered in the name of the customer. If securities are registered in street name or are in bearer form, inquiry must be made unless the amount involved is less than $10,000.

Question 10

Which of the following statements are TRUE regarding a broker-dealer’s annual report?
I. It must be filed by March 15 each year.
II. The report must be filed on a fixed or determinable date each year.
III. It must be prepared by an independent public accountant with Series 27 Registration.
IV. Notification must be given to the SEC if a broker-dealer changes its fiscal year.
a. I and III only
b. I and IV only
c. II and IV only
d. I, III, and IV only

Answer 10

C- A broker-dealer must hire an independent public accountant to conduct the annual audit and prepare the annual report, which must be filed on a fixed or determinable date each year. If a broker-dealer changes its fiscal year, notification must be given to the SEC. The basic rule is that the annual report must be filed no later than 60 calendar days after the date of the financial statements. A broker-dealer may seek an extension by applying through its DEA (Designated Examination Authority).

Question 11

Neva Simms opened a brokerage account at Broadhurst Securities in 1985. In 1998, she signed a discretionary account agreement allowing Sissi Pahars, her registered representative, to exercise discretionary authority. The discretionary account agreement needs to be retained by Broadhurst for three years after:

a. The last trade
b. The date of the discretionary agreement
c. Sissi leaves the firm
d. The discretionary arrangement ceases to exist

Answer 11

D- The discretionary account agreement must be retained by the broker-dealer for three years after the discretionary arrangement ceases to exist.

Question 12

When a broker-dealer accepts cash payments from a customer for a securities transaction, it:
I. Must file a report with the Internal Revenue Service if it receives more than $10,000
II. Must file a report with the Internal Revenue Service regardless of the dollar amount
III. Must identify the individual who delivered the cash payment on a report to the federal government
IV. Is not required to identify the client by name
a. I and III only
b. I and IV only
c. II and III only
d. II and IV only

Answer 12

A- Broker-dealers are allowed to accept cash from a customer to pay for a securities transaction. However, if the transaction is for more than $10,000, the broker-dealer is required to file a report (Form 4789) with the Internal Revenue Service within 15 days of the transaction. In the report, the broker-dealer must identify the client by name. This filing requirement applies to most financial institutions when cash/currency is exchanged with another person, and there are penalties associated with a failure to file a report.

Question 13

A broker-dealer only needs to give a privacy notice to a consumer if it:

a. Shares nonpublic client information with nonaffialiated third parties
b. Sells nonpublic client information to nonaffiliated third parties
c. Shares nonpublic client information with its affiliates
d. Discloses nonpublic client information to any insurance companies or banks with which it is affiliated.

Answer 13

A- A broker-dealer only needs to give a privacy notice to a consumer (someone with whom it does not have an ongoing relationship) if it discloses any nonpublic information about the consumer to third parties that are not affiliated with the firm.

Question 14

A broker-dealer that changed its status from introducing broker-dealer to clearing broker-dealer would need to:

a. Compute the Reserve Formula weekly instead of monthly
b. Resubmit any subordinated loans currently outstanding for reapproval
c. Take a higher haircut percentage
d. Send financial statements to customers

Answer 14

D- An introducing broker-dealer is not considered to have customers and does not have the obligation to send semiannual and annual reports. It would assume this obligation once becoming a clearing firm. An introducing broker-dealer would not compute the Reserve Formula at all.

Question 15

A registered representative has resigned from the firm. The fingerprint card of this employee must be retained for:

a. Two years following resignation
b. Three years following resignation
c. Six years following resignation
d. The lifetime of the firm

Answer 15

B- Fingerprint cards, as well as other employee records, including Forms U4 and U5, must be preserved for three years following an employees affiliation with a broker-dealer. This is in accordance with SEC Rule 17a-4, dealing with preservation of books and records.

Question 16

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

Answer 16

D- All three of these designated officers are required to sign the FOCUS Report.

Question 17

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

Answer 17

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.

Question 18

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

Answer 18

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

Question 19

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

Answer 19

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.

Question 20

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

Answer 20

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.

Question 21

If a broker-dealer allows its customers to receive or transmit wire transfers, it must collect information about transfers for:

a. $1,000
b. $2,000
c. $2,500
d. $3,000

Answer 21

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.

Question 22

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

Answer 22

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.

Question 23

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

Answer 23

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.

Question 24

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.

Answer 24

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

Question 25

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.

Answer 25

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

Question 26

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

Answer 26

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

Question 27

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

Answer 27

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

Question 28

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

Answer 28

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

Question 29

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.

Answer 29

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

Question 30

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.

Answer 30

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

Question 31

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

Answer 31

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.

Question 32

A client wires $5,000 out of his brokerage account to a non-domestic bank. What is required of the broker-dealer?

a. File a report with the IRS
b. Maintain a record of the transfer
c. Nothing
d. Notify its DEA

Answer 32

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

Question 33

A broker-dealer must provide a customer with its unaudited statement of financial condition within how many days of the financial statement date?

a. 45
b. 60
c. 65
d. 105

Answer 33

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

Question 34

A broker-dealer must provide a customer with its audited statement of financial condition within how many days of the financial statement date?

a. 45
b. 60
c. 65
d. 105

Answer 34

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

Question 35

The independent accountant to a broker-dealer has been selected as a contestant on a new reality show featuring accountants and has provided notice that he will no longer provide accounting services for the broker-dealer. The broker-dealer must notify the SEC about this:

a. As soon as it is practicable
b. Within 2 business days of the accountant giving notice
c. Within 10 business days of the accountant giving notice
d. Within 15 business days of the accountant giving notice

Answer 35

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

Question 36

If bearer bonds have been delivered to a broker-dealer, when must the broker-dealer check with the SEC to determine if the bonds have been reported missing or stolen?

a. Within 24 hours of when the broker-dealers receive the bonds
b. By the close of business on the following business day
c. By the end of the third business day after receipt of the bonds
d. By the end of the fifth business day after receipt of the bonds

Answer 36

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

Question 37

When a broker-dealer receives a complaint from a customer pertaining to an options transaction, the complaint must be retained on file with the broker-dealer for:

a. Two years after resolution
b. Four years after resolution
c. Six years after resolution
d. 30 days after resolution when it may then be discarded

Answer 37

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

Question 38

A broker-dealer is required to retain option assignment records in its files for:

a. Two years
b. Three years
c. Five years
d. Six years

Answer 38

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

Question 39

A broker-dealer is not required to send financial statements to customers as prescribed by SEC rules, provided the broker-dealer:
I. Forwards all customer trades to a clearing firm
II. Maintains an omnibus account for customers
III. Allows customers to access financial statements through the firm’s website
IV. Executes fewer than 10 proprietary trades per year
a. I and III only
b. I and IV only
c. II and III only
d. II and IV only

Answer 39

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

Question 40

According to SEC Rule 17a-4, which of the following books and records would need to be retained for six years?

a. Order tickets
b. A list of the offices of a broker-dealer
c. The application of the associated persons of a broker-dealer
d. Advertising used to promote mortgage-backed securities

Answer 40

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

Question 41

According to SEC Rule 17a-4, which of the following books and records would need to be retained for six years?

a. Trial balances
b. Long and short positions
c. Customer complaints
d. Marketing materials promoting mutual funds

Answer 41

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

Question 42

Which of the following is not included in the category of nonpublic personal information under Regulation SP?

a. Information obtained from the consumer
b. Aggregated data obtained about consumers
c. Information obtained from a consumer reporting agency
d. Information collected about the consumer’s transactions with nonaffiliated third parties

Answer 42

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

Question 43

A deposit of $12,000 in cash by a customer:

a. Requires the account to be frozen
b. Requires a separate disclosure notice to the customer
c. Requires a notice to be filed with the Department of Treasury
d. Requires a notice to be filed with FINRA

Answer 43

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

Question 44

A client closes her account with your firm and moves to another state. Your firm must keep her new account record for:

a. Two years
b. Three years
c. Six years
d. Until she informs your firm that she has opened another brokerage account

Answer 44

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

Question 45

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

Answer 45

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.