Series 27 Practice Test 1 Flashcards
In computing net capital, a broker-dealer would include:
A - Net worth plus unrealized profit or minus unrealized loss in the broker-dealer’s account
B - Net worth, plus unrealized profit or minus unrealized loss in the broker-dealer’s account, plus fails to deliver that are not aged
C - Net worth, plus unrealized profit or minus unrealized loss in the broker-dealer’s account, plus subordinated loans subject to a satisfactory subordination agreement
D - Net worth plus subordinated loans subject to a satisfactory subordination agreement
C - The capital of a broker-dealer consists of its net worth, to which unrealized profits on proprietary positions are added and unrealized losses are deducted. In addition, subordinated loans that are subject to a satisfactory subordination agreement are added.
ABC & Co. is an introducing broker-dealer that receives, but does not hold, customer securities. In its first year of operation, ABC must maintain:
A - A minimum net capital of $5,000 and a ratio of aggregate indebtedness to net capital of no more than 15 to 1
B - A minimum net capital of $50,000 and a ratio of aggregate indebtedness to net capital of no more than 15 to 1
C - A minimum net capital of $5,000 and a ratio of aggregate indebtedness to net capital of no more than 8 to 1
D - A minimum net capital of $50,000 and a ratio of aggregate indebtedness to net capital of no more than 8 to 1
D - An introducing broker-dealer that receives, but does not hold, customer securities for delivery to its clearing firm must have minimum net capital of $50,000. In addition, its ratio of aggregate indebtedness to net capital may not exceed 8 to 1 in its first year of operation.
In regard to a secured demand note, which of the following statements are CORRECT?
I - The lender maintains ownership of the securities pledged as collateral and has the benefits of any increase and the risks of any decrease in value.
II - The broker-dealer has the right to keep cash dividends paid on the securities pledged as collateral.
III - The lender has the right to substitute other securities for those pledged as collateral.
IV - The broker-dealer has the right to liquidate securities if the market value declines to a point where it no longer adequately collateralizes the note.
I, II, and IV only
I, III, and IV only
II, III, and IV only
I, II, III, and IV
B - On a secured demand note for which securities have been deposited as collateral, the lender retains all rights and risks of ownership, including the right to dividends paid on the securities. The lender has the right to substitute other securities as collateral at any time. If the collateral value of the securities drops below the amount of the note, the broker-dealer must notify the lender. If the lender fails to deposit additional collateral, the broker-dealer has the right to liquidate a sufficient amount of the securities to bring the collateral value up to the amount of the note.
If there is a deficiency in the value of securities pledged on a secured demand note, the broker-dealer must begin selling the securities if the lender fails to deposit additional collateral:
A - On the day the deficiency occurs
B - Prior to noon on the business day after the deficiency occurs
C - Prior to noon on the second business day after the deficiency occurs
D - On the fifth business day after the deficiency occurs
B - If the collateral value of securities pledged on a secured demand note drops below the amount of the note, the broker-dealer must immediately notify the lender and the Examining Authority. The lender will be required to deposit additional cash or securities prior to noon on the next business day. If the lender fails to deposit additional cash or securities by noon of the next business day, the broker-dealer must liquidate sufficient shares to raise the collateral value to the required amount.
Which of the following situations would require reporting under Rule 17a-11?
I - A broker-dealer is notified by its independent auditor of a material inadequacy in its internal accounting procedures.
II - A broker-dealer calculates its subordinated liabilities to be $80,000 and its equity to be $20,000 for a period of 75 days.
III - A broker-dealer with a minimum net capital requirement of $50,000 has net capital of $70,000.
IV - A broker-dealer with net capital of $250,000 has aggregate indebtedness of $3,100,000.
I and IV only
I, II, and III only
II, III, and IV only
I, II, III, and IV
A - Rule 17a-11 requires reports be sent to the SEC if:
An independent auditor discovers material inadequacies in its internal accounting procedures
If the firm’s debt-to-equity ratio exceeds 70% for more than 90 days
Its dollar amount of net capital is less than 120% of the minimum requirement
Its ratio of aggregate indebtedness to net capital exceeds 12 to 1
A clearing broker-dealer must file a notice under the provisions of Rule 17a-11 if which of the following situations occur?
I - Its aggregate indebtedness is 11 times its net capital.
II - Its net capital is $275,000.
III - Its books are not current.
IV - It is informed by an independent auditor that its internal procedures for safeguarding securities or maintaining records are inadequate.
II only
III and IV only
II, III, and IV only
I, II, III, and IV
C - Rule 17a-11 requires a broker-dealer to file a notice if its aggregate indebtedness exceeds 12 times its net capital or if the dollar amount of net capital is less than 120% of the minimum requirement. If a clearing broker-dealer’s net capital is less than $300,000 (120% of the $250,000 minimum), a notice must be filed within 24 hours. The broker-dealer must also file if it has books and records that are not current or material inadequacies in its accounting or control procedures.
Rule 17a-11 requires a broker-dealer to send immediate telegraphic notice to the SEC, followed by a written report, if its books and records are not current. If it is informed of any material inadequacy in it internal procedures, notice must be filed within 24 hours, followed by a proposed solution within 48 hours.
An established introducing broker-dealer makes a market in 20 securities selling at $5 per share or less and 20 securities selling for more than $5 per share. Its aggregate indebtedness is $1,800,000. Its minimum net capital requirement is: A - $70,000 B - $100,000 C - $120,000 D - $225,000
C - An established market maker requires net capital of 1/15th of its aggregate indebtedness, with a minimum of $100,000. 1/15th of $1,800,000 equals $120,000. Twenty securities priced at $5 or less require $20,000 of capital (20 x $1,000), while 20 securities priced at more than $5 require $50,000 of capital (20 x $2,500), for a total market maker requirement of $70,000. The largest of the three requirements is $120,000.
Reclamation for delivery of a bond is permitted:
I - If the bond is refused by the transfer agent because it has been reported stolen
II - If a called bond is delivered when part of the issue has been called for redemption
III - If a bond is called for redemption after the settlement date
IV - If a bond is delivered after notice that the entire issue has been called for redemption
I only
I and II only
I, II, and IV only
II, III, and IV only
B - Reclamation is the right to return or to demand the return of securities that were previously delivered. If a bond is stolen or otherwise is unacceptable to the transfer agent, reclamation is permitted. If a particular bond has been called for redemption, reclamation is permitted. However, reclamation is not permitted if an entire bond issue has been called. For example, if a broker-dealer buys a bond issued by a corporation and, prior to settlement date, that bond is called, the buying broker-dealer has the right to return the bond to the selling broker-dealer. However, if the entire issue is called for redemption, the buying broker-dealer must accept the bond.
In regard to fails to deliver on municipal securities, which TWO of the following statements are CORRECT?
I - The securities are subject to a haircut when they are 11 days old.
II - The securities are subject to a haircut when they are 21 days old.
III - The haircut on fails to deliver is the same as the amount applied to securities held in the broker-dealer’s proprietary account.
IV - The haircut is 5% regardless of the maturity date.
I and III
I and IV
II and III
II and IV
C - A fail to deliver on a municipal security becomes aged when it is 21 days old. For corporate securities a fail to deliver is aged when it is five days old. In both cases, a haircut is applied in the same amount as is applied to a broker-dealer’s proprietary position.
Receivables due from participation in municipal securities underwritings:
A - Are not allowable assets in computing net capital
B - Are allowable assets under all circumstances
C - Are allowable assets if they are less than 115 days old
D - Are allowable assets if they are 60 days old or less
D - Receivables due from municipal securities underwritings are not allowable assets if they are more than 60 days old.
The seller of a municipal bond delivers an interest check with the securities. When trying to cash the check, the buyer learns that the check bounced. Reclamation can be made:
A - Within five business days of learning that the check is not good
B - Within three business days of learning that the check is not good
C - Within one business day of learning that the check is not good
D - At any time since there is no limitation for reclamation in these circumstances
B - If the seller of a municipal bond delivers an interest check with the bond and the check bounces, reclamation can be made within three business days of learning that the check was not honored.
What information must be disclosed to a customer buying a new issue of municipal bonds underwritten on a negotiated basis? I - The total underwriting spread II - The additional takedown III - The total takedown IV - The manager's fee I only I and IV only II and III only II and IV only
A - For negotiated offerings, the total underwriting spread must be disclosed to customers. The manager’s fee, total takedown, and additional takedown are not disclosed to customers.
Newton brokerage borrows stock from Bullard brokerage. This transaction would be reflected in the: A - Purchase and Sales blotter B - General Ledger C - Mark to Market blotter D - Daily SIC folio
B - Stock borrowed and stock loaned are reflected in the general ledger for both broker-dealers. For Bullard this would be a liability, and for Newton it would be reflected as an asset. Initially, the transaction would be posted to a subsidiary ledger, and if the contract was still outstanding at month end, it would be reflected in the general ledger of each firm.
The provisions of the Customer Protection Rule do not apply to:
I - Broker-dealers that have a ratio of net capital to aggregate indebtedness of more than 12 to 1
II - Broker-dealers that introduce customers on a fully disclosed basis
III - Broker-dealers that effect all financial transactions through a bank account designated as “Special Account for the Exclusive Benefit of Customers”
IV - Broker-dealers with less than $1,000,000 in customer credit balances
I and IV only
II only
II and III only
III and IV only
C - SEC Rule 15c3-3 has several exemptions which are addressed in paragraph (k) of the rule. Choices (II) and (III) are the exemptions found under (k)(2)(ii) and (k)(2)(i) of the rule.
The financial reporting responsibility of an introducing broker is limited to:
A - Having the clearing broker-dealer file the necessary reports
B - Filing FOCUS Report Part II semiannually
C - Filing FOCUS Report Part IIA quarterly
D - Filing only financial reports upon termination of membership interest
C - An introducing firm files a FOCUS Report Part IIA quarterly. A clearing firm files FOCUS Report Part I and II.
Fidelity bond coverage is based on: A - The number of employees of the firm B - Whether the firm maintains custody of client assets C - The firm's net capital requirement D - All of the above
C - The basis of the fidelity bond requirement is the firm’s highest required net capital during the immediately preceding 12-month period. This computed figure, which the firm has at its disposal, is the basis of the minimum required coverage for the succeeding 12-month period.
Elgin Brothers makes markets in 450 equity issues; 400 issues are priced greater than $5 and 50 issues at $5 or less. Its net capital requirement based on market making is: $400,000 $250,000 $1,000,000 $1,050,000
C - The maximum net capital requirement based on the number of markets made is $1,000,000. Generally the price of the security is taken into account.
Shares greater than $5: 400 x $2,500 = $1,000,000
Shares less than or equal to $5: 50 x $1,000 = $50,000
But the net capital rule puts a $1,000,000 ceiling on this.
Which TWO of the following statements are TRUE regarding a broker-dealer’s annual report filed with the SEC?
I - There must be an oath or affirmation attached made by the Financial and Operations Principal.
II - There must be an oath or affirmation attached made by a general partner or principal.
III - The report must be prepared by an independent public accountant with at least five years experience.
IV - If there are discrepancies between the annual report and the FOCUS Part II or Part IIA, a reconciling statement should accompany the report.
I and III
I and IV
II and III
II and IV
D - A broker-dealer’s annual report must have an affirmation made by a general partner of principal. There is no specific experience required for the independent public accountant preparing the report. A reconciling statement should be attached for material discrepancies between the annual report and the corresponding quarterly FOCUS report.
Which of the following statements is TRUE when an investor pledges securities as collateral for a secured demand note?
A - The investor has no control over how the securities will be used by the broker-dealer.
B - The investor may not exchange or substitute the pledged securities with different securities.
C - The broker-dealer may use the securities for any business purpose whatsoever but may not pledge them as collateral for a loan from another party.
D - The investor retains her status as the beneficial owner of the securities, and the securities may be registered in the customer’s name.
A - The securities pledged as collateral for a secured demand note are under the control of the broker-dealer and the SEC net capital regulations preclude the lender from placing restrictions on how the broker-dealer may use the assets.
A broker-dealer has tentative net capital of 1,500,000. In its trading account is a position of 20,000 shares of Executron Inc. at $10. The haircut on this position would be: $225,000 $36,000 $30,000 $37,500
B - The applicable charge is based on the $200,000 value of the equity position, which is $30,000 ($200,000 x 15%). Keep in mind that the standard common stock haircut is 15%, assuming a ready market exists. Since this position exceeds 10% of the tentative net capital of the firm, an undue concentration charge is also applied. The undue concentration charge is applied to the amount that exceeds 10% of the tentative net capital. In this example, the amount subject to the undue concentration charge is $50,000. This amount is then reduced by the greater of $10,000 or the value of 500 shares. As a result, the $50,000 is reduced to $40,000, and this amount is subject to an additional 15% (or $6,000) charge. This leaves a total haircut for this equity position of $36,000 ($30,000 + $6,000).
When a subordinated loan matures, a broker-dealer:
A - Must return the principal amount of the loan to the lender
B - May not repay the principal amount of the loan if it would cause aggregate indebtedness to exceed 1,500% of net capital, or the dollar amount of net capital to fall below 120% of the minimum dollar requirement of Rule 15c3-1
C - May not repay the principal amount of the loan if it would cause aggregate indebtedness to exceed 1,200% of net capital, or the dollar amount of net capital to fall below 120% of the minimum dollar requirement of Rule 15c3-1
D - May not repay the principal amount of the loan if it would cause aggregate indebtedness to exceed 1,000% of net capital, or the dollar amount of net capital to fall below 120% of the minimum dollar requirement of Rule 15c3-1
C - A subordinated loan may not be repaid at maturity if repayment would cause aggregate indebtedness to exceed net capital by more than 1,200% or if the dollar amount of net capital falls below 120% of the minimum requirement. A subordinated loan may not be prepaid prior to maturity if prepayment would cause aggregate indebtedness to exceed net capital by more than 1,000% or if the dollar amount of net capital falls below 120% of the minimum requirement.
A broker-dealer is a sole proprietorship with net capital of $400,000 and aggregate indebtedness of $1,500,000. The broker-dealer carries customer accounts but clears its trades through a bank and claims an exemption from Rule 15c3-3 under paragraph (k). The maximum amount of equity that may be withdrawn by the broker-dealer is: $300,000 $250,000 $150,000 $100,000
B - A withdrawal of capital is not allowed if it would cause the ratio of aggregate indebtedness to net capital to exceed 10 to 1, or if it would cause net capital to decline below 120% of the minimum. A withdrawal of $250,000 would leave $150,000 of net capital. This would give the broker-dealer a ratio of 10 to 1 ($1,500,000 of aggregate indebtedness divided by $150,000 of net capital). Net capital would also exceed $120,000, which is 120% of the minimum requirement of $100,000.
A broker-dealer has the following items listed on its trial balance.
Subordinated Loan $300,000
Retained Earnings $350,000
Common Stock (Par Value) $250,000
Unrealized Profits $100,000
The subordinated loan represents what percentage of the broker-dealer’s total debt-equity?
30%
43%
50%
82%
A - The debt-equity of a broker-dealer consists of subordinated loans, common and preferred stock issued by the broker-dealer, retained earnings, and unrealized profits. The total of the debt and equity for the broker-dealer referred to in this question is $1,000,000. Of this total debt-equity, the subordinated loan represents 30% of the total (subordinated loan of $300,000 divided by debt-equity total of $1,000,000).
Which of the following situations would constitute a violation of Rule 15c2-1 regarding the hypothecation of securities?
I - A broker-dealer has granted the bank a cross-lien on securities it has pledged for its own account as additional collateral for a loan on customer securities.
II - A broker-dealer commingles stock of all of its customers for a loan without prior approval of the customers.
III - A broker-dealer commingles customer stock with his own stock after obtaining the approval of the customers.
IV - A broker-dealer borrows $200,000 against customer securities when the aggregate debt of the customers is $175,000.
II and IV only
I, III, and IV only
II, III, and IV only
I, II, III, and IV
C - A broker-dealer is restricted in the use that it may make of customers’ securities. If a broker-dealer wishes to hypothecate customers’ securities at a bank for purposes of obtaining a loan on the securities, it may commingle the securities of various customers in a single loan account only with the permission of the various customers. Choice II is therefore a violation because permission of each customer was not obtained.
A broker-dealer may never commingle the securities of customers with those of non customers, including its own securities, under any circumstances. Therefore, Choice III is a violation of Rule 15c2-1.
A broker-dealer may not borrow more than it loaned the customers. For example, if the debit balances of customers is $175,000, the maximum that the broker-dealer could borrow, using the customers’ securities as collateral, is $175,000. The broker-dealer may use as collateral (not borrow) stock with a value of 140% of the debit balance. Therefore, stock worth $245,000 may be used as collateral. Choice IV represents a violation because the broker-dealer is borrowing more than it loaned the customers.
If a broker-dealer has taken its own securities to a bank in a separate loan account, the broker-dealer may authorize the bank to have a cross-lien on its own stock as additional collateral for the loan granted on customers’ stock. However, it may not authorize a cross-lien on the customers’ stock as additional collateral on its own loan. Choice I is not a violation because the cross-lien is being granted on the broker-dealer’s stock, not the customers’ stock.
A broker-dealer has a short contractual commitment for $20,000 in XYZ common stock, which is designated as a Nasdaq . The current market value is $18,000. The haircut would be: 15% of $20,000 30% of $18,000 30% of $20,000 minus $2,000 15% of $18,000 minus $2,000
D - A haircut of 15% is applied to the market value of $18,000, since XYZ is a Nasdaq security. Since the market value has decreased by $2,000, this represents an unrealized profit on the short contractual commitment. Therefore, the haircut is decreased by $2,000.
A husband and wife both maintain separate cash accounts with a broker-dealer. In addition, they maintain a joint margin account. SIPC will provide coverage for which of the following?
Neither account is covered by SIPC.
Each cash account is treated as a separate customer.
The joint margin account is treated as a separate customer.
All accounts are combined.
I only
II only
IV only
II and III only
D - SIPC provides coverage for each separate customer. Each separate cash account would be covered. In addition, the joint account would also be covered.
A customer has purchased $20,000 of stock in her special cash account. The stock has a current market value of $18,000. The customer has a valid reason for failing to pay for the securities and the broker-dealer requests an extension. Assuming the extension is granted, the required deduction from net capital is: $20,000 $18,000 $5,400 $0
D - If a member firm has requested an extension and the extension has been granted by the Examining Authority, any unsecured amount owed by the customer may be disregarded in the computation of the member firm’s net capital.
Subsidiary ledgers must be maintained for: One year Three years Six years The life of the firm
B - Subsidiary ledgers must be maintained for three years.
Pursuant to SEC Rule 15c3-3, an introducing broker-dealer must take which of the following actions upon receipt of customer funds and securities?
A - Deposit them in an escrow account.
B - Transmit them to a broker-dealer claiming the k(2)(i) exemption.
C - Make a daily determination that they are in possession and control.
D - Promptly transmit them to the clearing broker.
D - An introducing broker-dealer may accept funds and securities from customers but may not hold them; such items must be promptly transmitted to the clearing broker.
Emilio Di Matteo works in operations for Equinox Brokerage. On a day-to-day basis his responsibilities include the proper care and protection of securities. His role in the quarterly box count would be which of the following?
A - He may participate in the count.
B - He may not participate in the count.
C - He may not participate in the count, but he may supervise the count.
D - He may participate in the count with a waiver from FINRA.
B - Pursuant to SEC Rule 17a13 (5)(d), the examination count, verification, and comparison shall be made or supervised by persons whose regular duties do not require them to have direct responsibility for the proper care and protection of securities.
Mel Thurston, a friend of one of the senior officers at Arkwright Securities, is willing to grant a subordinated loan to the broker-dealer for a ten-month period at the prime rate plus 2%. A written agreement is prepared and submitted to FINRA. FINRA will determine:
A - That it is subject to a haircut
B - That it is not allowable for capital purposes
C - That it may not be used to acquire inventory
D - That it may only be used for underwritings
B - A satisfactory subordination agreement requires a minimum maturity of one year. A temporary subordination agreement may have a maximum maturity of 45 days.
Which of the following items does not need to appear on an interdealer confirmation?
A - Whether the securities are trading ex- legal or flat
B - Whether the securities are fully registered or registered as to principal only
C - The signature of the registered representative who entered the transaction
D - For new issues, the dated date from which interest accrues
C - All of the choices must appear on confirmations for transactions between broker-dealers except the signature of the registered representative who entered the transaction.
According to MSRB record-keeping rules, which party is responsible for maintaining records for syndicate transactions?
A - Each member of the syndicate
B - The NRMSIR closest to the managing underwriter’s office
C - The managing underwriter for the syndicate
D - The issuer of the syndicated security
C - The managing underwriter for the syndicate is responsible for maintaining records for syndicate transactions.
Liabilities that are subordinated to the claims of creditors but are not subject to a satisfactory subordination agreement pursuant to Rule 15c3-1 are:
A - Not permitted under any circumstances
B - Excluded from aggregate indebtedness
C - Included in aggregate indebtedness
D - Deducted from net capital
B - Aggregate indebtedness of a broker-dealer consists of certain liabilities, such as fails to receive for the account of customers and securities loaned for the account of customers. Other liabilities, such as stock loaned for the account of the firm, are not aggregate indebtedness. A subordinated loan is a liability of a broker-dealer, but it is never aggregate indebtedness. Under certain circumstances, the subordinated loan may be considered to be part of the broker-dealer’s net capital, and in other circumstances, it may not be considered to be part of his net capital. However, the subordinated loan is never considered to be aggregate indebtedness.
Liabilities that are subordinated to the claims of creditors under a satisfactory subordination agreement filed with the SEC are considered to be part of the broker-dealer’s capital. A subordinated loan that is not subject to a satisfactory subordination agreement is not considered to be part of the broker-dealer’s capital.
A broker-dealer has total capital, before any deductions, of $1,000,000. The broker-dealer has a long securities position that consists of $100,000 of an 8% municipal bond maturing in 2035. The haircut on this position would be: $8,000 $7,500 $7,000 $6,500
The maximum haircut on municipal bonds applies to those with maturities exceeding 20 years and is 7% of the market value. 7% of $100,000 equals $7,000.
A broker-dealer computes its reserve requirement pursuant to Rule 15c3-3 to be $200,000. The broker-dealer currently has $250,000 on deposit in the Reserve Bank Account. It may reduce its aggregate indebtedness by: $250,000 $200,000 $75,000 $60,000
B - The requirement is $200,000. The broker-dealer may reduce its aggregate indebtedness by this amount only.
A newly formed introducing broker-dealer makes a market in 500 securities selling at more than $5 per share. Its aggregate indebtedness is $12,000,000. Its net capital requirement is: $800,000 $1,000,000 $1,250,000 $1,500,000
D - Rule 15c3-1 requires nonclearing market makers to maintain net capital of at least the greater of:
$100,000
$1,000 for each security trading at $5 per share or less plus $2,500 for each security trading at more than $5 per share, to a ceiling of $1,000,000
1/15th of aggregate indebtedness (1/8 of AI in the first year of operation).
A new market maker requires net capital of 1/8th of its aggregate indebtedness, with a minimum of $100,000. 1/8 x $12,000,000 = $1,500,000. Although 500 securities times $2,500 equals $1,250,000, the maximum market maker requirement is $1,000,000. The aggregate indebtedness requirement applies since it is the largest of the three.
If a physical count of XYZ Corporation indicated that the broker-dealer had 1,200 shares in its possession, indicating a long securities difference of 200 shares, and the broker-dealer had not resold the securities, the net capital would be: A - Increased by $10,000 B - Increased by $7,000 C - Decreased by $10,000 D - Unaffected
D - Long securities differences for securities that have not been sold by a broker-dealer are disregarded in the net capital computation.
A broker-dealer holds a secured demand note. The collateral value of the securities pledged on the note is insufficient to collateralize the note. The broker-dealer may take which of the following steps?
I - Obtain additional cash to raise the collateral value to the required amount.
II - Obtain additional securities to raise the collateral value to the required amount.
III - Sell sufficient securities that have been pledged as collateral.
IV - Reduce the principal amount of the secured demand note with the permission of the broker-dealer’s Examining Authority.
I and II only
I, II, and III only
II, III, and IV only
I, II, III, and IV
D - If a broker-dealer holds a secured demand note whose collateral value is less than the amount of the note, the broker-dealer must obtain additional cash or securities to raise the collateral value to the required amount. If the lender fails to deposit additional collateral, the broker-dealer must sell enough of the securities to bring the collateral value to the required level.
If the broker-dealer wishes to reduce the amount of the demand note instead of requiring more collateral from the lender, it may do so only with the permission of its Examining Authority.
A purchaser may execute a close-out by which of the following means?
I - Purchase at current market value all or any part of the securities necessary to complete the transaction for the account and liability of the seller.
II - Accept from the seller securities which are comparable in quantity, quality, price, and maturity, with any additional expense borne by the seller.
III - Require the seller to repurchase the securities with accrued interest with the seller bearing the burden of any change in market price or yield.
I only
II only
III only
I, II, and III
D - Any one of these three methods may be used by the buyer to close out the seller. Note that if one of these methods is not completed during the close-out period, the close-out process lapses, and a new close-out notice must be sent.
A broker-dealer has the following items listed on its trial balance.
Subordination Agreement $100,000 Par Value of Common Stock $75,000 Retained Earnings $200,000 Unrealized Profits $25,000 The amount of debt in relation to the debt-equity of the broker-dealer is:
25%
31.25%
33%
36.4%
A - The debt-equity ratio is the ratio of debt to the total debt and equity. The debt (subordinated loan) is $100,000. The total of debt and equity is $400,000. Therefore, the ratio is 25% ($100,000 of debt divided by $400,000 of debt and equity).
A broker-dealer clears all of its trades through a bank. In this case:
A - The broker-dealer is required to maintain all the records required by Rule 17a-3
B - Both the broker-dealer and the bank are required to maintain all the records required by Rule 17 a-3
C - The broker-dealer is required to maintain certain records required by Rule 17a-3 and the bank is required to maintain other records required by Rule 17a-3
D - The broker-dealer is excused from maintaining the records required by Rule 17a-3 if the bank maintains the records and notifies the SEC that they are available for inspection
D - If a member firm clears all its transactions through a bank, and the bank agrees to abide by the record-keeping requirements of Rule 17a-3, the broker-dealer is not required to maintain the required records.
Blotters reflecting purchases and sales of securities, receipts and deliveries of securities, and receipts and disbursements of cash are prepared: Daily Weekly Quarterly Annually
A - The blotter, which is a record of original entry, is prepared daily.
A broker dealer had retained earnings of $800,000 and capital stock of $400,000. During the next accounting period, expenses were $300,000, commissions were $500,000, and the value of its holdings after haircuts increased by $200,000. The ending capital will have: A - Increased by $200,000 B - Decreased by $100,000 C - Increased by $400,000 D - Increased by $700,000
C - Offset the expenses and commissions to produce an increase of $200,000; then add the unrealized gain for a total increase of $400,000.
Consider the following data for Elkington Securities.
Tentative Net Capital $3,500,000
Long Position – Big Enchilada Corp. $500,000
Short – Marguerita Corp. $420,000
Assume both positions are Nasdaq National Market issues. The undue concentration haircut would be:
A - Determined by netting the long and short position
B - Based on the greater of the long or short position
C - Based on the long position only
D - Added to the regular haircut on the securities
D - In the example, both the long and short position would be subject to an undue concentration charge as each position is greater than 10% of tentative net capital, (as well as a regular haircut). 10% of Tentative Net Capital is $350,000; $150,000 of Big Enchilada is subject to the charge, and $70,000 of Marguerita is subject to the charge.
Which of the following choices would not be eligible for SIPC coverage? A - Municipal bonds B - Options C - Futures D - Pink Sheet issues
C - Futures are not securities. SIPC only covers securities.
A security is deemed to be under the control of a broker-dealer for purposes of Rule 15c3-3 under which of the following circumstances?
I - Securities in the custody of a clearing corporation of a national securities exchange that will be delivered to the broker-dealer without payment of money
II - Securities in the custody of another broker-dealer in a special omnibus account free of any lien
III - Securities in transfer for a period of less than 40 calendar days
IV - Securities failed to receive from another broker-dealer
I and II only
II and III only
I, II, and III only
I, II, III, and IV
C - Choices I, II, and III are considered to be control locations. Securities that the broker-dealer has failed to receive from another broker-dealer are not considered to be in the broker-dealer’s possession or under its control.
A broker-dealer with a ratio of aggregate indebtedness to net capital of 6 to 1 that carries customer funds of $1,500,000 may compute the amount required to be on deposit in its Reserve Bank Account: A - Daily B - Weekly C - Monthly D - Weekly or monthly, at its option
B - The broker-dealer is carrying funds in excess of $1,000,000. A weekly calculation is required.
A broker-dealer may not allow the withdrawal of equity capital if it would cause which TWO of the following situations to occur?
I - The aggregate indebtedness would exceed the net capital by 1,200%, or the net capital would fall below 120% of the minimum dollar requirement.
II - The aggregate indebtedness would exceed the net capital by 1,000%, or the net capital would fall below 120% of the minimum dollar requirement.
III - The dollar amount of subordinated agreements would exceed 70% of the total of debt and equity.
IV - The dollar amount of subordinated agreements would exceed 60% of the total of debt and equity.
I and III
I and IV
II and III
II and IV
C - A broker-dealer may not withdraw equity capital if such withdrawal would cause aggregate indebtedness to exceed net capital by more than 1,000% or if such withdrawal would cause the dollar amount of net capital to fall below 120% of the minimum dollar requirement. For example, if a broker-dealer has aggregate indebtedness of $1,000,000 and net capital of $100,000, its ratio would be 10 to 1. No withdrawal of capital would be allowed as this would cause the ratio to exceed 10 to 1.
Equity capital may not be withdrawn if such withdrawal would cause subordinated loans to exceed 70% of the debt-equity total.
A clearing broker-dealer calculates its net capital to be $270,000. The broker-dealer is required to:
A - Send immediate notice to the SEC and its examining authority
B - Cease conducting business with the public
C - File a notice with the SEC and its examining authority within 24 hours
D - File Part II of the FOCUS Report within 48 hours
C - If a broker-dealer’s dollar amount of net capital dropped below 120% of the minimum specified under Rule 15c3-1, it would be required to file a notice within 24 hours. Since a clearing broker-dealer requires $250,000 of net capital, a notice would be filed if its net capital fell below $300,000.
Which of the following statements is true of a clearing broker-dealer that has aggregate indebtedness of $5,850,000 and net capital of $450,000?
A - It must immediately file a notice of net capital deficiency.
B - It must file a notice with the SEC and its examining authority within 24 hours.
C - It must file a notice of net capital deficiency if its ratio of aggregate indebtedness to net capital does not decrease below 12 to 1 within 90 days.
D - It is not currently subject to any notice requirement.
B - This broker-dealer’s ratio of aggregate indebtedness to net capital is 13 to 1. This is not a net capital deficiency. However, if the ratio is above 12 to 1, the broker-dealer must file an Early Warning notice with its examining authority and the SEC within 24 hours.
A broker-dealer has a short contractual commitment for $12,000 in DEF, a listed common stock. The current market value is $11,000. The haircut would be: $3,300 $2,300 $1,650 $650
D - The haircut on a short contractual commitment is the regular haircut for that type of security, increased by any unrealized loss or decreased by any unrealized gain. The haircut for contractual commitments is 30%, unless the security is listed on an exchange or designated as a Nasdaq National Market System (NNM) security, in which case the haircut is 15%.
The basic haircut is 15%, since DEF is a listed security. In addition, there is an unrealized profit of $1,000. The broker-dealer will receive $12,000 upon delivery of the stock, which currently has a market value of $11,000. The net haircut is therefore $650 (15% of $11,000, minus the unrealized profit of $1,000).
A broker-dealer computes its reserve requirement pursuant to Rule 15c3-3 to be $200,000. The broker-dealer currently has $150,000 on deposit in the Reserve Bank Account. It may reduce its aggregate indebtedness by: $200,000 $150,000 $60,000 $45,000
B - A broker-dealer is allowed to reduce its aggregate indebtedness by the amount that is required to be on deposit and is on deposit in the Customer Reserve Bank Account.
A broker-dealer has an aged fails to deliver. The contract price is $20,000, and the market price is $22,000. The haircut would be: $1,300 $3,000 $5,000 $5,300
A - In this situation, the haircut would be 15% of the market price of $22,000 ($3,300) minus the $2,000 excess of the market price over the contract price, for a total haircut of $1,300.
A due bill occurs on a trade that is:
A - Executed before the ex-dividend date and delivered before the record date
B - Executed before the ex-dividend date and delivered after the record date
C - Executed after the ex-dividend date and delivered before the record date
D - Executed after the ex-dividend date and delivered after the record date
B - A due bill occurs on a trade that is executed before the ex-dividend date and delivered after the record date.
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
II and IV only
I, II, and III only
II, III, and IV only
I, II, III and IV
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.
A broker-dealer is required under the provisions of Rule 17a-13 to do which of the following?
I - Physically count and examine all securities held by the broker-dealer.
II - Account for all securities subject to its control but not in its physical possession, such as securities in transfer, fails to receive, and fails to deliver.
III - Verify all securities subject to its control but not in its possession, such as securities in transfer, where such status has existed for more than 30 days.
IV - Record on its records all unresolved security differences.
I and II only
I, II, and III only
II, III, and IV only
I, II, III, and IV
D - Rule 17a-13 deals with the quarterly count of securities. The broker-dealer must physically count and examine all securities in its possession. For securities under its control but not in its possession, such as securities in transfer, the broker-dealer must account for these securities and verify their location if necessary. Any short difference must be recorded on the broker-dealer’s records.
A FINRA member is required to review its fidelity bond coverage:
Monthly
Annually
Only if they are subject to reporting under SEC Rule 17a-11
Only if they have claim against them
B - A member is required to review its fidelity bond coverage annually.
An account sells short one uncovered Rapunzel May 60 call for a $5 premium when the stock is 62. The margin requirement is: $1,500 $1,740 $1,240 $2,000
B - Uncovered calls are subject to the following margin requirement:
20% of the value of the stock
at its current market price (6,200) = $1,240
Add the premium 500
Total margin requirement $1,740
Note: the cash required to be deposited by the client would be the margin requirement less the premium, or $1,240.
A clearing broker has an obligation to file all of the following EXCEPT:
A - A FOCUS Report Part I within 10 business days after the end of the month
B - An audited statement indicating balances in the Reserve Bank Account within five business days of month end
C - A FOCUS Report Part II within 17 business days of the end of the calendar quarter
D - An unaudited statement of financial condition dated six months from the date of the audited statement
B - There is no requirement for a broker dealer to have a special audit of the Reserve Bank Account on a monthly basis
Under Rule 17a-3, a broker-dealer must prepare and maintain which of the following records?
I - A memorandum of every order for a customer, whether executed or unexecuted, showing all terms and conditions of the order
II - A memorandum of every purchase and sale for the broker-dealer’s account indicating price and time of execution
III - Copies of confirmations of all purchases and sales of securities for the account of customers
IV - Copies of confirmations of all purchases and sales of securities for the account of partners of the member firm
I only
I and II only
I, II, and III only
I, II, III, and IV
D - Rule 17a-3 requires the broker-dealer to maintain all the records that are indicated in this question.
A security is deemed to be under the control of a broker-dealer for purposes of Rule 15c3-3 under which of the following circumstances?
I - Securities in the custody of a foreign depository approved by the SEC
II - Securities in the custody of a bank free of any lien
III - Securities in transit between offices of a broker-dealer
IV - Securities loaned to another broker-dealer
I and II only
II and III only
I, II, and III only
I, II, III, and IV
C - Securities are considered to be under the control of a broker-dealer if they are in an SEC-approved depository, are being held in custody at a bank free of any lien or other encumbrance, or are in transit between offices of the broker-dealer. Securities are not under a broker-dealer’s control if they have been loaned to another broker-dealer or if they have been pledged at a bank as collateral for a loan.
Which of the following statements are TRUE about the MSRB’s underwriting fee?
I - It must be paid to the MSRB no later than 30 days following the date the invoice is sent.
II - Securities with a final stated maturity of less than nine months from their issuance are not subject to this fee.
III - Securities with an aggregate par value of less than $1,000,000 are exempt from this fee.
IV - It may be credited toward the $100 annual fee that is required for all members.
I and II only
II and III only
I, II, and III only
I, II, III, and IV
C - The underwriting fee must be paid to the MSRB no later than 30 days following the date that the invoice is sent to the managing underwriter. Offerings with a final stated maturity within nine months of issuance or those having an aggregate par value of less than $1,000,000 are not subject to this fee. The underwriting fee may not be used to offset the continuing registration requirement for which there is an annual fee of $100.
Reclamation is allowed for up to 18 months for: I - Deliveries made to a wrong party II - Deliveries of a wrong issue III - Duplicate deliveries IV - Securities delivered with a missing or mutilated coupon II and III only I, II, and III only I, II, and IV only I, II, III, and IV
B - Reclamation is allowed for up to 18 months in case of irregularities in deliveries such as delivering a wrong issue, delivering securities to a wrong party, making a duplicate delivery, or the refusal to transfer securities by the transfer agent due to lack of documentation. Choice IV is not correct because securities delivered with a missing or mutilated coupon must be reclaimed within three days.
In regard to a subordinated loan that is considered part of a broker-dealer’s capital, which of the following statements are CORRECT?
I - The lender must be a stockholder or partner of the broker-dealer.
II - The lender must agree that all claims for payment are subordinated to the claims of present and future creditors.
III - The minimum amount of the loan must be $5,000.
IV - The lender must agree that the proceeds of the loan are part of the broker-dealer’s capital.
II and IV only
I, II, and III only
II, III, and IV only
I, II, III, and IV
A - In order for a subordinated loan to be considered as part of a broker-dealer’s capital, certain conditions must be met. Among the conditions are that the lender agrees that the proceeds of the loan are part of the broker-dealer’s capital and the lender agrees that any claim for repayment is subordinated to the claims of all present and future customers. There are no minimum or maximum amounts for subordinated loans. The lender need not be a stockholder or partner of the broker-dealer unless the broker-dealer wishes to consider the loan to be part of its equity capital.
A broker-dealer holds securities on a secured demand note with a collateral value that is less than the amount of the note. Under what circumstances may the broker-dealer reduce the amount of the note?
I - Under no circumstances
II - With the permission of the broker-dealer’s Examining Authority
III - If the reduction does not cause aggregate indebtedness to exceed net capital by 1,200% or more
IV - If the reduction does not cause aggregate indebtedness to exceed net capital by 1,000% or more
I only
II only
II and III only
II and IV only
D - If a broker-dealer wishes to reduce the amount of a loan on a secured demand note, it may do so only with the permission of its Examining Authority. Such reduction will not be allowed if it will cause aggregate indebtedness to exceed net capital by 1,000% or more.
Under which of the following circumstances is a broker-dealer excused from complying with the requirement of sending notices to its customers regarding their free credit balances?
I - The broker-dealer has free credit balances in margin accounts only.
II - The broker-dealer has distributed all of the credit balances to its customers within the preceding quarter.
III - The broker-dealer does not hold cash or securities for customers.
IV - The broker-dealer establishes a separate bank account for funds that is clearly designated as a trust account for customers and does not use the funds in any way in the conduct of its business.
III only
III and IV only
I, II, and III only
II, III, and IV only
B - A broker-dealer must send quarterly notices to customers regarding their free credit balances unless they do not hold cash or securities for customers or the broker-dealer has established a separate trust account for customer funds that precludes the use of the funds by the broker-dealer.
Choice II is incorrect because a broker-dealer is required to send the report if it held funds during the preceding quarter, even though it is currently not holding such funds.
A broker-dealer is long common stock with a total value of $50,000 and is short common stock with a total value of $200,000. The haircut is: $60,000 $37,500 $30,000 $22,500
C - Rule 15c3-1 requires a 15% haircut on the greater of the member firm’s long or short position. To the extent that the smaller position exceeds 25% of the greater position, an additional haircut of 15% is applied to the excess.
In this situation, the short position is greater than the long position, and a haircut of 15% of $200,000 is applied. As the smaller long position is $50,000, which does not exceed 25% of the short position, no additional haircut is applied. Therefore, the total haircut is $30,000.
Regulation T margin requirement is 50%. A customer purchases $100,000 of stock in her special cash account. The market value of the stock is $50. SEC Rule 15c3-3 requires the broker-dealer to obtain physical possession of how many shares of stock? 500 600 1,000 2,000
D - The broker-dealer must obtain possession of all the customer’s fully paid stock. As the stock has a market value of $50 per share and the total value is $100,000, the broker-dealer must obtain possession of 2,000 shares.
All of the following may authenticate a mutilated security EXCEPT the: Trustee Operations manager Transfer agent Registrar
B - No matter how experienced, the operations manager may not authenticate a mutilated security. The issuer could also authenticate a mutilated security.
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
I only
I and III only
III and IV only
I, II, and III only
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.
Consider the following data for Ebenezer Securities in answering this question. Total Common stock January 31 $1,050,000 Retained Earnings $840,000 Income: for February Trading profits $275,000 Commissions $327,000 Margin Interest received $74,000 Expenses: Employee compensation $264,000 Rent $20,000 Office supplies $12,000 Depreciation: equipment $6,000 Other relevant items: Subordinated loan $500,000 effective February 10
What will the firm’s retained earnings be when the books are closed for the month of February?
It will remain at $840,000 until fiscal year end.
$1,516,000
$1,176,000
$1,214,000
D - Net the revenue and expense items.
Revenues total $676,000 minus $302,000 expenses = $374,000
Add this to the existing retained earnings of $840,000 = $1,214,000
Consider the following data for Ebenezer Securities in answering this question. Total Common stock January 31 $1,050,000 Retained Earnings $840,000 Income: for February Trading profits $275,000 Commissions $327,000 Margin Interest received $74,000 Expenses: Employee compensation $264,000 Rent $20,000 Office supplies $12,000 Depreciation: equipment $6,000 Other relevant items: Subordinated loan $500,000 effective February 10
What is the ownership equity at the end of February?
$1,214,000
$1,424,000
$2,764,000
$2,264,000
D - At the end of February, the ownership equity of Ebenezer consisted of:
Common Stock $1,050,000
Retained Earnings $1,214,000
Total $2,264,000
Consider the following data for Ebenezer Securities in answering this question. Total Common stock January 31 $1,050,000 Retained Earnings $840,000 Income: for February Trading profits $275,000 Commissions $327,000 Margin Interest received $74,000 Expenses: Employee compensation $264,000 Rent $20,000 Office supplies $12,000 Depreciation: equipment $6,000 Other relevant items: Subordinated loan $500,000 effective February 10
What is Ebenezer’s debt/equity percentage at the end of February?
$500,000 / 2,764,000 = 18%
$500,000 / 2,264,000 = 22%
$500,000 / 1,050,000 = 47%
0% because a subordinated loan is not effective for 30 days after filing
A - Ebenezer’s debt/equity percentage is 18%. Divide the subordinated loan by the debt equity total, which includes the retained earnings, the common stock, and the effective subordinated loan. The subordinated loan is in both the numerator and denominator of the formula.
$500,000
($1,214,000 + $1,050,000 + $500,000)
= 18%
Assets that are not readily convertible into cash are:
Excluded in the computation of net capital
Included in net capital
Included in net capital at a reduced value
Added to aggregate indebtedness
A - Assets that are not readily convertible into cash, such as furniture and fixtures, are excluded in full in the computation of net capital.
A broker-dealer maintains the following long and short positions in municipal bonds.
Long Short
$1,000,000 ABC 5% of 2035 $400,000 DEF 5% of 2035
The haircut applicable to its security positions would be:
$92,500
$82,500
$75,000
$70,000
D - The haircut on municipal bonds is applied to the greater of the long or short position. For municipal bonds with maturities of 20 years or more, the haircut is 7% on the greater position. 7% of $1,000,000 equals $70,000.
Which of the following statements regarding temporary subordination agreements under Rule 15c3-1 is/are CORRECT?
I - The agreement must have a minimum duration of 45 days.
II - The agreement may be established for the purpose of engaging in the underwriting of securities.
III - The agreement may be established for the purpose of reducing the ratio of aggregate indebtedness to net capital below the reporting level of Rule 17a-11.
IV - The agreement may be established to increase the dollar amount of net capital to the minimum requirement of Rule 15c3-1.
II only
I and II only
II, III, and IV only
I, II, III, and IV
A - Regular subordination agreements must have a minimum duration of one year. However, temporary subordination agreements are permitted to facilitate underwritings or used for other extraordinary activities if the duration of the agreement does not exceed 45 days. Temporary subordination agreements may not be used to raise permanent capital in order to comply with the provisions of Rule 15c3-1.
Under Rule 17a-11, a broker-dealer that clears and carries customer accounts is required to send immediate notice to the SEC and its examining authority under which of the following circumstances?
I - Net capital falls below 120% of the minimum requirement of Rule 15c3-1.
II - Net capital falls below $250,000.
III - The total amount of subordinated loans exceeds 70% of the debt-equity total of the broker-dealer for a period exceeding 90 days.
IV - The ratio of aggregate indebtedness to net capital exceeds 1,200%.
I and IV only
II and III only
I, III, and IV only
II, III, and IV only
B - Immediate telegraphic or facsimile notice is required if the ratio of aggregate indebtedness to net capital exceeds 1,500%, if the dollar amount of net capital falls below the minimum requirement, or if the broker-dealer’s subordinated loans total more than 70% of its debt and equity for a period exceeding 90 days.
Which of the following statements is CORRECT concerning MSRB record-keeping rules?
A - Firms are required to maintain all new account documentation and trade tickets in physical form.
B - New account records must be maintained physically, but trade tickets may be stored electronically by the firm.
C - Firms may store both trade tickets and new account information electronically.
D - MSRB rules prohibit the electronic storage of all customer records unless original copies are kept in an easily assessable location for a minimum of two years.
C - MSRB rules allow for the storage of customer records in either an electronic or physical format.
The proceeds of a subordination agreement may be considered as part of the equity capital of a broker-dealer if which of the following criteria are met?
I - The lender is a partner or stockholder of the broker-dealer.
II - The agreement has a minimum duration of three years.
III - The agreement does not provide for repayment if it would cause aggregate indebtedness to exceed net capital by eight times.
IV - The agreement does not contain a provision for accelerated maturity.
I, II, and III only
I, II, and IV only
II, III, and IV only
I, II, III, and IV
B - The minimum duration of a subordinated loan is normally one year. Subordinated loans may be considered to be part of a broker-dealer’s capital if they are qualified. If a broker-dealer wishes to consider the proceeds of a subordinated loan to be part of its equity as well as part of its capital, then the lender must be a partner or stockholder, the agreement may not provide for accelerated maturity, and the minimum duration must be three years.
Notification must be sent to the SEC for which of the following?
A - Change in a broker-dealer’s fiscal year
B - Extension of time to submit the annual report
C - Change in the broker-dealer’s fixed date for filing an annual report
D - All of the above
A - Choices (b) and (c) are submitted to the broker-dealer’s Designated Examining Authority.
A broker-dealer that sends its customers monthly statements is required to notify customers of their free credit balances: A - Monthly B - Quarterly C - Annually D - Whenever they make a new transaction
A - Statements regarding customers’ free credit balances must be sent quarterly. However, if a broker-dealer sends monthly statements to customers, they must receive a statement of the free credit balances with the monthly statement.
A customer has a margin account with a debit balance of $75,000, and the broker-dealer holds stock worth $60,000. The broker-dealer has issued a margin call for an additional $20,000. The broker-dealer must deduct from net capital: $75,000 $60,000 $20,000 $15,000
D - A broker-dealer is required to reduce its net capital by the full amount of a customer’s unsecured debit balance which is $15,000.
A broker-dealer is long common stock with a total value of $60,000 and is short common stock with a total value of $200,000. The haircut that is applied is: $61,500 $39,000 $37,500 $31,500
D - In this situation, the short position is greater than the long position, and a haircut of 15% of $200,000 is applied. As the long position is $60,000, which exceeds 25% of the short position by $10,000, an additional haircut of $1,500 (15% of the excess of $10,000) is applied. Therefore, the total haircut is $31,500.
During the course of an audit, the auditor discovers a material inadequacy in the broker-dealer’s procedures for safeguarding securities. The auditor is required to:
A - Notify the SEC and the broker-dealer’s examining authority within 24 hours
B - Notify the broker-dealer’s chief financial officer, who must take immediate steps to correct the inadequacy
C - Notify the broker-dealer’s chief financial officer, who must send telegraphic notice to the SEC and the broker-dealer’s examining authority within 24 hours
D - Notify the broker-dealer’s chief financial officer and make note of the inadequacy in its final report
C - If an auditor discovers a material inadequacy in a broker-dealer’s internal operations, the auditor is required to notify the broker-dealer’s chief financial officer, who must, in turn, notify the SEC and the broker-dealer’s examining authority within 24 hours.
A short securities difference would become a credit item in the computation of the Reserve Formula under Rule 15c3-3 if it is unresolved for more than: A - Three business days B - Five business days C - Fifteen calendar days D - Thirty calendar days
D - Short securities differences are listed as credit items in the Reserve Formula of SEC Rule 15C3-3 if they are unresolved for 30 days.
Review the Fail Run at Holdover Brokerage.
Fail to Deliver Past Settlement Date Market Price Contract Price
1000 sh. Blumquist 6 business days $24 $20
1000 sh. Ragamuffin 7 business days $28 $31
Fail to Receive
1500 shares Incipient 9 business days $16
$18
Which of the following statements is/are TRUE regarding the fails?
I - There is a $7,600 charge for the fail in Blumquist.
II - There is no charge for the trade in Blumquist.
III - There is $7,200 charge for the fail in Ragamuffin.
IV - There is a $4,400 charge for the trade in Incipient.
I only
I and II only
II and III only
II and IV only
C - Blumquist Calculation:
15% times $24,000 = $3,600 minus excess of market over contract = 0. A broker-dealer cannot have a negative haircut, so there is no fail to deliver charge on this position.
Ragamuffin: 15% times $28,000 = $4,200 plus $3,000 ‘the excess of contract price over market price) = $7,200. There is no charge for the fail to receive.
Constable Securities, a partnership, computes its net capital under the alternative method. A partner is contemplating a withdrawal of $250,000. Before the withdrawal is made the firm should verify that:
I - The withdrawal does not cause the capital to fall below 120% of the required minimum.
II - The AI/NC ratio does not exceed 8:1 after the withdrawal.
III - Net capital does not fall below the amount of subordinated loans outstanding.
IV - Net capital does not fall below 5% of aggregate debit items pursuant to SEC Rule 15c3-3.
I and II only
I and IV only
I and III only
III and IV only
B - These are some of the conditions that must be met before equity capital may be withdrawn by a stockholder or partner. If a broker-dealer is subject to the aggregate indebtedness provisions, the AI/NC ratio may not exceed 10:1, not 8:1. Constable would not be subject to the AI/NC ratio anyway, as it computes under the alternative method.
In order for a subordinated agreement to satisfy Rule 15c3-1, the minimum duration of the agreement must be: Six months One year Two years Three years
B - In order for a subordinated loan to be considered as part of a broker-dealer’s net capital, the duration of the loan must be at least one year.
Blotters that are maintained by a broker-dealer pursuant to Rule 17a-3 must contain: I - Receipts and delivers of securities II - Receipts and disbursements of cash III - Dividends received on stock held by the broker-dealer for the account of customers IV - Purchases and sales of securities IV only I, II, and III only I, II, and IV only I, II, III, and IV
C - The blotter reflects purchases and sales of securities, receipt and delivery of securities, and receipt and disbursement of cash.
In regard to discretionary accounts:
A - The customer must grant prior written approval for the opening of the account
B - The account must be approved by a partner or officer of the firm
C - The account must be reviewed frequently by a partner or officer of the firm
D - All of the above
D - In order for a broker-dealer to maintain a discretionary account for a customer, the broker-dealer must first obtain written authorization from the customer to exercise such discretion. The discretionary authorization is effective only if specifically accepted by a partner or officer of the broker-dealer. Discretionary accounts must be reviewed frequently by a partner or officer of the broker-dealer.
The amount of a member firm’s fidelity bond is based on its:
A - Net capital requirement
B - Net worth
C - Aggregate indebtedness
D - Reserve requirement under SEC Rule 15c3–3
A - A member firm is required to carry a fidelity bond covering officers and employees to protect against such things as forgery, securities loss, and fraudulent trading. The amount of the fidelity bond is based on the member firm’s net capital requirement.
When a customer sells securities through a broker-dealer, a mandatory buy-in is required if the broker-dealer does not receive securities from the customer by the: Third business day after the trade date Fifth business day after the trade date 10th business day after the trade date 10th business day after settlement date
D - Rule 15c3-3 requires a broker-dealer to obtain possession of securities within a reasonable time. If a customer sells securities and fails to deliver the securities within ten business days of the settlement date, the broker-dealer must buy in the customer. Under exceptional circumstances, the broker-dealer may apply to FINRA for an extension.
A member firm may charge its customers a reasonable amount that does not discriminate between customers for which of the following services?
I - Safekeeping of securities
II - Collection of dividends and interest
III - Forwarding proxy material from corporations
IV - Exchange or transfer of securities
I and II only
II and IV only
I, II, and IV only
I, II, III, and IV
C - A member firm may charge its customers for such services as safekeeping of securities, collection of dividends and interest, and exchange or transfer of securities, if such charges are reasonable and do not unfairly discriminate between customers. A member firm may not charge a customer for forwarding proxies or other reports from a corporation. The member firm is required to forward such material to the customer if the corporation reimburses the member firm for the expenses involved.
Which of the following situations is governed by MSRB Rule G-37 on political contributions?
A - The participation by a municipal broker-dealer in a competitive bid for Aberdeen School District G.O. bonds
B - The participation by a municipal broker-dealer in a negotiated sale of Mountain City Housing Finance Authority bonds
C - A municipal finance professional’s contribution to the presidential primary election campaign fund of a U.S. Senator
D - A municipal finance professional’s contribution to the election fund for a candidate for mayor in London
B - The underwriting ban only affects situations where the issuer official could have an impact on the choice of underwriters, as in a negotiated transaction. Federal elected officials and foreign officials are not issuer officials for purposes of Rule G-37.
A broker-dealer that has been suspended:
A - May not participate in an underwriting during the time of its suspension
B - May be invited to participate in an underwriting that will take place after the period of the suspension ends
C - May participate in an underwriting only if it was invited to do so prior to its suspension
D - May participate in an underwriting even though it is otherwise suspended from other types of business
A - A broker-dealer that is suspended may not participate in any underwriting, even if it was invited to participate prior to its suspension. A broker-dealer that is currently suspended may not be invited to participate in an underwriting that will take place after its period of suspension ends.
Final determination on whether a security is in good deliverable form is made by the:
A - Transfer agent
B - Receive and deliver department of the member firm
C - Buyer’s Cashier
D - Uniform Practice Committee
A - The ultimate decision on whether a security is in good deliverable form is made by the transfer agent. The Uniform Practice Code as it relates to good deliveries is primarily designed to insure that a security delivered by one broker-dealer to another broker-dealer is acceptable to the transfer agent.
According to MSRB rules, which of the following statements are TRUE concerning reporting methods for call provisions on customer confirmations?
I - If appropriate, a confirmation should contain a caveat stating that the yield realized by a customer may differ from the yield indicated on the confirmation if the securities are called.
II - If appropriate, a confirmation should state that all information about a security’s call provision will be supplied by the broker-dealer upon request.
III - Any catastrophe call provisions should be indicated on a customer’s confirmation.
IV - If securities are callable, the date of the call and the call price should be disclosed when it is used to calculate yield.
III and IV only
I, II, and III only
I, II, and IV only
I, II, III, and IV
C - A confirmation should contain a caveat stating that if the bond is called, the yield realized by a customer may differ from the yield indicated on the confirmation. It should also state that the broker-dealer will supply all information about a security’s call provisions upon request. Finally, if securities are callable, the call date and call price should be disclosed. Choice III is wrong because catastrophe call provisions are not included on the confirmation.
FINRA Conduct Rules require a member firm to:
A - Send customers a quarterly balance sheet and income statement
B - Send customers a quarterly balance sheet
C - Make available a balance sheet and income statement to a customer
D - Make available a balance sheet to a customer
D - A member firm is required under FINRA Conduct Rules to send a balance sheet to a customer if the customer requests one. There is no requirement to send an income statement to a customer.
Examples of items posted to subsidiary ledgers are:
I - Fails to deliver and fails to receive
II - Subordinated loans
III - Securities in transfer
IV - Long and short securities differences
IV only
I and III only
II and III only
I, III, and IV only
D - Fails to receive and fails to deliver, securities in transfer, long and short securities differences, and securities borrowed and loaned are examples of items posted to a subsidiary ledger. This ledger would provide the details of the specific transactions that caused the fails, or the specific securities that were borrowed and loaned. Entries should be posted to the subsidiary ledgers no later than two business days after they occur.
A member firm may lend stock belonging to a customer:
A - If the customer has signed the margin agreement
B - If the customer has borrowed from the member firm
C - If the customer has signed a separate loan consent agreement
D - Under no circumstances
C - A member firm may lend stock belonging to a customer only if the customer has granted written consent to lend the stock. When the customer opens a margin account, the member firm will require the customer to complete the margin agreement. In addition, the member firm will request that the customer sign the loan consent agreement. If the customer fails to sign the loan consent agreement, the member firm may not lend the customer’s stock under any circumstances. If the customer signs the loan consent agreement, the member firm may lend stock with a value not exceeding 140% of the customer’s debit balance (the loan amount).
Newton Brokerage is managing a contingent underwriting. Newton plans to sell 5,000,000 shares of Nostalgic Corp. on an all-or-none basis. Regulations require the broker-dealer to establish:
A - A special account for the exclusive benefit of Nostalgic Corp.
B - A secured demand account for the customers of Newton
C - An escrow account for the persons having a beneficial interest in the underwriting
D - A drawdown account to enable the syndicate to pay expenses
C - This is covered by SEC Rule 15c2-4 of the 1934 Securities Exchange Act. If a broker-dealer is participating in a distribution other than a firm commitment underwriting, it must either promptly forward funds to the issuer or establish an account with an escrow agent who has agreed in writing to hold such funds.
The Alexandria, Virginia Sewer Authority just sold $20,000,000 of its revenue bonds to a syndicate managed by Wilson & Company, a municipal securities dealer. It is a serial bond issue with par values of $1,000,000 scheduled to mature annually, beginning exactly six months after the dated date. Wilson & Company must therefore pay the MSRB an underwriting assessment fee based on a: $1,000,000 par value $2,000,000 par value $19,000,000 par value $20,000,000 par value
D - The underwriting assessment is based on the face amount of the securities purchased from the issuer. It applies only to issues with a stated maturity of more than nine months. It is imposed on the face amount of all securities purchased from the issuer if any part of the issue has a final stated maturity of more than nine months. Therefore, this entire issue of $20,000,000 would be assessed, despite the fact that $1,000,000 worth has a maturity of less than nine months.
Funds collected from customers and placed in an escrow account would be released from that account when:
A - The syndicate closes with the issuer
B - The appropriate event or contingency has occurred
C - The managing underwriter declares that the syndicate is over
D - Syndicate profits are distributed
B - In an all-or-none underwriting, or a mini-maxi underwriting, client funds are held in escrow until the appropriate event (the attainment or lack thereof of a certain sales target) has been achieved.
Under the provisions of Rule 10b-10, a confirmation sent to a customer must disclose:
I - The time of the transaction, or a statement that the time of the transaction will be furnished on request
II - The capacity in which the member acted, as either a broker or a dealer
III - Whether the transaction is solicited or unsolicted
IV - The amount of commission charged on an agency transaction
I and II only
II and III only
II and IV only
I, II, and IV only
D - Broker-dealers must send confirmations to customers for each purchase and sale made for the customer. The confirmation must disclose, among other items, if the broker-dealer acted as a broker (agent) or as a dealer (principal). If the broker-dealer acted as an agent for both the customer and for a third party, it must disclose this fact.
The broker-dealer must disclose the amount of commission charged if it acted in an agency capacity. If it acted for both the buyer and the seller in a single transaction, it must disclose this fact to both the buyer and the seller. In addition, the broker-dealer must disclose, or offer to disclose, the time when the transaction occurred and the name of the other party to the transaction.
Whether a transaction is solicited or unsolicited must be indicated on the order ticket, not the confirmation.
Brighton Brokerage receives $5,000 from a client in the morning on February 28 and $6,000 from the same client in the afternoon. These cash payments by the client:
A - Are illegal under the Trust Indenture Act of 1939
B - Should be reported on Form 4789
C - Do not require reporting because the individual payments are not $10,000 or more
D - Are not permitted until approved by FINRA
B - If $10,000 or more is paid in cash during the course of one business day, it is subject to reporting to the U.S. Treasury on Form 4789 by the broker-dealer.
If a broker-dealer computes its net capital requirement under the Alternate Method it:
I - Must reduce aggregate debit items by 3%
II - Must have at least $500,000 net capital
III - Must have at least 2% of its Aggregate debit items in the Reserve Bank Account
IV - May disregard the Aggregate Indebtedness standard
I and II only
I and III only
III and IV only
II, III, and IV only
C - If a broker-dealer elects, it may determine its minimum net capital under the Alternative Method, which is the greater of $250,000 or 2%of the aggregate debit items as computed in accordance with the Reserve Formula under SEC Rule 15c3-3. The aggregate indebtedness standard is not used when the alternative method is chosen.
Which of the following items are included in the definition of aggregate indebtedness under Rule 15c3-1?
I - Money borrowed from a bank collateralized by securities owned by a customer
II - Money borrowed from a bank collateralized by securities owned by the member firm
III - Fails to receive for the account of customers
IV - Fails to receive for the account of the member firm for securities that have not been resold
I and III only
II and IV only
I, II, and IV only
I, II, III, and IV
A - Aggregate indebtedness includes any borrowing that is collateralized by securities owned by customers. It does not include borrowing that is collateralized by securities owned by the member firm.
Fails to receive for the account of customers is always aggregate indebtedness. Fails to receive for the account of the member firm is not aggregate indebtedness if the firm has not sold the securities. If the firm has sold the securities, it would then be aggregate indebtedness.
A firm’s written supervisory procedures must provide for the prompt review and written approval by a municipal securities principal of:
I - The opening of each customer account in which transactions for municipal securities may be effected
II - Each transaction in municipal securities
III - The handling of all written customer complaints pertaining to transactions in municipal securities
IV - All advertising relating to municipal securities activities
I only
I and II only
I, II, and III only
I, II, III, and IV
D - All of these statements are true. However, the rule should not be interpreted to mean that the principal must personally answer all written complaints. Instead, the principal should supervise all activities regarding complaints and their remedies. Also, accounts should be reviewed on a regular and frequent basis in order to detect and prevent irregularities and abuses. This does not necessarily mean reviewing accounts on a daily basis.
Which of the following broker-dealers may make a computation of the amount to be deposited in the Reserve Bank Account under the alternate method?
I - Ratio of aggregate indebtedness to net capital: 6 to 1
Carries customer free credits equal to: $1,200,000
II - Ratio of aggregate indebtedness to net capital: 9 to 1
Carries customer free credits equal to: $700,000
III - Ratio of aggregate indebtedness to net capital: 7 to 1
Carries customer free credits equal to: $800,000
IV - Ratio of aggregate indebtedness to net capital: 7 to 1
Carries customer free credits equal to: $1,100,000
III only
II and III only
III and IV only
I, II, and III only
A - The Reserve Bank Account may be computed on a monthly basis if a broker-dealer’s ratio of aggregate indebtedness to net capital does not exceed 8 to 1 and total aggregate customer free credits do not exceed $1,000,000.
A broker-dealer is required to make inquiry of the Securities Information Center with respect to securities that come into its possession to determine if the security has been reported as missing, lost, or stolen for which of the following accounts?
I - Another broker-dealer delivers 100,000 shares
II - A regular customer delivers 100,000 shares registered in the customer’s name
III - A customer delivers 100,000 shares registered in street name
IV - A new customer delivers 100,000 shares registered in the customer’s name
II only
III and IV only
II, III, and IV only
I, II, III, and IV
B - Broker-dealers are required to use diligence to ensure that securities in their possession are not lost or stolen. Inquiry must be made of the Securities Information Center in all cases where securities delivered by a customer are registered in street name, or for customers who are unknown to the broker-dealer. Inquiries need not be made for deliveries by customers with whom the broker-dealer has had prior business dealings (if the securities are registered in the name of the customer), or if the dealer can verify the securities through internal records, or for deliveries from other broker-dealers or issuers. Inquiries may also be waived for transactions of $10,000 or less.
A customer has $300,000 in securities and $120,000 in cash with a broker-dealer who has become insolvent. She will be protected for:
A - The full amount of $420,000
B - $200,000 for securities and $120,000 for cash
C - $300,000 for securities only
D - $500,000
A - SIPC provides protection for up to $500,000 of securities, of which $250,000 may be in cash, per customer. In this case, the full amount of $420,000 would be protected.
In connection with a negotiated sale of a new issue of municipal securities, a broker-dealer must send to a customer purchasing these securities information containing the:
I - Underwriting spread
II - Initial offering price for each maturity in the issue
III - Amount of any fee received by the dealer as agent for the issuer
IV - Names of any purchasers of the bonds in an amount equal to or exceeding 10% of the total issue
I only
II and IV only
I, II, and III only
I, II, III, and IV
C - In connection with a negotiated sale of new issue of municipal securities, the customer must be informed of the underwriting spread, the amount of any fee received by the broker-dealer as agent for the issuer, and the initial offering price for each maturity.
Annual reports submitted by a broker-dealer must contain which of the following items?
I - Statement of Financial Condition
II - Statement of Income
III - Statement of Changes in Stockholders’ Equity
IV - Statement of Changes in Liabilities Subordinated to Claims of General Creditors
I and II only
II and III only
I, III, and IV only
I, II, III, and IV
D - Annual reports submitted by the broker-dealer must include all the items indicated in the answer.
If Tuesday, February 22 is the record date for a Palladin Corporation cash dividend, and Monday, Feb. 21 is a national holiday, the ex-dividend date would be: A - Wednesday the 23rd B - Friday the 18th C - Thursday the 17th D - Wednesday the 16th
C - The ex-dividend date is two business days prior to the Feb. 22nd record date. Counting backward gives us Thursday the 17th. An investor would need to buy the stock no later than Wednesday the 16th to be entitled to the dividend.
A customer has a cash account with $40,000 in cash and $10,000 in stock. He has a margin account with equity of $20,000. Under SIPC coverage:
A - Each account is covered separately
B - Both accounts are considered as a single customer
C - Only the cash account is covered
D - Only the margin account is covered
B - If a customer maintains a cash and a margin account, both would be combined to determine the coverage under SIPC.
A municipal securities representative has two clients who share the same address but have different last names. If both clients purchase a new offering of municipal securities, the dealer is required to:
A - Deliver one official statement if both clients consent in writing
B - Deliver one official statement if both clients consent verbally
C - Deliver an official statement to each client at the same address
D - Obtain a written statement from the clients as to where the dealer should send the official statement
A - Under MSRB Rule G-32, if two or more customers share the same address, a dealer may satisfy its official statement delivery requirements by sending one copy of the document provided:
The dealer addresses the official statement to the group (for a fund or corporation) or by addressing the documents to both or all of the names of the clients
The investors consent in writing to the delivery of one official statement
You would not need to obtain the written consent if both investors have the same last name or you reasonably believe the clients are members of the same family
A broker-dealer’s computation of the reserve requirement reveals that it has a deficit in the Reserve Bank Account of $20,000. The broker-dealer must:
A - Notify the SEC immediately by telegram and cease doing business
B - Make the additional deposit in the bank account on the day the computation is made
C - Make the additional deposit in the bank account no later than one hour after the opening of banking business on the day following the computation
D - Make the additional deposit in the bank account no later than one hour after the opening of banking business on the second business day following the computation
D - If a broker-dealer, when making its monthly calculation under the Reserve Formula of Rule 15c3-3, determines that a deposit is required into the Reserve Bank Account, the deposit must be made no later than one hour after the opening of banking business on the second business day following the computation.
A broker-dealer is required to furnish customers with annual reports that include which of the following items?
I - A balance sheet with notes prepared in accordance with generally accepted accounting principles
II - Footnotes containing a statement of the broker-dealer’s net capital and its required net capital
III - A statement that the most recent annual report is available for inspection at the SEC if the auditor commented on any material inadequacies
IV - A statement indicating that the broker-dealer’s Statement of Financial Condition is available for inspection at the broker-dealer’s office and at the SEC
II and III only
I, II, and III only
II, III, and IV only
I, II, III, and IV
D - All of the items listed are correct statements regarding the annual report.
Synagex Inc., a member firm, is notified by the SEC that its aggregate indebtedness is presently 16 times greater than its net capital. Synagex does not agree with this finding. Which of the following statements is TRUE?
A - Synagex need not notify FINRA if its opinion of its net capital status is verified by an independent public accountant.
B - Synagex is required to promptly notify the SEC and FINRA of the claimed deficiency, stating its reasons for disagreement.
C - Synagex must advise all of its customers that it is being investigated for net capital violations.
D - Synagex need not send any disclosure to a regulator until its chief financial officer has been ordered to do so by the SEC.
B - In cases where a broker-dealer has been advised by the SEC that it has a net capital deficiency, it must promptly notify the SEC and FINRA of this situation in the required manner. If the broker-dealer does not agree with the finding, its notification may include a statement of disagreement.
Consider the following information for Gemstar Trading, an introducing broker-dealer.
Market-making activities:
12 stocks priced at $5 or less
20 stocks priced at greater than $5
Gemstar’s minimum net-capital requirement based on the above is:
$32,000
$62,000
$100,000
$250,000
C - Gemstar would be classified as a securities dealer under the Net Capital Rule with a minimum requirement of $100,000. Gemstar doesn’t make markets in enough issues for the formula dictated by the price of the stock to matter. If it made a market in one issue, its net-capital requirement would still be $100,000.
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
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.
A commercial bank is the paying agent on several municipal bond issues and in this capacity has collected numerous ownership records and other personal data. The bank is considering releasing these records to its municipal broker-dealer subsidiary for use as a prospecting list. Which statement is TRUE concerning the broker-dealer’s use of this information?
A - Use of the information is prohibited since it was obtained in a fiduciary capacity.
B - The information may be used with the issuer’s consent.
C - Use of the information requires the consent of both the issuer and bondholder.
D - Use of the information is acceptable for institutional accounts but prohibited for retail accounts.
B - Information concerning ownership of municipal securities may be used by a broker-dealer with the issuer’s consent. Customer consent is not required, since the ownership records are considered the property of the issuer.
If FINRA determines that a member is experiencing financial difficulty, which TWO of the following actions may be required:
I - Collect all debit balances from customers
II - Deliver segregated securities to customers
III - Postpone opening of new branch offices
IV - Accept unsolicited orders only
I and II
I and III
II and III
III and IV
D - In order to minimize exposure to customers and other broker-dealers, FINRA could require that a firm postpone opening branch offices, deliver customer’s fully paid securities, and limit its business to unsolicited orders only. FINRA’s Conduct Rules provide an extensive list of possible actions that may be required.
When is a FOCUS report considered to be filed with the Commission?
A - When the envelope is mailed
B - When the envelope is post marked
C - When received at the Commission’s principal and regional offices
D - When reviewed by the Commission staff
C - A FOCUS report is considered filed when received at the SEC’s principal and regional offices.
To investigate allegations of excessive trading in discretionary accounts, a manager’s primary focus should be:
A - The lower quality investments held in the account
B - The frequency of trading in the account
C - The high proportion of speculative trading relative to investment grade securities held in the account
D - The investment objectives of the client
D - In investigating allegations of excessive trading, the most important element in the process is to examine the investment objectives of the customer. Investment objectives are highly instrumental in guiding a registered representative and should always be considered prior to making any recommendations to a customer. Frequent trades might be acceptable in the account of a day trader but inappropriate for many other investors.
Rule 15c3-2 regarding notification to customers concerning their free credit balances requires which of the following actions?
I - The customer must get a written notice of the amount due to the customer
II - The notice must state that the funds are not segregated and may be used by the broker-dealer
III - The notice must state that the funds are payable on demand by the customer
IV - The notice must be sent monthly
I and III only
II and III only
I, II, and III only
I, II, III, and IV
C - The quarterly notification to customers regarding their free credit balances must indicate the amount that is owed to the customer, the fact that the funds are not segregated from other funds of the broker-dealer and may be used by the broker-dealer in the conduct of its business, and the fact that the credit balances are payable on demand of the customer.
Which of the following statements are TRUE in regard to Rule 15c2-1?
I - The bank may rehypothecate the stock of customers only with the specific consent of the broker-dealer who deposited the stock.
II - The broker-dealer must give the bank written notice that the stock belongs to customers and that the broker-dealer is in compliance with Rule 15c2-1.
III - If the amount borrowed on the stock is less than the maximum allowed under the Rule, the broker-dealer may use the balance available as collateral on a loan made to finance the broker-dealer’s business operations.
IV - The stock of all customers may be commingled if the broker-dealer obtains their consent.
II and IV only
I, II, and IV only
II, III, and IV only
I, II, III, and IV
A - Rule 15c2-1 requires that a broker-dealer who is hypothecating customer’s stock at a bank give the bank written notice that the stock belongs to customers and such hypothecation does not contravene the rule. The bank may not rehypothecate the stock under any circumstances. The bank may not have a cross-lien on the customer’s stock to secure the broker-dealer’s indebtedness to the bank. Commingling of stock belonging to customers may be done if the customers have granted their written permission.
During a close-out procedure, the freeze period is determined by the: A - Bond issuer B - Buyer of the bonds C - Paying agent for the issue D - Seller of the bonds
D - During the execution period of the close-out procedure, the seller may promise delivery to the buyer and specify a period during which delivery is intended. The execution period will be temporarily frozen but would resume again if delivery is not made. The freeze period is two business days.
A broker-dealer whose aggregate indebtedness exceeds its net capital by more than eight times must compute the amount of cash or qualified securities in the Reserve Bank Account:
A - Daily
B - Weekly as of the last business day of the week
C - Monthly as of the last business day of the month
D - Quarterly as of the last business day of the quarter
B - A broker-dealer must determine its Reserve Formula weekly. However, under certain circumstances the computation may be made monthly if the broker-dealer has a ratio of aggregate indebtedness to net capital that does not exceed 8 to 1 and the broker-dealer does not carry customer free credits exceeding $1,000,000. If the computation is made monthly, the broker-dealer is required to maintain a reserve requirement of 105% of the amount required by Rule 15c3-3.
All the following are provided to customers of a broker-dealer EXCEPT: A - Notification of free credit balances B - FOCUS reports C - Statement of financial condition D - Audited balance sheet
B - Broker-dealers file FOCUS reports with the SEC and their primary regulator. There is no requirement to provide this report to clients.
A broker-dealer whose aggregate indebtedness to net capital ratio exceeds 800%, or who carries customer funds exceeding $1,000,000, must compute the reserve requirement of Rule 15c3-3 at least: A - Daily B - Weekly C - Monthly D - Quarterly
B - Broker-dealers are normally required to make the computation under Rule 15c3-3 weekly and to maintain 100% of the difference between credits and debits on deposit in the Reserve Bank Account.
A broker-dealer is excused from sending notices to customers under Rule 15c3-2 if it meets which of the following requirements?
I - The broker-dealer segregates customers’ free credit balances in such a way as to preclude their use by the broker-dealer.
II - The broker-dealer establishes a separate bank account for these funds that is clearly designated as a trust account for customer funds.
III - The broker-dealer maintains detailed records of the account including the names of all customers having balances in the account and the amounts of each customer’s balance.
IV - The broker-dealer takes no action that would indicate the funds are being used, directly or indirectly, in connection with the broker-dealer’s business operations.
I only
I and II only
II, III, and IV only
I, II, III, and IV
D - Quarterly notices to customers concerning their free credit balances need not be sent if customer funds are maintained in a separate account clearly designated as a trust account for the customer funds and are segregated in such a way as to preclude their use by the broker-dealer. Detailed records of each customer and the amount of each customer’s funds must be maintained.
Which of the following statements is/are TRUE of a firm’s requirement to keep books and records under MSRB rules?
I - A small municipal broker-dealer is exempt from creating and maintaining books and records if the cost would be unreasonable.
II - An introducing broker-dealer that clears all customer transactions on a fully disclosed basis is not required to create and maintain those records created and maintained by its clearing firm.
III - A broker-dealer that is a bank or a separately identifiable municipal department or division within a bank is required to create and maintain only those records required by its designated bank regulatory agency.
I only
II only
I and II only
I, II, and III
B - An introducing broker-dealer, clearing all transactions with customers on a fully disclosed basis, is not required to keep those books and records which are usually kept by a clearing firm. Broker-dealers are subject to MSRB recordkeeping rules regarding their municipal securities dealer activities. Small firms are not exempt from record-keeping requirements.
On September 15, delivery of 500 shares of stock is due to a broker-dealer. The selling broker-dealer does not make delivery on the settlement date. The buying broker-dealer:
A - Must cancel the trade through a buy-in
B - Will increase its fail to deliver position in the Stock Record
C - Will increase its fail to receive position in the Stock Record
D - Will increase its stock loan position in the Stock Record
C - If a broker-dealer fails to receive securities on the settlement date, a record will be made in the fail to receive section of the Stock Record.
In which of the following situations could a broker-dealer be considered to be approaching financial difficulty?
I - A 30% decline in net capital experienced in the three-month period immediately preceding such a computation
II - Its books and records are not up-to-date
III - The broker-dealer is unable to clear and settle transactions in a timely manner
IV - The member currently has net capital of $1,400,000 with a requirement of $1,200,000
I and IV only
II and III only
I, III, and IV only
I, II, III, and IV
D - Any of these events could be indicative of an approaching net capital violation, requiring that the broker-dealer take precautionary steps. SEC and FINRA rules specifically indicate those conditions that broker-dealers must resolve in accordance with industry guidelines. The SEC’s Early Warning rule is triggered if a broker-dealer’s ratio of aggregate indebtedness to net capital exceeds 12:1 or its net capital is less than 120% of the required minimum. FINRA rules also describe conditions under which it considers a firm to be approaching “financial or operational difficulty,” including:
Net capital of less than 150% of the minimum required (for more than 15 consecutive business days)
Ratio of aggregate indebtedness to net capital exceeds 10:1 (for 15 consecutive business days)
A reduction in excess net capital of 25% in the preceding two months or 30% or more in the three-month period immediately preceding such a computation
A substantial change in the manner in which it processes its business which, in the view of FINRA, increases the potential risk of loss to customers
Other broker-dealers’ books and records are not maintained in accordance with the provisions of SEC Rules 17a-3 and 17a-4
Inability to clear and settle transactions promptly
FINRA members who are considered to be approaching financial or operational difficulty may be prohibited from expanding their business or may be required to reduce their level of business activity.
A broker-dealer conducts its security count under Rule 17a-13 on January 15. The next security count must be made no later than: February 15 March 15 April 15 May 15
D - A broker-dealer may not conduct a quarterly securities count less than two months following the previous count, nor more than four months following the previous count. The previous count was conducted on January 15. The next count could not be made before March 15 or after May 15.
The maximum penalty for failure to disclose material information in a transaction in the over-the-counter market is a:
A - One-year suspension
B - Bar from the securities industry
C - $1,000,000 fine and/or 5 years in prison
D - $5,000,000 fine and/or 20 years in prison
D - The most severe penalties for securities law violations are found under the Securities Exchange Act of 1934. Violations of antifraud or other provisions of the Act could result in a fine of not more than $5,000,000, imprisonment for not more that 20 years, or both.
