Series 27 Practice Test 1

Question 1

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

Answer 1

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.

Question 2

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

Answer 2

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.

Question 3

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

Answer 3

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.

Question 4

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

Answer 4

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.

Question 5

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

Answer 5

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

Question 6

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

Answer 6

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.

Question 7

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

Answer 7

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.

Question 8

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

Answer 8

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.

Question 9

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

Answer 9

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.

Question 10

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

Answer 10

D - Receivables due from municipal securities underwritings are not allowable assets if they are more than 60 days old.

Question 11

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

Answer 11

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.

Question 12

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

Answer 12

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.

Question 13

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

Answer 13

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.

Question 14

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

Answer 14

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.

Question 15

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

Answer 15

C - An introducing firm files a FOCUS Report Part IIA quarterly. A clearing firm files FOCUS Report Part I and II.

Question 16

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

Answer 16

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.

Question 17

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

Answer 17

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.

Question 18

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

Answer 18

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.

Question 19

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.

Answer 19

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.

Question 20

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

Answer 20

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).

Question 21

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

Answer 21

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.

Question 22

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

Answer 22

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.

Question 23

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%

Answer 23

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).

Question 24

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

Answer 24

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.

Question 25

``` 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 ```

Answer 25

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.

Question 26

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

Answer 26

D - SIPC provides coverage for each separate customer. Each separate cash account would be covered. In addition, the joint account would also be covered.

Question 27

``` 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 ```

Answer 27

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.

Question 28

``` Subsidiary ledgers must be maintained for: One year Three years Six years The life of the firm ```

Answer 28

B - Subsidiary ledgers must be maintained for three years.

Question 29

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.

Answer 29

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.

Question 30

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.

Answer 30

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.

Question 31

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

Answer 31

B - A satisfactory subordination agreement requires a minimum maturity of one year. A temporary subordination agreement may have a maximum maturity of 45 days.

Question 32

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

Answer 32

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.

Question 33

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

Answer 33

C - The managing underwriter for the syndicate is responsible for maintaining records for syndicate transactions.

Question 34

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

Answer 34

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.

Question 35

``` 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 ```

Answer 35

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.

Question 36

``` 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 ```

Answer 36

B - The requirement is $200,000. The broker-dealer may reduce its aggregate indebtedness by this amount only.

Question 37

``` 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 ```

Answer 37

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.

Question 38

``` 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 ```

Answer 38

D - Long securities differences for securities that have not been sold by a broker-dealer are disregarded in the net capital computation.

Question 39

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

Answer 39

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.

Question 40

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

Answer 40

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.

Question 41

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%

Answer 41

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).

Question 42

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

Answer 42

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.

Question 43

``` Blotters reflecting purchases and sales of securities, receipts and deliveries of securities, and receipts and disbursements of cash are prepared: Daily Weekly Quarterly Annually ```

Answer 43

A - The blotter, which is a record of original entry, is prepared daily.

Question 44

``` 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 ```

Answer 44

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.

Question 45

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

Answer 45

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.

Question 46

``` Which of the following choices would not be eligible for SIPC coverage? A - Municipal bonds B - Options C - Futures D - Pink Sheet issues ```

Answer 46

C - Futures are not securities. SIPC only covers securities.

Question 47

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

Answer 47

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.

Question 48

``` 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 ```

Answer 48

B - The broker-dealer is carrying funds in excess of $1,000,000. A weekly calculation is required.

Question 49

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

Answer 49

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.

Question 50

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

Answer 50

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.

Question 51

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.

Answer 51

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.

Question 52

``` 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 ```

Answer 52

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).

Question 53

``` 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 ```

Answer 53

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.

Question 54

``` 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 ```

Answer 54

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.

Question 55

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

Answer 55

B - A due bill occurs on a trade that is executed before the ex-dividend date and delivered after the record date.

Question 56

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

Answer 56

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

Question 57

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

Answer 57

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.

Question 58

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

Answer 58

B - A member is required to review its fidelity bond coverage annually.

Question 59

``` 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 ```

Answer 59

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.

Question 60

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

Answer 60

B - There is no requirement for a broker dealer to have a special audit of the Reserve Bank Account on a monthly basis

Question 61

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

Answer 61

D - Rule 17a-3 requires the broker-dealer to maintain all the records that are indicated in this question.

Question 62

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

Answer 62

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.

Question 63

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

Answer 63

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.

Question 64

``` 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 ```

Answer 64

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.

Question 65

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

Answer 65

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.

Question 66

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

Answer 66

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.

Question 67

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

Answer 67

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.

Question 68

``` 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 ```

Answer 68

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.

Question 69

``` 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 ```

Answer 69

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.

Question 70

``` All of the following may authenticate a mutilated security EXCEPT the: Trustee Operations manager Transfer agent Registrar ```

Answer 70

B - No matter how experienced, the operations manager may not authenticate a mutilated security. The issuer could also authenticate a mutilated security.

Question 71

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

Answer 71

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

Question 72

``` 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

Answer 72

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

Question 73

``` 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

Answer 73

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

Question 74

``` 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

Answer 74

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%

Question 75

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

Answer 75

A - Assets that are not readily convertible into cash, such as furniture and fixtures, are excluded in full in the computation of net capital.

Question 76

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

Answer 76

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.

Question 77

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

Answer 77

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.

Question 78

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

Answer 78

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.

Question 79

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.

Answer 79

C - MSRB rules allow for the storage of customer records in either an electronic or physical format.

Question 80

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

Answer 80

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.

Question 81

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

Answer 81

A - Choices (b) and (c) are submitted to the broker-dealer's Designated Examining Authority.

Question 82

``` 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 ```

Answer 82

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.

Question 83

``` 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 ```

Answer 83

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.

Question 84

``` 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 ```

Answer 84

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.

Question 85

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

Answer 85

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.

Question 86

``` 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 ```

Answer 86

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.

Question 87

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

Answer 87

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.

Question 88

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

Answer 88

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.

Question 89

``` 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 ```

Answer 89

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.

Question 90

``` 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 ```

Answer 90

C - The blotter reflects purchases and sales of securities, receipt and delivery of securities, and receipt and disbursement of cash.

Question 91

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

Answer 91

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.

Question 92

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

Answer 92

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.

Question 93

``` 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 ```

Answer 93

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.

Question 94

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

Answer 94

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.

Question 95

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

Answer 95

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.

Question 96

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

Answer 96

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.

Question 97

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

Answer 97

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.

Question 98

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

Answer 98

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.

Question 99

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

Answer 99

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.

Question 100

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

Answer 100

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.

Question 101

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

Answer 101

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).

Question 102

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

Answer 102

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.

Question 103

``` 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 ```

Answer 103

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.

Question 104

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

Answer 104

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.

Question 105

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

Answer 105

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.

Question 106

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

Answer 106

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.

Question 107

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

Answer 107

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.

Question 108

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

Answer 108

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.

Question 109

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

Answer 109

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.

Question 110

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

Answer 110

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.

Question 111

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

Answer 111

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.

Question 112

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

Answer 112

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.

Question 113

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

Answer 113

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.

Question 114

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

Answer 114

D - Annual reports submitted by the broker-dealer must include all the items indicated in the answer.

Question 115

``` 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 ```

Answer 115

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.

Question 116

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

Answer 116

B - If a customer maintains a cash and a margin account, both would be combined to determine the coverage under SIPC.

Question 117

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

Answer 117

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

Question 118

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

Answer 118

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.

Question 119

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

Answer 119

D - All of the items listed are correct statements regarding the annual report.

Question 120

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.

Answer 120

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.

Question 121

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

Answer 121

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.

Question 122

``` If securities reported as stolen or missing are subsequently recovered, a report must be filed: A - Immediately B - Within one day of recovery C - Within two days of recovery D - Within three days of recovery ```

Answer 122

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

Question 123

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.

Answer 123

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.

Question 124

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

Answer 124

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.

Question 125

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

Answer 125

C - A FOCUS report is considered filed when received at the SEC's principal and regional offices.

Question 126

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

Answer 126

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.

Question 127

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

Answer 127

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.

Question 128

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

Answer 128

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.

Question 129

``` 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 ```

Answer 129

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.

Question 130

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

Answer 130

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.

Question 131

``` 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 ```

Answer 131

B - Broker-dealers file FOCUS reports with the SEC and their primary regulator. There is no requirement to provide this report to clients.

Question 132

``` 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 ```

Answer 132

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.

Question 133

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

Answer 133

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.

Question 134

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

Answer 134

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.

Question 135

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

Answer 135

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.

Question 136

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

Answer 136

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.

Question 137

``` 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 ```

Answer 137

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.

Question 138

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

Answer 138

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.

Question 139

Prior to the first sale of any securities by a syndicate, the syndicate manager must furnish in writing to the other members of the syndicate: I - The priority of orders II - The procedure by which the priority of orders may be changed III - If there is an order period, whether orders may be confirmed prior to the end of the order period I only I and II only II and III only I, II, and III

Answer 139

D - Prior to the first sale by the syndicate, the syndicate manager must disclose in writing to other members: the priority of orders; the procedure, if any, by which such priority may be changed; and if there is an order period, whether orders may be confirmed prior to the end of the order period.

Question 140

Interweb Brokerage has the following balances in its Reserve Formula. Total Credit Items $985,000 Total Debit Items $800,000 It is eligible to compute the formula monthly. In addition, there is cash in the Reserve Bank Account of $160,000. The required deposit is: $985,000 $540,000 $185,000 $34,250

Answer 140

D - A broker-dealer computing the reserve formula under SEC Rule 15c3-3 that is eligible for the monthly computation must adjust the excess of total credits over total debits by 5%. In this case the credits exceed debits by $185,000. Five percent of $185,000 equals $9,250. Add this to the difference between the cash on deposit ($160,000) and the amount required ($185,000) equals $25,000. $25,000 plus $9,250 equals $34,250. Interweb would have to deposit $34,250.

Question 141

A broker-dealer is controlled by a publicly-held corporation. If a customer wishes to purchase stock of the parent company, the broker-dealer: A - Must disclose the relationship to the parent company in writing B - Must refuse to accept the order C - Must disclose the amount of control by the parent company over the broker-dealer D - May accept the order in the same manner as any other order

Answer 141

A - If a broker-dealer who is controlled by a public company has a customer who wishes to purchase the stock of that company, the broker-dealer must disclose the control relationship prior to accepting the order. If this initial disclosure was verbal, written disclosure must also be provided prior to settlement (completion of the transaction).

Question 142

A bank may allow a broker-dealer to withdraw funds and qualified securities from its Reserve Bank Account: A - On the request of the broker-dealer B - With the written authorization of the broker-dealer's Examining Authority C - With the written authorization of the SEC D - With satisfactory proof of the correctness of the withdrawal as indicated by a computation of the Reserve Formula under Rule 15c3-3

Answer 142

A - Funds may be withdrawn from the Reserve Bank Account at any time when calculation of the Reserve Formula indicates there is an excess. No permission is required to make the withdrawal.

Question 143

In regard to discretionary accounts, which of the following statements is/are CORRECT? I - The customer must approve each transaction in writing before the order is executed. II - The customer must grant written authorization to the member firm to exercise discretion in the account. III - The account may not be accepted unless approved in writing by a partner, officer, or designated official of the member firm. IV - Each discretionary order must be approved prior to entry by a partner, officer, or designated official of the member firm. II only II and III only I, III, and IV only I, II, III, and IV

Answer 143

B - In a discretionary account, the member firm must obtain the written consent of the customer prior to exercising discretion. The account may not be handled on a discretionary basis until it is accepted by a partner, officer, or designated official. Orders that are entered in a discretionary account must be approved on the day the order is entered by a partner, officer, or designated official. There is no requirement for advance approval. A discretionary order does not require the approval of the customer prior to entry. If it did require such approval, it would not be a discretionary order.

Question 144

Broker A enters into a transaction to buy municipal securities from Broker B. Broker A sends a confirmation to Broker B that it bought the securities at 98. Broker A then receives a confirmation from Broker B stating that the sale price was 99. Which of the following statements is/are TRUE? I - Either party may void the transaction. II - If Broker A wants to void the transaction and Broker B disagrees, Broker B may take legal rescourse. III - The problem may be submitted to arbitration. IV - Broker B's sales price stands unless overturned by arbitration. I only II and III only I, II, and III only I, II, III, and IV

Answer 144

C - If a trade is confirmed by both parties but a discrepancy exists, either party may void the transaction. However, if either party disagrees with voiding the transaction, legal recourse may be taken. Typically, such a discrepancy will be taken to arbitration if a compromise cannot be reached.

Question 145

A broker-dealer who wishes to hypothecate customers' securities at a bank is required: A - To give written notice to the bank that the securities are carried for the account of a customer and that such hypothecation does not contravene Rule 15c2-1 B - To notify the bank of the dollar amount representing customer securities and the dollar amount representing firm securities if the broker-dealer has commingled the securities C - To notify the bank promptly if customer securities will be used as collateral to secure a loan to finance the broker-dealer's operations D - All of the above

Answer 145

A - Rule 15c2-1 deals with hypothecation of customer securities. When customer securities are deposited at a bank as collateral for a loan, the broker-dealer is required to give written notice to the bank that the securities are carried for the account of its customers and that the hypothecation of the securities does not contravene the provisions of Rule 15c2-1.

Question 146

``` Customer X deposits $3,000 in cash in her account at 9:30 a.m. At 5:00 p.m. on the same day, she deposits another $8,000 in money orders. The firm needs to file: A CTR A CMIR A W-9 Form Nothing ```

Answer 146

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

Question 147

If the collateral value of securities pledged on a secured demand note falls below the principal amount of the note: A - The broker-dealer must immediately notify the lender and the Designated Examining Authority B - The broker-dealer must immediately liquidate a sufficient amount of securities to raise the collateral value of the cash plus the remaining securities to the amount of the secured demand note C - The broker-dealer must comply with the requirements of (a) and (b) only if the collateral value of the securities drops below 50% of the amount of the note D - None of the above are correct

Answer 147

A - If the collateral value of securities pledged on a secured demand note falls below the principal amount of the note, the broker-dealer must immediately notify the lender and the Designated Examining Authority.

Question 148

All of the following are filed with the SEC EXCEPT: A - FOCUS Report Part I B - FOCUS Report Part II C - A summary of SRO assessments D - A notification regarding the hiring of an auditor

Answer 148

C - Focus I and Focus II are filed on a monthly and quarterly basis, respectively with the SEC and the FINRA. Assessments payable to an SRO (FINRA) are not filed with the SEC.

Question 149

All of the following securities may be used as collateral in a margin account EXCEPT: A - Convertible bonds that have been transferred from a UTMA account into the name of the owner who has just reached the age of majority B - Mutual funds purchased more than one month ago that are subject to a contingent deferred sales charge for the next three years C - Treasury bills that mature in less than 30 days D - Shares of a new offering of a Nasdaq stock that have just been allocated to a customer by a syndicate member

Answer 149

D - All of the following securities may be used as collateral in a margin account EXCEPT: Convertible bonds that have been transferred from a UTMA account into the name of the owner who has just reached the age of majority Mutual funds purchased more than one month ago that are subject to a contingent deferred sales charge for the next three years Treasury bills that mature in less than 30 days Shares of a new offering of a Nasdaq stock that have just been allocated to a customer by a syndicate member

Question 150

``` A client wants to write uncovered options. In addition to obtaining a signed option agreement your firm should obtain: A - A minimum equity of at least $25,000 B - A signed margin agreement C - Form W-9 D - Fully paid stock as collateral ```

Answer 150

B - Uncovered options must be executed in a margin account. If the client has not previously established a margin account, she must do so.

Question 151

A broker-dealer may enter into a temporary subordination agreement for purposes of: A - Engaging in an underwriting B - Raising equity to correct a deficiency in its Reserve Bank Account under Rule 15c3-3 C - Raising equity to correct a deficiency in its net capital ratio under Rule 15c3-1 D - Increasing its net capital to 120% of the minimum required under Rule 15c3-1

Answer 151

A - Temporary subordination agreements, which may not exceed 45 days in duration, are limited to underwritings only.

Question 152

``` Reclamation based on the fact that a municipal security was delivered after publication of notice of call may be made: A - Within 10 days B - Within 30 days C - Within 60 days D - With no time limit ```

Answer 152

D - There is no time limit, however, this rule does not apply if the entire issue has been called for redemption or if the security involved was traded as a called security.

Question 153

``` The 5% Policy applies to which of the following? I - Agency sales in the OTC market II - Principal transactions in municipal bonds III - Mutual fund sales IV - New issues of corporate securities I only I and IV only II and III only I, II, and III only ```

Answer 153

A - The 5% Policy applies to both agency and principal OTC transactions. However, it does not apply to any sale under a prospectus, such as a mutual fund or a new issue, or to transactions in governments or municipals.

Question 154

Which of the following statements is NOT TRUE regarding a temporary subordinated loan? A - It may not be used as part of the broker-dealer's capital. B - A firm is limited to executing three such agreements in a 12-month period. C - The loan may not have more than 45 days to maturity. D - The proceeds of the loan are to be used for underwriting purposes only.

Answer 154

A - Temporary subordinated loans are short-term loans that are used for underwriting purposes. A broker-dealer is limited to executing no more than three such loans per year, with maturities of no greater than 45 days. These loans are acceptable as capital in the broker-dealer's financial structure.

Question 155

``` On a secured demand note, the value of the note may not be more than what percentage of the market value of common stock pledged to back the note? 30% 50% 70% 85% ```

Answer 155

C - Securities that are pledged on a secured demand note are usually subject to the same haircuts that apply to securities held in a broker-dealer's proprietary accounts. However, if common stock is pledged as collateral to back a secured demand note, it is subject to a haircut of 30%, rather than 15%. Therefore, the value of the note may not exceed 70% of the value of the stock.

Question 156

Which of the following statements is TRUE of a CUSIP number? A - It is assigned in place of a serial number when a bond is not part of a serial issue. B - It is required to be printed on the face of the bond certificate and be legible to effect good delivery. C - It is assigned to each bond certificate to identify the security with the book of record of the registrar. D - It must be promptly obtained by the managing underwriter for each new municipal issue.

Answer 156

D - Each broker-dealer who acquires, as principal or agent, a new issue of municipal securities from the issuer for the purpose of distributing such issue, must apply in writing to the MSRB for assignment of a CUSIP number to the new issue. This task is generally performed by the syndicate manager. However, member firms need not apply if the issuer has made application for the number.

Question 157

Armstead Brokerage determines that it is missing 1,000 shares of Neshiminy Corp. after it conducted its quarterly securities (box) count. Armstead's responsibility is to: A - Report within two business days if the securities are not recovered B - Only report this if there is a suspicion of criminal activity C - Request duplicate certificates from the transfer agent D - Report within 10 business days

Answer 157

D - Unlike other circumstances where reporting must occur much sooner (one business day after securities have been determined to be missing for two business days), a reporting institution is given 10 business days to make such a report if the short security difference was discovered as the result of the quarterly box count.

Question 158

When a purchaser wishes to close out a transaction: I - Notice of the close-out may be given to the seller over the telephone II - Written notice must be sent to the seller accompanied with a copy of the seller's confirmation of the transaction III - The execution date for the close-out must be at least 10 business days after written notice is sent by the purchaser IV - The execution date for the close-out must be at least 10 business days after initial notice is given, be it by telephone or in written form I and II only II and III only I, II, and III only I, II, and IV only

Answer 158

D - Choice (III) is incorrect. The execution date for the close-out must be at least 10 business days after initial notice of the close-out is given by the purchaser, not after written notice is sent. Initial notice is usually given over the telephone.

Question 159

``` All of the following securities settle regular way in three business days except: A - Preferred stock B - U.S. government bonds C - Municipal bonds D - Warrants ```

Answer 159

B - U.S. government bonds settle in one business day (T + 1)

Question 160

Good-faith deposits arising in connection with an underwriting of stock: A - Are not an allowable asset B - Are an allowable asset only if the underwriting has not settled C - Are an allowable asset if 11 days or less have elapsed from the settlement of the underwriting with the issuer D - Are an allowable asset if less than 30 days have elapsed from the settlement of the underwriting with the issuer

Answer 160

C - A good faith deposit represents the cash deposit made by a broker-dealer that is bidding for an underwriting. Once the underwriting is completed, the issuer that is holding the good-faith deposit will return it to the broker-dealers. If the deposit has not been returned within 11 days of the settlement of the underwriting, the full amount of the deposit must be deducted from capital.

Question 161

``` A call option contract may be bought: A - On margin in the general account B - In the cash or margin account C - For either cash or margin D - In the margin account only if it is in the money ```

Answer 161

B - Call options have no loan value under Regulation T and therefore must be bought for cash. Options could be purchased in a margin account provided the full purchase price is deposited.

Question 162

``` A broker-dealer with total customer credits of $500,000 and total customer debits of $450,000 computes its reserve requirement under Rule 15c3-3 under the alternate method. The broker-dealer must deposit into its Reserve Bank Account: $50,000 $52,500 $55,000 None of the above ```

Answer 162

A or B - Computations under the Reserve Formula must be made weekly, and the difference between the credit items and the debit items must be deposited in the Reserve Bank Account no later than one hour following the opening of banking business on the second business day following the computation. Under certain circumstances, a broker-dealer may make a monthly rather than weekly computation. The monthly computation is allowed if the broker-dealer's ratio of aggregate indebtedness to net capital does not exceed 8 to 1 and the broker-dealer does not carry aggregate customer funds in excess of $1,000,000. In this case, the broker-dealer must maintain 105% of the difference between credits and debits. In this question, the difference is $50,000. If the broker-dealer made weekly computations, it would deposit $50,000. If the broker-dealer makes monthly computations, it would deposit $52,500 (105% of $50,000).

Question 163

``` If a FINRA member is required to make an adjustment in its fidelity bond coverage, it must: I - Notify SIPC II - Notify FINRA III - Make the change within 60 days of the anniversary date of the issuance IV - Make a deduction from net capital I only II and III only I, II, and III only I, II, III, and IV ```

Answer 163

B - The broker-dealer is obligated to notify FINRA within 10 business days of any modification to its fidelity bond coverage and make the change within 60 days of the anniversary date of issuance of the coverage.

Question 164

A short securities difference: A - Does not affect net capital B - Requires a 30% haircut immediately C - Requires a 100% deduction immediately D - Requires a 100% deduction after 28 business days

Answer 164

D - A short securities difference represents the deficit amount of securities that a broker-dealer has in its possession over the amount reflected on its records. For example, a broker-dealer indicates on its records that it has 800 shares of XYZ stock. A physical count of the securities reveals that it has only 700 shares. The broker-dealer has a short securities difference of 100 shares. If the broker-dealer fails to resolve the difference within 28 business days, it is required to deduct the full market value of the securities from its net capital. Under the current requirement a short securities difference is subject to a graduated deduction, and becomes a 100% deduction after 28 days.

Question 165

``` If a broker-dealer engages in more than 10 transactions in any one calendar year for its own investment account, its net capital requirement is: $50,000 $100,000 $250,000 $500,000 ```

Answer 165

B - A dealer is required to maintain net capital of at least $100,000. A dealer is defined as a firm executing 10 or more transactions in its investment account over the course of a calendar year.

Question 166

``` A broker-dealer has debit balances of customers totaling $900,000 and credit balances totaling $600,000. The broker-dealer may use as collateral stock with a total value of: $1,500,000 $1,260,000 $900,000 $300,000 ```

Answer 166

B - The broker-dealer may use stock with a value of 140% of the debit balances of $900,000. $900,000 times 1.4 equals $1,260,000.

Question 167

All of the following must be maintained for six years EXCEPT: A - All long and short securities differences B - Repurchase and reverse repurchase agreements C - Dividends and interest received D - The stock record

Answer 167

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

Question 168

In which of the following circumstances would a dealer NOT need to post to the securities records? A - Short positions taken by the dealer B - Securities received in and delivered out on the same day C - The location of securities held by the dealer D - Long security count differences

Answer 168

B - If securities are received in and delivered out on the same day, on or before the settlement date, no posting to the securities records is required. However, the two offsetting transactions would appear on the blotter.

Question 169

``` On January 15, a broker-dealer has debt-equity totaling $1,250,000, of which $750,000 consists of satisfactory subordination agreements. On February 15, the broker-dealer's total debt-equity drops to $1,000,000 because of trading losses. There are no changes in total debt-equity or subordinated agreements through May 30. The broker-dealer was in violation of Rule 15c3-1 commencing on: January 16 February 16 90 days after February 15 120 days after February 15 ```

Answer 169

C - Rule 15c3-1 requires that a broker-dealer's debt may not exceed 70% of the debt-equity total for a period exceeding 90 days. In this question, debt is 75% of the debt-equity total. The broker-dealer must lower the percentage of debt to 70% within 90 days. Failure to do so requires that the broker-dealer send immediate telegraphic or facsimile notice to the SEC and its Designated Examining Authority.

Question 170

Which of the following statements is TRUE regarding the audited statement to be furnished to customers? A - It must be sent to customers no more than 60 days after the date of the audit. B - It must be furnished to customers no more than 105 days after the date of the audit. C - It is identical to the audited annual report filed with the SEC. D - It must indicate that an income statement is available for inspection at the regional office of the SEC.

Answer 170

B - A broker-dealer must furnish an audited annual report to its customers no more than 105 days after the date of the audit. The report contains a Statement of Financial Condition, not the income statement.

Question 171

Which of the following is filed with the greatest frequency? A - Statement of Financial Condition B - FOCUS Report Part II C - Statement pursuant to SEC Rule 17a-5 D - Notice to customers regarding payment for order flow

Answer 171

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

Question 172

On a loan of stock, the lender: A - Forfeits all rights of ownership to the borrower B - Retains all rights of ownership C - Retains all rights of ownership except the right to receive dividends D - Retains all rights of ownership except the right to vote the stock

Answer 172

D - On a loan of stock between broker-dealers, the customer lending the stock retains all rights of ownership, such as collecting dividends, but does not retain the right to vote. This right goes to the new owner of the stock.

Question 173

``` Fail to receive and fail to deliver ledgers must be posted no later than: A - The trade date B - The settlement date C - The day after the settlement date D - Two days after the settlement date ```

Answer 173

D - The fail to receive ledger and the fail to deliver ledger are posted no later than two business days following the settlement date.

Question 174

A registered representative has written an article addressing the impact of the Internet on individual investors. The article will appear in a national business newspaper. This article must be: I - Approved by the Advertising Department of FINRA II - Approved by a firm principal III - Retained for three years IV - Approved by the representative's employer only if specific recommendations are made I and III only I and IV only II and III only III and IV only

Answer 174

C - Communications with the public require internal approval before use. The record retention requirement is three years after use. Whether specific recommendations are made is unrelated to internal approval.

Question 175

On Tuesday, April 9, Bridgewater Securities conducts a securities count. Bridgewater is missing 1,000 shares of Rigamarole Corp. valued at $50 per share. The impact on its financial statements at the end of April would be a: $50,000 charge to capital $25,000 charge to capital $50,000 credit item in the reserve formula $50,000 debit item in the reserve formula

Answer 175

B - Bridgewater must deduct $25,000 from its capital to recognize the short difference. After 14 business days from the time it occurred, the charge is 50% of the market value of the securities. April 30 is 15 business days after April 9. The short securities difference does not affect the reserve formula until more than 30 calendar days have passed.

Question 176

An agency order memorandum is prepared: A - On the same day the order is received B - Before the order is executed C - At the time the order is received D - At the time the trade blotter is posted

Answer 176

B - The agency order memorandum, or trade ticket, should be written prior to the execution of the order.

Question 177

On Tuesday, July 14, a customer purchases the stock of a company that declared a 10% stock dividend on July 7 that is payable to holders of record on Thursday, July 16. In this case: A - The buyer will receive a due bill B - The seller will be required to deliver additional shares C - The seller will receive the additional shares D - The seller will receive a due bill

Answer 177

C - In order to be entitled to the dividend, the customer would have had to purchase the stock prior to the ex-dividend date. For cash dividends and for stock dividends of less than 25%, the ex-dividend date is two business days prior to the record date. If the record date is Thursday, July 16, the ex-dividend date would be July 14. A purchase on July 14 would be made on the ex-dividend date and therefore the seller, not the buyer, would be entitled to the dividend.

Question 178

Which TWO of the following statements are TRUE concerning the delivery of municipal securities? I - Bearer bonds are delivered in units of $5,000 or $10,000 par value. II - Delivery may be made to an agent designated by the purchaser. III - A legal opinion need not accompany the securities unless specifically called for in the terms of the transaction. IV - Securities issuable in both bearer and registered form may be delivered in either form. I and III I and IV II and III II and IV

Answer 178

D - Delivery of municipal securities may be made to an agent designated by the purchaser. Deliveries of securities issuable in both bearer and registered form may be delivered in either form. Clarifying the other choices, bearer bonds are deliverable in units of $1,000 or $5,000 par value, and a legal opinion must always accompany a municipal security unless the terms of the transactions are ex-legal.

Question 179

``` Dealer-to-dealer when-issued confirmations must be sent to a contra-party within: 1 business day of the trade date 2 business days of the trade date 3 business days of the trade date 5 business days of the trade date ```

Answer 179

A - Dealer-to-dealer confirmations for when-issued transactions must be sent to the contra-party within one business day of the trade date.

Question 180

``` An account sells short 1 uncovered Rapunzel May 65 call for 2 when the Stock is 62. The margin requirement is: $1,440 $1,140 $1,740 $2,000 ```

Answer 180

B - 20% of the market value of the stock = $1,240 (20% x 6,200) = $ 1,240 Add the premium $ 200 Subtract the out-of-the-money amount $ 300 Total margin requirement $ 1,140

Question 181

``` Broker-dealers that carry customer accounts must maintain a minimum dollar amount of net capital of: $25,000 $100,000 $175,000 $250,000 ```

Answer 181

D - Firms that (1) carry customer accounts or broker or dealer accounts; or (2) receive or hold funds or securities for customers, brokers, or dealers must maintain minimum net capital of $250,000.

Question 182

``` Liabilities that are subordinated to the claims of creditors under a satisfactory subordination agreement in accordance with the provisions of Rule 15c3-1 are: A - Included in aggregate indebtedness B - Excluded from aggregate indebtedness C - Deducted from net capital D - None of the above ```

Answer 182

B - In accordance with the provisions of Rule 15c3-1, liabilities that are subordinated to the claims of creditors under a satisfactory subordination agreement are excluded from aggregate indebtedness.

Question 183

If a broker-dealer has an entry on its books, short securities differences more than 30 days old for $90,000: A - Aggregate indebtedness increases B - Capital has already been charged C - The stock has already been bought in D - The broker-dealer will recall stock loaned to cover the shortfall

Answer 183

B - Capital has already been charged through a reduction in the retained earnings account. The fact that this entry is on the books of the firm means it has not yet been bought in, which the firm must do after 45 days under the Customer Protection Rule.

Question 184

What information need NOT be recorded by a municipal securities broker-dealer prior to settlement of the first transaction with a customer? A - Signatures of the representative and the principal introducing and accepting the account B - The customer's name and residence or principal business address C - Tax identification or Social Security number D - Written authorization from a customer with respect to discretionary accounts

Answer 184

C - MSRB rules require municipal securities brokers and dealers to obtain certain information from each customer. With the exception of the tax identification or Social Security number, this information must be obtained prior to the settlement of the first transaction.

Question 185

The inventory records of your firm indicate that 12,200 shares of Nitsy should be in inventory. When the quarterly box count is completed, the actual inventory is 12,500. The market value of Nitsy is $11.85. As the financial principal of the firm, how will you handle this long securities difference when computing the firm's net capital? A - Deduct $3,555 from the net capital of the firm. B - Add $3,555 to the net capital of the firm. C - Ignore the overage resulting from the box count. D - Sell the overage and record the proceeds as operating income

Answer 185

C - Long securities differences for stock that has not been sold have no effect on the net capital of the firm. The broker-dealer will neither add nor deduct the value when computing its net capital. If, however, the securities have been sold, the sale proceeds will be recorded as a special item of revenue and a deduction from net capital is required.

Question 186

``` Metcalf Brokerage has calculated its tentative net capital at $2,400,000. Within its common stock trading account is a position consisting of 10,000 shares of Fordham, Inc. stock valued at $34 a share. The additional haircut because of undue concentration would be: $51,000 $15,000 $13,500 $12,450 ```

Answer 186

D - When a broker-dealer has a common stock position whose market value exceeds 10% of its tentative net capital, an undue concentration haircut must be applied. In the example given, the tentative net capital was $2,400,000 of which 10% would be $240,000. The security position has a value of $340,000, 10,000 shares x $34. There is $100,000 excess, $340,000 - $240,000. There is an exclusion from the undue concentration rule for the market value of 500 shares, or $10,000, whichever is greater. The market value of 500 shares equals $17,000, subtracted from the $100,000 excess equals $83,000. 15% of $83,000 equals $12,450.

Question 187

Disbrow Securities sells $1,400,000 face amount of municipal securities to Elger Securities. Upon settlement, there is a $300 difference in the amounts computed by the firms. According to the MSRB: I - Elger can reject the bonds II - Elger must accept and the parties must reconcile any money differences within 10 business days following settlement III - The trade can be cancelled if one party objects IV - The calculation of the seller determines the amount of payment to be made IV only I and III only II and III only II and IV only

Answer 187

D - The MSRB has published a table indicating the maximum differences per transaction that would be sufficient to cause rejection of a delivery. For transactions of $1,000,000 and over, the minimum difference is $500. If the difference is $300, Elger may not reject the delivery. Both firms should attempt to reconcile any money differences within 10 business days of settlement. Ultimately, calculation of the selling party is used to determine monetary amounts. The trade could only be canceled if both parties mutually agree.

Question 188

Once interest and commissions receivable are more than 30 days old: A - These items are not included in the reserve Formula B - They are treated as deductions from net worth C - There is a 50% haircut D - The broker-dealer must eliminate them from its books and records

Answer 188

B - Once more than 30 days old, commissions receivable and interest receivable are deducted from net worth. The net effect is that capital is reduced.

Question 189

``` Regarding the undue concentration rule, a broker-dealer may exclude debt securities that do not exceed: $10,000 $25,000 $40,000 $100,000 ```

Answer 189

B - There is an exclusion to the undue concentration rule for debt positions that do not exceed $25,000.

Question 190

When stock is purchased in a restricted margin account the customer must: A - Pay the full purchase price on the settlement date B - Pay the full purchase price prior to the entry of the order C - Deposit sufficient cash to remove the restriction D - Deposit the initial Regulation T margin requirement within two business days of the settlement date

Answer 190

D - A restricted account is a margin account in which the equity is less than the minimum requirement of Regulation T. There are no penalties associated with a restricted margin account. Customers who wish to purchase stock in a restricted margin account may do so on normal credit terms, by paying for the purchase within two business days of the settlement date. This would be five business days after the trade date, based on a regular-way settlement of three business days.

Question 191

``` A firm has extended loans to its senior officers in the amount of $600,000 in order to purchase stock in the company. The company will hold the stock until the loan balances are paid off at which time the stock will be delivered to the officers. The current market value of the stock that it is holding is $540,000. When calculating allowable assets for net capital purposes, what portion of the loan may be included? $600,000 $540,000 $60,000 $0 ```

Answer 191

B - Since the company is holding the stock as collateral for the loans outstanding, it could sell the stock for $540,000 if there is a default by the officers. This amount would be an allowable asset for net capital purposes; however, the $60,000 difference between the value of the stock and the loans outstanding is unsecured and would not be included for net capital purposes.

Question 192

A broker-dealer that changed its status from introducing broker-dealer to clearing broker-dealer would need to: A - Compute the Reserve Formula weekly instead of monthly B - Resubmit any subordinated loans currently outstanding for reapproval C - Take a higher haircut percentage D - Send financial statements to customers

Answer 192

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

Question 193

``` Your firm is carrying convertible bonds that have a market value of 120% of par. For net capital purposes the haircut applied would be: A - 0, as there is no haircut on bonds B - 2% to 9% of the face amount C - 15% of the face amount D - 15% of the market value ```

Answer 193

D - If a convertible bond is trading for 100% or more of par value, the haircut is the same as if it were common stock, which is 15% of market value.

Question 194

A dealer who is a member of an underwriting syndicate may publish information or recommendations regarding a security in registration: A - If such information or recommendation appears in a publication that has been distributed with reasonable regularity B - If earnings projections do not go beyond the issuer's current fiscal year C - If an opinion or recommendation at least as favorable was contained in the previous issue of such publication D - All of the above

Answer 194

D - This situation is covered by SEC Rule 139. A broker-dealer is allowed to publish information or recommendations regarding a security that is being registered with the SEC in the normal course of the broker-dealer's business if it complies with certain requirements. The recommendation must be made only in a publication that has been distributed with reasonable regularity. Any projection of earnings may not extend beyond the current fiscal year. In addition, an opinion or recommendation regarding the issue that was at least as favorable as the current one had to have been made in the previous issue of such publication.

Question 195

When calculating the net capital of a broker-dealer, certain assets would be allowed, others are disallowed, and still others must be adjusted for their liquidity factors. Which of the following assets would be considered nonallowable assets for net capital purposes? A - Cash in the Reserve Bank Account B - Secured customer debit balances C - Securities borrowed to facilitate customer short sales D - Syndicate receivables -- common stock, 15 days old

Answer 195

D - Syndicate receivables for underwritings that have settled are allowable for certain periods. If the underwriting relates to common stock, the receivable would not be allowable after 11 days; however, for a municipal underwriting, the syndicate receivable becomes nonallowable after 60 days.

Question 196

``` In January of this year, your firm was a participant in a municipal bond underwriting. The entire issue was sold out by February 12, and the firm has recorded syndicate receivables on its books in the amount of $87,200. When preparing the FOCUS report at the end of April, the haircut on this receivable would be: $87,200 $34,880 $26,160 $13,080 ```

Answer 196

A - Syndicate receivables on municipal underwritings that are older than 60 days are nonallowable assets for net capital purposes. Therefore, the haircut would be 100%. If the syndicate receivables were for a common stock underwriting, it would be disallowed after 11 days.

Question 197

Bathgate Capital is a municipal broker-dealer active in the secondary market. Its liability regarding transaction assessments would be: I - Calculated on .0005% of the par value of bonds transacted with dealers II - Calculated on .0005% of the market value of bonds transacted with dealers III - Calculated on .005% of the par value of bonds transacted with customers IV - Waived if securities have a final stated maturity of nine months or less and $1,000,000 or less I and III only I and IV only II and III only III and IV only

Answer 197

B - In addition to underwriting assessments, MSRB rules provide for assessments in the secondary market, based on .0005% ($.005 per $1,000) of the total par value of interdealer and customer transactions. Transactions fees are not assessed on municipal securities that have a final stated maturity of nine months or less.

Question 198

Final settlement of corporate syndicate accounts must be effected by the syndicate manager: A - In a timely and orderly manner B - Within 60 days following the syndicate settlement date C - Within 90 days following the syndicate settlement date D - Based on the terms and conditions specified in the syndicate agreement

Answer 198

C - Corporate syndicate accounts must be settled by the syndicate manager within 90 days following the syndicate settlement date, according to the Uniform Practice Code of FINRA.

Question 199

Under the provisions of SEC Rule 15c3-3, the Customer Protection Rule, monies due the customer must be segregated in a Reserve Bank Account. The amount of money that is on deposit in this account when calculating net capital will be: A - Added to the aggregate indebtedness B - Deducted from the aggregate indebtedness C - A nonallowable asset D - Subject to a haircut

Answer 199

B - The balance of the cash already on deposit in the Reserve Bank Account will be a deduction from the aggregate indebtedness of the firm.

Question 200

Of the following individuals who is/are considered a consultant under MSRB rules? I - A municipal finance professional working for the underwriter II - An attorney who has been paid a finder's fee III - An attorney who has been paid for legal advice IV - A lobbyist hired by the dealer to support specific legislation I only II only II and IV only III and IV only

Answer 200

B - Municipal finance professionals are excluded from the definition of consultant. Accountants, attorneys, and engineers compensated solely for professional services are also excluded. The lobbyist would be considered a consultant only if hired to retain municipal securities business.

Question 201

The underwriter of securities that are used to partially refund an outstanding issue is required to: A - Apply for a CUSIP number on the new issue B - Apply for a CUSIP number on the new issue and on any refunded portions of the old issue C - Inform CUSIP to delete any refunded portions of the issue from its system D - Provide all bondholders affected by the refunding with the opportunity to purchase the new issue

Answer 201

B - Underwriters involved in a refunding must apply for a separate CUSIP number for the refunding issue and a separate number for each part of an outstanding issue that is refunded to a particular date or price. There is no requirement to give an existing bondholder priority in a new issue.

Question 202

The firm has pledged $375,000 of stock with a bank as collateral for customer margin accounts. When calculating the reserve deposit according to SEC Rule 15c3-3, this amount is considered: A - A customer secured debit balance B - An exclusion from the deposit calculation C - A customer credit item included in the deposit calculation D - A fail to deliver contract reduced by 1%

Answer 202

C - Loans obtained by the firm that use customer securities as collateral are credit items and are included in the reserve deposit computation.

Question 203

The trial balance of a broker-dealer contains the following information relative to customer accounts. Customer Debit Balances: Secured $720,000 Unsecured $72,000 Customer Credit Balances $126,000 When calculating the SEC Rule 15c3-3 reserve deposit, which TWO of the following statements are TRUE? I - Total customer debits in the computation amount to $792,000. II - The debits and credits will be shown as a single net number. III - The debits and credits are shown individually and are not netted. IV - The unsecured debits balances are not included in the computation. I and II II and IV I and III III and IV

Answer 203

D - Customer debits and credits are shown individually on each side of the trial balance and are shown in full, rather than as a single net item. Unsecured debits represent monies owed to the firm whereby there is no collateral available. An example might be customer purchases in a margin account for which a Federal Reg. T extension has been obtained.

Question 204

``` A broker-dealer calculating net capital under the alternative method has aggregate debit items of $12,600,000. According to Rule 17a-11, a report must be filed if the firm's net capital falls below: $250,000 $300,000 $302,400 $630,000 ```

Answer 204

D - Under the alternative computation, if the net capital falls below 5% of the aggregate debits, an early warning notice must be sent to the appropriate regulatory authorities. In this case, 5% of $12,600,000 is $630,000.

Question 205

All of the following statements regarding filing requests for extensions of a broker-dealer's audited financial statements are TRUE EXCEPT: A - The request must include a letter from the broker-dealer's independent auditor B - A request must be made at least three business days preceding the due date of the report C - The request must state the amount of additional time requested, but may not exceed 45 days D - The request must describe the measures to be implemented to assure there will be no further delay recurrences

Answer 205

C - A request for an extension may not exceed 30 days from the due date of the report. The report containing the audited financial statements is due within 60 days of fiscal year-end. An extension could extend the filing period to a maximum of 90 days past year-end. A broker-dealer is required to send a copy of its audited statement of financial condition to its customers no later than 45 days after the filing of its annual report

Question 206

Half and Nelson Leverage Capital Inc. currently maintain long call positions in the following securities: 120 at-the-money contracts LHVZ Oct 65 @ 3.50 16 in-the-money contracts PLUM Nov 45 @ 12.10 320 out-of-the-money contracts SLIB Nov 70 @ 1.20 What is the broker-dealer's required haircut on these positions? $14,964 $38,400 $49,880 $99,760

Answer 206

C - Haircuts on long option positions are 50% of the market value of the premium. 120 contracts x $350 = $42,000 x 50% = $21,000 16 contract x $1,210 = $19,360 x 50% = $9,680 320 contracts x $120 = $38,400 x 50% = $19,200 Total haircut = $49,880

Question 207

``` A brokerage firm with a net capital requirement of $475,000 must maintain a fidelity bond of: $475,000 $570,000 $600,000 $650,000 ```

Answer 207

B - A broker-dealer that has a minimum net capital requirement of $475,000 must maintain a fidelity bond of not less than 120% of its net capital requirement under SEC Rule 15c3-1. 120% of $475,000 equals $570,000.

Question 208

``` If a broker-dealer allows its customers to receive or transmit wire transfers, it must collect information about transfers for: $1,000 $2,000 $2,500 $3,000 ```

Answer 208

D - Broker-dealers who transfer or transmit funds (wire transfers) must collect information about any transfer of $3,000 or more, including the names of the transmitter and the recipient. Firms must also verify the identity of the transmitters and recipients who are not established customers.

Question 209

``` Linda Holt is a registered representative at Peabody Financials. She has a client who makes transactions in his account that seem contradictory to his financial objectives. She thinks that the transactions may be related to illegal activity. Linda must file a Suspicious Activity Report when a transaction or group of transactions equals or exceeds: $1,000 $2,500 $3,000 $5,000 ```

Answer 209

D - A firm must file a Suspicious Activity Report (SAR) whenever a transaction (or group of transactions) equals or exceeds $5,000 and the firm suspects one of the following actions: The client is violating federal criminal laws. The transaction involves funds related to illegal activity. The transaction is designed to evade the reporting requirements (structured transactions). The transaction has no apparent business or other legitimate purpose, and the broker-dealer cannot determine any reasonable explanation after examining all the available facts and circumstances surrounding the transaction.

Question 210

Volcanic Investments does not have a proprietary trading account. It clears through Magma Securities. Which of the following statements is TRUE? A - Volcanic Investments does not need to enter into a PAIB agreement in order for its deposits with Magma Securities to be treated as an allowable asset for capital purposes. B - Magma Securities may never use the deposits made by Volcanic Investments for its own capital calculations. C - Volcanic Investments must enter into a PAIB agreement in order for it to treat its deposit with Magma Securities as an allowable asset for capital purposes. D - The deposit with Magma Securities will not be an allowable asset for either Magma Securities or Volcanic Investments if a PAIB agreement is not in place.

Answer 210

C - If an introducing firm does not have a proprietary trading account, it must still enter into a PAIB agreement with its clearing firm in order to treat its deposit at the clearing firm as an allowable asset for capital purposes.

Question 211

When a broker-dealer enters into a PAIB agreement with a clearing member, which of the following statements is CORRECT? A - The introducing broker must notify its DEA five business days before the agreement will become effective. B - The clearing member must notify its DEA five business days before the agreement becomes effective. C - The introducing broker must notify its DEA within two business days of the agreement's effective date. D - The clearing member must notify its DEA within two business days of the agreement's effective date.

Answer 211

D - The introducing broker is required to notify its designated examining authority (in writing) no later than two business days following the effective date of a PAIB agreement.

Question 212

The term customer under the net capital rule would include: A - A municipal broker-dealer B - General, special, or limited partners C - Broker-dealers that maintain a special omnibus account D - Subordinated lenders

Answer 212

C - Other broker-dealers are generally not viewed as customers for regulatory purposes; however, those maintaining a special omnibus account are considered customers.

Question 213

In regard to the Reserve Bank Account pursuant to Rule 15c3-3, which of the following statements are CORRECT? I - The account must be maintained separately from any other account of the broker-dealer. II - The broker-dealer may use the amounts labeled as Total Credits under the Reserve Formula only for the specific purposes indicated under Total Debits. III - Computations under the Reserve Formula must be made daily. IV - Deposits required in the Reserve Bank Account must be made on the business day following the computation. I and II only I, II and III only II, III, and IV only I, II, III, and IV

Answer 213

A - Choice (I) is a correct statement. The Reserve Bank Account must be a separate account maintained by the broker-dealer distinct from any other account of the broker-dealer. Choice (II) is a correct statement and describes the Reserve Formula. The Reserve Formula requires the listing of the credit items. The total value of the credit items must be on deposit at the bank unless the member firm has offsetting debit items. In this case, the amount of the debit items may be deducted from the credit items and the net amount deposited into the Reserve Bank Account. For example, let's assume that the amounts labeled under Total Credits is $100,000. If there were no Total Debits listed, the full amount of $100,000 would have to be deposited. However, the firm may use the Total Credits to apply against the Total Debits and thereby reduce its required deposit. If the Total Debits were $20,000, the firm would be required to deposit only $80,000 in the Reserve Bank Account. Choice (III) is incorrect as computations must be made either monthly or weekly. If the broker-dealer makes monthly calculations, it must maintain 105% of the required amount on deposit. Choice (IV) is incorrect as deposits must be made into the account on the second business day following the calculation.

Question 214

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.

Answer 214

A - 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.

Question 215

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 A. I and II only B. II and III only C. I, II, and III only D. I, II, III, and IV

Answer 215

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.

Question 216

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

Answer 216

B - If a customer maintains a cash and a margin account, both would be combined to determine the coverage under SIPC.

Question 217

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 A. I and III only B. II and III only C. I, II, and III only D. I, II, III, and IV

Answer 217

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.

Question 218

Interweb Brokerage has the following balances in its Reserve Formula. Total Credit Items $985,000 Total Debit Items $800,000 It is eligible to compute the formula monthly. In addition, there is cash in the Reserve Bank Account of $160,000. The required deposit is: A. $985,000 B. $540,000 C. $185,000 D. $34,250

Answer 218

D - A broker-dealer computing the reserve formula under SEC Rule 15c3-3 that is eligible for the monthly computation must adjust the excess of total credits over total debits by 5%. In this case the credits exceed debits by $185,000. Five percent of $185,000 equals $9,250. Add this to the difference between the cash on deposit ($160,000) and the amount required ($185,000) equals $25,000. $25,000 plus $9,250 equals $34,250. Interweb would have to deposit $34,250.

Question 219

A bank may allow a broker-dealer to withdraw funds and qualified securities from its Reserve Bank Account: A. On the request of the broker-dealer B. With the written authorization of the broker-dealer's Examining Authority C. With the written authorization of the SEC D. With satisfactory proof of the correctness of the withdrawal as indicated by a computation of the Reserve Formula under Rule 15c3-3

Answer 219

A - Funds may be withdrawn from the Reserve Bank Account at any time when calculation of the Reserve Formula indicates there is an excess. No permission is required to make the withdrawal.

Question 220

A count of securities under Rule 17a-13 may be made: A. Only by employees whose regular duties involve direct responsibility for the care and protection of securities B. By employees whose regular duties involve direct responsibility for the care and protection of securities under the supervision of someone who is outside the area of care and protection of securities C. Only by employees whose regular duties do not involve direct responsibility for the care and protection of securities D. By a principal of the member firm

Answer 220

B - The quarterly count of securities required under the provisions of Rule 17a-13 may be conducted by employees who are directly responsible for the handling of the securities if the count is supervised by a person whose regular duties do not involve direct responsibility for the handling of the securities.

Question 221

A broker-dealer with total customer credits of $500,000 and total customer debits of $450,000 computes its reserve requirement under Rule 15c3-3 under the alternate method. The broker-dealer must deposit into its Reserve Bank Account: A. $50,000 B. $52,500 C. $55,000 D. None of the above

Answer 221

B - Computations under the Reserve Formula must be made weekly, and the difference between the credit items and the debit items must be deposited in the Reserve Bank Account no later than one hour following the opening of banking business on the second business day following the computation. Under certain circumstances, a broker-dealer may make a monthly rather than weekly computation. The monthly computation is allowed if the broker-dealer's ratio of aggregate indebtedness to net capital does not exceed 8 to 1 and the broker-dealer does not carry aggregate customer funds in excess of $1,000,000. In this case, the broker-dealer must maintain 105% of the difference between credits and debits. In this question, the difference is $50,000. If the broker-dealer made weekly computations, it would deposit $50,000. If the broker-dealer makes monthly computations, it would deposit $52,500 (105% of $50,000).

Question 222

A short securities difference: A. Does not affect net capital B. Requires a 30% haircut immediately C. Requires a 100% deduction immediately D. Requires a 100% deduction after 28 business days

Answer 222

D - A short securities difference represents the deficit amount of securities that a broker-dealer has in its possession over the amount reflected on its records. For example, a broker-dealer indicates on its records that it has 800 shares of XYZ stock. A physical count of the securities reveals that it has only 700 shares. The broker-dealer has a short securities difference of 100 shares. If the broker-dealer fails to resolve the difference within 28 business days, it is required to deduct the full market value of the securities from its net capital. Under the current requirement a short securities difference is subject to a graduated deduction, and becomes a 100% deduction after 28 days.

Question 223

In regard to the Reserve Bank Account pursuant to Rule 15c3-3, which of the following statements are CORRECT? I. The account must be maintained separately from any other account of the broker-dealer. II. The broker-dealer may use the amounts labeled as Total Credits under the Reserve Formula only for the specific purposes indicated under Total Debits. III. Computations under the Reserve Formula must be made daily. IV. Deposits required in the Reserve Bank Account must be made on the business day following the computation. A. I and II only B. I, II and III only C. II, III, and IV only D. I, II, III, and IV

Answer 223

A - Choice (I) is a correct statement. The Reserve Bank Account must be a separate account maintained by the broker-dealer distinct from any other account of the broker-dealer. Choice (II) is a correct statement and describes the Reserve Formula. The Reserve Formula requires the listing of the credit items. The total value of the credit items must be on deposit at the bank unless the member firm has offsetting debit items. In this case, the amount of the debit items may be deducted from the credit items and the net amount deposited into the Reserve Bank Account. For example, let's assume that the amounts labeled under Total Credits is $100,000. If there were no Total Debits listed, the full amount of $100,000 would have to be deposited. However, the firm may use the Total Credits to apply against the Total Debits and thereby reduce its required deposit. If the Total Debits were $20,000, the firm would be required to deposit only $80,000 in the Reserve Bank Account. Choice (III) is incorrect as computations must be made either monthly or weekly. If the broker-dealer makes monthly calculations, it must maintain 105% of the required amount on deposit. Choice (IV) is incorrect as deposits must be made into the account on the second business day following the calculation.

Question 224

A firm conducting a box count must do which of the following? I. Verify securities pledged where such securities have been pledged for more than 30 days. II. Count all securities subject to repurchase and reverse repurchase agreements. III. Conduct another count within 30 days if there are discrepancies. IV. Record on the books and records all unresolved differences by the time the next FOCUS report is prepared. A. IV only B. I and II only C. II and IV only D. III and IV only

Answer 224

B - The firm is not required to conduct another box count within 30 days. It must record unresolved differences no later than 7 business days after the count was conducted.

Question 225

If a broker-dealer becomes insolvent, SIPC will provide coverage for: A. Customers of the broker-dealer B. Another broker-dealer that has securities in the possession of the failed broker-dealer C. A subordinated lender D. All of the above

Answer 225

A - SIPC covers customers of the broker-dealer. It does not cover other broker-dealers that have securities in the possession of the failed broker-dealer (unless the securities belong to its customers), and it does not cover subordinated lenders.

Question 226

Exeter Brokerage has free credit balances of $700,000. It is currently in SIPC liquidation. Which of the following statements is TRUE regarding the payment of cash to customers? A. Customers will receive cash payments based upon the free credit balance in their account. B. An amount of $200,000 will be subject to general creditor provisions. C. Separately identifiable cash is covered without limit. D. SIPC will make cash payments based upon the size of the customer account.

Answer 226

A - Each customer's account has SIPC coverage which is limited to a maximum of $500,000 in securities of which no more than $250,000 may be for cash. The trustee appointed by SIPC would review the individual balance of each customer to determine eligibility.

Question 227

The Reserve Bank Account established pursuant to Rule 15c3-3 may be used by a broker-dealer: A. For any valid purpose relating to customer accounts B. Only for receipt and disbursement of customer funds C. As collateral for a bank loan to finance customer debit balances D. None of the above

Answer 227

D - The Reserve Bank Account is used for the protection of customer funds only. The broker-dealer may not use the assets in the account for any purpose other than as a reserve for customer protection.

Question 228

When reviewing the debit balances of the firm, your trial balance indicates that $1,045,000 is secured by customer assets. Which TWO of the following statements are TRUE regarding the reserve deposit computation? I. The $1,045,000 will be used to reduce the reserve deposit requirement. II. The $1,045,000 must be reduced by 1% when calculating the reserve deposit. III. The $1,045,000 must take a haircut of 15%. IV. The securities held by the broker-dealer have value greater than $1,045,000. A. I and II B. I and III C. II and III D. II and IV

Answer 228

D - When calculating the reserve deposit requirement, even though customer debit balances are secured, they must still be reduced by 1% to allow for returned checks and NSF payments to the firm. In order to be considered secured debits the firm will hold assets in excess of the amounts owed to it. These extra amounts account for market fluctuation of the securities that it holds.

Question 229

A broker-dealer trial balance indicates the following: Fails to Receive Customer accounts $700,000 Firm account -- Unsold $250,000 Firm account -- Sold, no offset $150,000 When calculating the reserve deposit, the amount that must be included as a credit item is: A. $700,000 B. $850,000 C. $950,000 D. $1,100,000

Answer 229

A - Only the $700,000 amount due to customers is included in the Reserve Bank Account computation. The other fails to receive relate to firm accounts and are not included in the Reserve Bank Account.

Question 230

A broker-dealer's activities are limited to the purchase, sale, and redemption of investment company securities and interests in insurance company separate accounts. Which of the following statements is TRUE? A. The broker-dealer is defined as a carrying broker-dealer, required to maintain $250,000 net capital. B. The broker-dealer may make monthly determinations of its deposit requirements under SEC Rule 15c3-3. C. The broker-dealer is not required to maintain a reserve account under SEC Rule 15c3-3. D. This firm must file Focus Report Part I on a monthly basis.

Answer 230

C - Under SEC Rule 15c3-3, sections (k)(1)(i) & (ii), a broker-dealer that limits activities to those described does not have to establish a Special Reserve Account.

Question 231

A broker-dealer that qualifies for the (k)(2)(i) exemption from SEC Rule 15c3-3 is subject to what minimum dollar amount of net capital? A. $5,000 B. $50,000 C. $100,000 D. $250,000

Answer 231

C - Under SEC Rule 15c3-1, the Net Capital Rule, a broker-dealer that is exempt from the provisions of SEC Rule 15c3-3 pursuant to paragraph (k)(2)(i) must maintain a minimum net capital of $100,000. This exemption is applicable for firms which carry no margin accounts, promptly transmit all customer funds and deliver all securities, does not otherwise hold funds or securities for, or owe money or securities to, customers and effects all financial transactions for customers through one or more bank accounts maintained exclusively for this purpose.

Question 232

A client wants to write uncovered options. In addition to obtaining a signed option agreement your firm should obtain: A. A minimum equity of at least $25,000 B. A signed margin agreement C. Form W-9 D. Fully paid stock as collateral

Answer 232

B - Uncovered options must be executed in a margin account. If the client has not previously established a margin account, she must do so.

Question 233

When a customer pledges stock at a bank in order to obtain a loan to purchase other stock, the amount that may be lent is determined by: A. Regulation X B. Regulation U C. Regulation T D. The bank's loan officer

Answer 233

B - Regulation U of the Federal Reserve Board regulates the amount that a bank (or any other lender that is not a broker-dealer) may lend to an individual who wishes to borrow from the bank, using stock as collateral, for the purpose of buying more stock. If an individual goes to a bank with $10,000 worth of fully paid stock, and wishes to use the stock as collateral for a loan, the bank must determine if the loan is for the purchase of additional stock. If the loan is for that purpose, the bank is restricted by Regulation U as to the maximum amount of credit that it may extend. The amount that may be lent under Regulation U is the same amount that may be lent under Regulation T, which regulates credit advanced by broker-dealers.

Question 234

Which of the following accounts is not defined or classified as a special account according to the Federal Reserve Board's Regulation T? A. An arbitrage account B. A memorandum account C. A consolidated account D. A cash account

Answer 234

C - Several special accounts are identified and defined according to Regulation T. They include cash, memorandum, arbitrage, and nonpurpose credit accounts.

Question 235

A client has a margin account with a long market value of $950,000 and a debit balance of $550,000. If the broker-dealer declares bankruptcy, which TWO of the following statements are TRUE? I. The client is permitted to pay $550,000 and receive $950,000 of securities. II. The client is permitted to pay $500,000 and receive $950,000 of securities. III. The client is covered for $400,000 of securities. IV. The client is covered for $500,000 of securities. A. I and III B. I and IV C. II and III D. II and IV

Answer 235

A - According to SIPC, if a client has a margin account, the net equity is covered (the long market value minus the debit balance). In this example, the client is covered for $400,000 of securities. A client is also permitted (but not required) to pay off the debit balance and receive the full value of the securities. If the client paid $500,000, he would only receive $900,000 of securities.

Question 236

A client with a cash account executed the following transactions: Tuesday morning he bought $25,000 worth of AQL stock and on the following day he sold the shares for $27,500. On the settlement date, the client instructed the broker-dealer to use the sales proceeds to pay for the purchase. The broker-dealer is: A. Not permitted to use the sales proceeds B. Not permitted to use the sales proceeds and the account is subject to a freeze C. Permitted to use the sales proceeds, provided the transaction has been approved in advance by a principal D. Permitted to use the sales proceeds, provided the transaction has been approved in advance by FINRA

Answer 236

B - If a client fails to pay for a security prior to its sale, a free-riding violation has occurred. The client may not use the sales proceeds to pay for the purchase since the client has made no payment to the broker-dealer. The broker-dealer is required to place a 90-day freeze on the account. This means that the customer must pay for all purchases in advance for a period of 90 days.

Question 237

Which of the following entries are assets? ``` Fails to Deliver Fails to Receive Trading Account of Firm -- Common Stock -- Long Trading Account of Firm -- Common Stock -- Short, Sold to Customers A. I and III only B. II and III only C. I, II, and III only ID. I, III, and IV only ```

Answer 237

A - Fails to Deliver and the Trading Account -- Long represent balance sheet assets.

Question 238

Which of the following points are NOT associated with a minor rule violation (MRV)? A. A maximum fine of $2,500 B. Egregious misconduct involving customers C. Record-keeping irregularities D. Technical deficiencies

Answer 238

B. Minor Rule Violations (MRVs) include technical violations of rules such as reporting and record-keeping deficiencies. The maximum fine is $2,500. Actions of an egregious nature involving customers are not minor violations and would begin with a prehearing conference followed by a hearing, decisions, and (possible) sanctions. It is also worth noting that FINRA does not issue injunctions, nor may its sanctions include imprisonment.

Question 239

Andrews, Lowell, Barbican & Co., a registered broker-dealer has the following positions in J. Verne Publishing (JVP): 5,000 shares of JVP, current market value 67.50 50 short JVP covered calls, exercise price 65 @ 4.75 What is the total haircut on this stock and option position? A. $11,250 B. $26,875 C. $38,125 D. $50,625

Answer 239

C. Covered calls require a 15% haircut on the stock position, which is reduced by the amount that the options are in-the-money. In this case the option contracts are in the money by 2.50 points, which amounts to $250 per contract. The calculations for the haircuts are: 5,000 x $67.50 = $337,500 x 15% = $50,625 $50,625 - ($250 x 50) = $50,625 - $12,500 = $38,125 Total Haircut = $38,125

Question 240

Stallion, Trotter and Gelding Investments have the following proprietary positions: Long 1,000 shares of Horsefeathers Mattresses Inc. (HFM) at 42 Long 10 HFM Apr 40 puts @ 1.75 What is the required haircut based on this hedged stock position? A. 0 B. $2,000 C. $6,300 D. $7,175

Answer 240

B. The haircut on a hedged position is the lesser of 15% of the market value of the stock ($42 x 1,000 = $42,000 x 15% = $6,300) not to exceed the out-of-the-money amount of the option. In this example, the maximum loss is 2 points per share. This amounts to a maximum potential loss of $2,000.

Question 241

A brokerage firm with a net capital requirement of $50,000 must maintain a fidelity bond of: $60,000 $100,000 $250,000 $600,000

Answer 241

B. A broker-dealer that has a net capital of less than $250,000 must maintain a minimum coverage which is the greater of 120% of the members net capital requirement or $100,000. 120% of $50,000 is $60,000, which is less than $100,000.

Question 242

A fidelity bond does NOT cover which of the following incidents? A. Forgery B. Loss of securities C. Errors and omissions D. Fraudulent trading

Answer 242

C. FINRA members that are not members of an exchange are required to carry a blanket fidelity bond covering officers and employees that provides against losses (on premises or in transit), misplacement, forgery and alteration (including check forgery), loss of securities (including securities forgery), and fraudulent trading.

Question 243

What is the haircut on cumulative nonconvertible preferred stock? A. 10% of par value B. 10% of market value C. 15% of par value D. The haircut percentage varies based on maturity

Answer 243

B. Haircuts are based on market value. For nonconvertible preferred stock, the haircut is 10%.

Question 244

Which of the following statements most accurately describes the activities of a broker-dealer with a $5,000 net capital requirement? A. The broker-dealer may act as a market maker in bonds. B. The broker-dealer may act only in the capacity of an agent. C. The broker-dealer may purchase as principal from another broker-dealer to fill a customer's order. D. The broker-dealer may participate in a firm commitment underwriting.

Answer 244

C. A firm with a $5,000 net capital requirement may engage in simultaneous principal transactions without being subject to the dealer's minimum capital requirement of $100,000.

Question 245

Use the following information to answer this question: Fleming Brokerage is long the following unlisted option: Hightower Corporation April 42 call, purchased for 4, current premium 8.25. Suppose the strike price of the Hightower unlisted call is 51 and the shares are selling at 48. What is the capital treatment? A. Add 3 ($300) to net worth B. Subtract 3 ($300) from net worth C. No value is given D. Add 20% of the market value of the shares to net worth

Answer 245

C. This call is out-of-the-money; no value is given, and there is no change to net worth

Question 246

Z-Trade borrows $400,000 in stock from Quicktrade and lends the shares to Comstock Trading. What portion of the amount payable against securities loaned is a part of Z-Trade's aggregate indebtedness? A. 15% B. 30% C. 100% D. Nothing

Answer 246

A. The net capital rule (15c3-1) specifies 85% of the amount payable (to Quicktrade) is excluded from aggregate indebtedness; the remaining 15% is treated as aggregate indebtedness.

Question 247

Churchwell Brokerage had been computing its net capital under the aggregate indebtedness standard. The broker-dealer now elects to calculate net capital under the alternative standard. In order to do so, it must: ``` Perform the 15c3-3 computation weekly Notify its DEA in writing File a FOCUS Part II Maintain a Special Reserve Account for Customer Credit Balances A. III only B. I and II only C. II and III only D. III and IV only ```

Answer 247

B. When a change is made from the aggregate indebtedness standard to the alternative method, a broker-dealer is required to notify its designated examining authority and perform the reserve calculation on a weekly basis

Question 248

Jupiter Trading has a fail to receive of 600 shares of Maywood Industries, which is offset by securities borrowed from Bluestone Brokerage (a broker-dealer). The treatment of the payable is: A. Added to AI B. Excluded from AI C. Added to 15c3-3 computation on credit side D. Recorded on a subsidiary ledger

Answer 248

B. A firm excludes from aggregate indebtedness a fail to receive offset by a fail to deliver. Another offset to the fail to receive are securities borrowed from a broker-dealer. If securities are borrowed from a customer to effect delivery, aggregate indebtedness increases.

Question 249

If a broker-dealer does not promptly forward securities of customers or broker-dealers, it is considered: A. Delinquent B. A clearing firm subject to a $250,000 requirement C. Subject to disciplinary action D. Inadequately staffed

Answer 249

B. If a firm does not promptly forward securities, it is considered a clearing firm with a $250,000 requirement. A broker-dealer that has that specified level of net capital would not be subject to disciplinary action, but will be required to change its reporting structure.

Question 250

Affirmative determination is NOT applicable in the sale of which of the following? A. Common stock B. Preferred stock C. Corporate bonds D. Convertible preferred stock

Answer 250

C. Affirmative determination relates to a broker-dealer's delivery responsibilities in a short sale (marking order tickets short and determining that the securities are available for borrowing). The requirement is applicable to equity securities and equity equivalents. Affirmative determination does not apply to the sale of nonconvertible debt instruments.

Question 251

Haskins Trading (a broker-dealer) introduces customers to Lionheart Brokerage. The clearing agreement states that deficits in accounts are the liability of the introducing firm. Who must deduct the deficiency? A. Haskins B. Lionheart C. Both D. Neither

Answer 251

C. FINRA rules require that both firms deduct deficits in customer accounts from net capital.

Question 252

Which of the following statements is TRUE if the membership of a broker-dealer in a national securities exchange has been discontinued? A. The broker-dealer must notify its customers within two business days of the event. B. The SEC must be notified within two calendar days. C. All customer positions must be transferred to a clearing firm. D. The broker-dealer is required to file a report with the SEC within two business days.

Answer 252

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

Question 253

Which of the following items is included in aggregate indebtedness? A. Credit balances in noncustomer accounts containing short securities positions B. Equities in noncustomers accounts that are segregated according to the Commodity Exchange Act C. Monies payable to the extent funds are required to be on deposit and are on deposit in a special reserve bank account D. Liabilities on open contractual commitments

Answer 253

A. Credit balances in noncustomer accounts containing short positions are included in aggregate indebtedness.

Question 254

A broker-dealer's activities are limited to the purchase, sale, and redemption of investment company securities and interests in insurance company separate accounts. Which of the following statements is TRUE? A. The broker-dealer is defined as a carrying broker-dealer, required to maintain $250,000 net capital. B. The broker-dealer may make monthly determinations of its deposit requirements under SEC Rule 15c3-3. C. The broker-dealer is not required to maintain a reserve account under SEC Rule 15c3-3. D. This firm must file Focus Report Part I on a monthly basis.

Answer 254

C. Under SEC Rule 15c3-3, sections (k)(1)(i) & (ii), a broker-dealer that limits activities to those described does not have to establish a Special Reserve Account.

Question 255

Which of the following would be considered non-control locations under Rule 15c3-3? A. Fails to receive, open for 25 days B. Dividends receivable, open for 45 days C. Securities in transfer for 45 days D. Customer securities carried in a special omnibus account

Answer 255

C. If securities are at the transfer agent for more than 40 calendar days, they are not in control of the broker-dealer. The position must be verified.

Question 256

Rourke Securities is an introducing firm with a net capital requirement of $100,000. It has $300,000 in subordinated loans. What is the minimum equity capital required to be in compliance? $100,000 $128,571 $250,000 $500,000

Answer 256

B. Subordinated loans may not exceed 70% of net capital (for a period exceeding 90 days). $300,000 / .7 = $428,571 as a minimum level of net capital. $428,571 - $300,000 = 128,571. This is the minimum level of equity capital to remain in compliance with the net capital rule

Question 257

The maximum reduction of a secured demand note below its original principal amount is: 10% 15% 25% 30%

Answer 257

B. The maximum reduction of a secured demand note is 15%; after such reduction, net capital must still be maintained at 120% of the required minimum amount.

Question 258

Which of the following would not be considered a hedge? Long stock, long call Short stock, long call Long stock, long put Short stock, long convertible bond

Answer 258

A. A long stock position plus a long call represents a bullish position. The other positions are examples of hedges for long equity or short equity positions.

Question 259

A general securities broker-dealer makes markets in 50 stocks that trade between $15 and $60 per share. What is the firm's net capital requirement? $125,000 $250,000 $375,000 $1,000,000

Answer 259

B General securities broker-dealers must maintain at least $250,000 of net capital. It may be higher based on other factors such as market making. Market making has a minimum net capital requirement of $100,000 and a maximum of $1,000,000. The specific net capital requirement is based on the number of issues in which the broker-dealer makes a market. When shares are priced greater than $5, $2,500 must be maintained per issue. 50 x $2,500 = $125,000. Although this is greater than $100,000, $250,000 is required as a general securities broker-dealer.

Question 260

A broker-dealer must provide a customer with its unaudited statement of financial condition within how many days of the financial statement date? 45 60 65 105

Answer 260

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

Question 261

If bearer bonds have been delivered to a broker-dealer, when must the broker-dealer check with the SEC to determine if the bonds have been reported missing or stolen? Within 24 hours of when the broker-dealers receive the bonds By the close of business on the following business day By the end of the third business day after receipt of the bonds By the end of the fifth business day after receipt of the bonds

Answer 261

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

Question 262

When a broker-dealer receives a complaint from a customer pertaining to an options transaction, the complaint must be retained on file with the broker-dealer for: Two years after resolution Four years after resolution Six years after resolution 30 days after resolution when it may then be discarded

Answer 262

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

Question 263

A broker-dealer's proprietary account contains the following position: Short 100 XYZ @ 40 and Long 1 XYZ May 50 call What is the amount of the haircut applied to this position? $500 $600 $400 $1,000

Answer 263

B. In the case of proprietary accounts involving short stock positions and protective calls, the haircut is based on the short stock position. A charge of 15% is applied to the current market value of the short position for a haircut of $600 ($4,000 x .15). The haircut applied to the short position may not exceed the out-of-the-money amount of the option. Since the option is out-of-the-money by 10 points or $1,000, a haircut of $600 is appropriate.

Question 264

Which of the following choices is NOT a minimum requirement for a business continuity plan established by a broker-dealer? Regulatory reporting OSJ inspections Order entry, execution, and comparison Operational assessments

Answer 264

B, When creating a business continuity plan, FINRA provides minimum standards that must be observed. These include regulatory reporting, communications with customers, mission critical systems, and financial and operational assessments. Inspections of an Office of Supervisory Jurisdiction (OSJ) are not specifically indicated as part of the business continuity plan, but are requirements addressed elsewhere in FINRA supervisory rules.

Question 265

When a customer opens an account at a broker-dealer's office that is located in a bank, the broker-dealer must: Notify FINRA when a customer opens an account Provide special disclosures to its customer Forward the new account form to the main office overnight Maintain custody of the customer's cash and securities at the bank location

Answer 265

B. Broker-dealers that conduct business with the public on the premises of a financial institution must provide a disclosure statement to customers. This statement indicates that the securities products purchased or sold are not insured by the FDIC, are not deposits or obligations of the financial institution, are not in any way guaranteed by the institution, and are subject to investment risk, including possible loss of principal.

Question 266

Jeff Willingham has a margin account with Doverton Securities. On January 5, 20XX, he placed an order to sell 10,000 shares of XYXY at 15 with his broker. He owns the securities but will not be able to deliver them by the settlement date. If the firm marks the order ticket short and has not made delivery, within how many days would Doverton Securities be required to close out the position?

Answer 266

D. In instances where a broker-dealer knows or has been led to believe that the seller owns the security being sold but the seller will not be able to deliver the security by the scheduled settlement date, broker-dealer must borrow securities or close out the short position by buying securities of a like kind and quantity. This close-out must take place within 35 days after the trade date.

Question 267

All of the following information must be reported on Form RTRS when transactions are sent in to the system EXCEPT: The reporting symbol The identity of any intermediary used as a submitter The denomination of the bonds to be delivered The name of the person to be contacted if errors occur

Answer 267

C. All of the choices are required on Form RTRS except the denomination of the bonds to be delivered.

Question 268

According to SEC Rule 17a-4, which of the following books and records would need to be retained for six years? Order tickets A list of the offices of a broker-dealer The application of the associated persons of a broker-dealer Advertising used to promote mortgage-backed securities

Answer 268

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

Question 269

Revere Brokerage receives an ACAT transfer request from Lighthouse Brokerage. Under SRO rules, how many days does Revere have to protest, or validate, the transfer request? One calendar day One business day Three business days Three calendar days

Answer 269

B. Eligible securities are transferred by the National Securities Clearing Corporation (NSCC) using the Automated Customer Account Transfer (ACAT). Under SRO rules, the carrying broker-dealer has one business day to either protest or validate a transfer request. If validated, the transfer must take place within three business days.

Question 270

Which of the following statements is TRUE regarding the carrying agreement between the carrying firm and an introducing firm? The customer of the introducing firm must be notified of the existence of the agreement only if the introducing firm is an affiliate of the carrying firm. The customer of the introducing firm must be notified of the existence of the agreement only if the customer is opening a margin account. The agreement must include a provision requiring the carrying firm that receives a written customer complaint regarding the introducing firm to notify the customer that is has received the complaint. The agreement must include a provision requiring the carrying firm that receives a written customer complaint regarding the introducing firm to notify the introducing firm's DEA without notifying the introducing firm.

Answer 270

C. Under SRO rules, there must be a written agreement between a clearing or carrying firm and an introducing firm. The rule specifies the responsibilities of both firms and addresses certain disclosure and reporting requirements. Any customer of an introducing firm (whose account is carried on a fully disclosed basis) is required to be notified in writing of the existence of the agreement and the relationship between the two firms. The agreement must include a provision requiring the carrying firm that receives a written customer complaint regarding the introducing firm to notify the customer that it has received the complaint. In addition, the clearing firm must also submit promptly any written customer complaint it receives regarding the introducing firm or its employees to both the introducing firm and the introducing firm's designated examining authority (DEA).

Question 271

A broker-dealer that makes a market in 200 stocks priced above $5.00 is required to maintain a net capital of: $100,000 $250,000 $500,000 $1,000,000

Answer 271

C. According to SEC Rule 15c3-1, the net capital rule, market makers are required to maintain net capital of $1,000 for each security valued at $5 or less and $2,500 for each security priced above $5, with a maximum

Question 272

At a minimum, the supervisory responsibilities of a broker-dealer include all of the following, EXCEPT: The firm must create and maintain written supervisory procedures A principal must approve and review all transactions The firm must conduct on-site inspections of remote offices Each branch office must be reviewed annually

Answer 272

C. Each office of supervisory jurisdiction (OSJ) and branch office that supervises one or more nonbranch locations (a supervisory branch) must be reviewed on an annual basis. Branch offices that do not supervise one or more nonbranch locations should be reviewed every three years and nonbranch locations should be reviewed periodically.

Question 273

All of the following statements are TRUE regarding supervisory procedures, EXCEPT: Each representative must be assigned to a particular principal who is responsible for that representative's activities Each representative must participate at least annually in a meeting or interview at which compliance issues are discussed A copy of the member's written supervisory procedures must be kept in each office of supervisory jurisdiction Each office in which registered representatives solicit orders must be designated an office of supervisory jurisdiction

Answer 273

D. Each branch of a member is not necessarily an OSJ. If final approval of customer accounts or orders occurs in an office, that office must be an OSJ. Orders taken at branches that are not designated as OSJs must be reviewed and approved at an OSJ.

Question 274

egarding a broker-dealer that changes its fiscal year: The firm is required to notify SIPC The firms DEA must approve the change The SEC must approve the change Notification to the SEC is sufficient

Answer 274

B. Under SEC Rule 17a-5, a broker-dealer that wants to change its fiscal year is required to file notice (not approval) with the SEC. The firm must also provide a detailed explanation of the reasons for the change and the firm's DEA (the designated examining authority which is usually FINRA) must approve the change in fiscal year.

Question 275

Turnaround Brokerage is a firm that only executes client orders. After the firm receives an order from a client who wants to purchase a security, it will purchase as principal an equal number of shares or purchase shares to accumulate the number of shares necessary to complete the order. These transactions will be cleared through another registered broker-dealer. Sell orders are executed in the same manner. The firm's minimum net capital requirement is: $5,000 $100,000 $250,000 $1,000,000

Answer 275

A. This type of activity may be conducted by a $5,000 broker-dealer. There is no limit as to the number of trades that may be conducted in this manner. These trades are referred to as riskless principal transactions.

Question 276

Half and Nelson Leverage Capital Inc. currently maintain long call positions in the following securities: 120 at-the-money contracts LHVZ Oct 65 @ 3.50 16 in-the-money contracts PLUM Nov 45 @ 12.10 320 out-of-the-money contracts SLIB Nov 70 @ 1.20 What is the broker-dealer's required haircut on these positions? $14,964 $38,400 $49,880 $99,760

Answer 276

C. Haircuts on long option positions are 50% of the market value of the premium. 120 contracts x $350 = $42,000 x 50% = $21,000 16 contract x $1,210 = $19,360 x 50% = $9,680 320 contracts x $120 = $38,400 x 50% = $19,200 Total haircut = $49,880

Question 277

Ali, Frazier & Co. is an introducing broker-dealer that has a PAIB with the member firm that conducts its clearing. Ali, Frazier & Co. has the following proprietary positions in Manila Paper and Corrugated Box Co. (MPB): Short 500 shares of MPB at 37 Long 5 MPB Feb 35 calls @ 4.75 What is the required haircut for this stock and option position? 0 $1,000 $2,300 $2,775

Answer 277

A. A short stock and long call create a hedged position. The haircut is based on the lesser of 15% of the contract value of the stock position ($37 x 500 = $18,500 x 15% = $2,775) or the maximum potential loss for the position. Since the call option can be exercised at 35, the stock can be acquired at a price lower than the contract sale value of the stock (37). The position would result in a gain upon exercise of the option. As such, the haircut is 0.

Question 278

When a broker-dealer enters into a PAIB agreement with a clearing member, which of the following statements is CORRECT? The introducing broker must notify its DEA five business days before the agreement will become effective. The clearing member must notify its DEA five business days before the agreement becomes effective. The introducing broker must notify its DEA within two business days of the agreement's effective date. The clearing member must notify its DEA within two business days of the agreement's effective date.

Answer 278

C. The introducing broker is required to notify its designated examining authority (in writing) no later than two business days following the effective date of a PAIB agreement.

Question 279

Use the following information to answer this question: Fleming Brokerage is long the following unlisted option: Hightower Corporation April 42 call, purchased for 4, current premium 8.25. The current market price for Hightower shares is 48. The treatment for capital purposes is: Add $425 to net worth Subtract $400 from net worth Add $600 to net worth Add $825 to net worth

Answer 279

C. The call is in-the-money; the in-the-money ($600 per contract) amount is added to net worth.

Question 280

What is the deduction from net worth if the following positions are held in the proprietary account of a broker-dealer? Long 1 Thermo May 40 call Short 1 Thermo May 45 call Thermo's stock price is 42 0 $500 20% times $4,200 less the out-of-the-money amount 20% times $4,000 plus the in-the-money amount

Answer 280

A. There is no deduction necessary in this example. If the exercise price of a long call is equal to or less than exercise value of a short call (based on the same underlying security), a deduction is not required

Question 281

What is the deduction from net worth in the firm's proprietary account for the following positions? Long Thermo July 50 call @ 2.15 Short Thermo July 45 call @ 4.55 0 $500 The difference in premiums $4,500

Answer 281

B. The broker-dealer has a proprietary position in a spread. In this case, the deduction required is based on the level of risk associated with the difference in strike prices. The stock can be called away from the broker-dealer at $45 per share. The broker-dealer may exercise its long call at $50 per share. The 5-point difference in strike prices amounts to a deduction of $500.

Question 282

DEF Securities has delivered 100,000 shares of Robotic Inc. to PQR Securities. DEF does not have a receipt. PQR now claims the shares were never received. Which of the following statements is TRUE? PQR must notify the SEC within two business days. DEF must notify the SEC within two business days of notice of nonreceipt. DEF must report to the SEC within one business day of notice of nonreceipt. DEF must report to the SEC within two calendar days of notice of nonreceipt.

Answer 282

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

Question 283

For an equity security to be considered a threshold security, there must be an aggregate fail to deliver position for: 4 consecutive settlement days 5 consecutive settlement days 10 consecutive settlement days 13 consecutive settlement days

Answer 283

B. A threshold security is any equity security that is registered in accordance with Section 12 of the Securities Exchange Act of 1934 or for which the issuer must file reports in accordance with section 15(d) of the Act and: There is an aggregate fail to deliver position for 5 consecutive settlement days at a clearing firm for 10,000 shares or more and equal to at least .5% of the total outstanding shares of the issuer. A self-regulatory organization has included the security on a threshold securities list sent to its members. A broker-dealer must close out any fail to deliver in a threshold security after 13 settlement days.

Question 284

Which TWO of the following disclosure items would be included on an order ticket? Whether the firm acted as principal or agent Whether the order was solicited or unsolicited The commission charged by the broker-dealer The designation DNR, if the customer does not want the order reduced when the stock trades ex-dividend I and III I and IV II and III II and IV

Answer 284

D. Whether the order was solicited or unsolicited and do-not-reduce instructions would be recorded on an order ticket. Whether the firm acted as principal or agent and the commission charged would be disclosed on a confirmation.

Question 285

A deposit of $12,000 in cash by a customer: Requires the account to be frozen Requires a separate disclosure notice to the customer Requires a notice to be filed with the Department of Treasury Requires a notice to be filed with FINRA

Answer 285

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

Question 286

Which of the following statements is NOT true regarding broker-dealers engaged in the sale of redeemable shares of investment companies on other than a subscription way basis? The broker-dealer may sell shares for clients for immediate reinvestment in redeemable securities of investment companies. The broker-dealer must promptly transmit all funds. The broker-dealer may not owe funds to customers. The broker-dealer would have a $5,000 minimum net capital requirement.

Answer 286

D. A broker-dealer that engages in the sale of redeemable shares of investment companies (mutual funds) on other than a subscription way basis (does accept customer payments made out to the distributor) must maintain a minimum net capital of $25,000. This type of firm is required to promptly transmit all funds, and may not owe money or securities to customers, or hold funds or securities for customers. A broker-dealer that accepts no payment and engages solely in the sale of redeemable shares of investment company securities and operates on a subscription basis (does not accept customer payments made out to the distributor) is required to maintain a minimum net capital of $5,000.

Question 287

Which TWO of the following statements are TRUE concerning a municipal securities broker's broker? The firm is required to maintain a minimum net capital $150,000. The firm is required to maintain a minimum net capital $100,000. The firm may not maintain a proprietary account. The firm must limit their business to municipal and government securities. I and III I and IV II and III II and IV

Answer 287

A. Under SEC Rule 15c3-1, the Net Capital Rule, a broker-dealer that is defined as a municipal securities broker's broker is required to maintain a minimum net capital of $150,000. The firm may only transact business in municipal (not government) securities, and it may not maintain a proprietary account.

Question 288

Aggregate indebtedness includes which TWO of the following choices? Credit balances in customers' and noncustomers' accounts having short positions in securities Amounts payable against securities loaned which have not been sold Fixed liabilities adequately secured by assets used in the ordinary course of business Credit balances in customers' and noncustomers' accounts I and III I and IV II and III II and IV

Answer 288

B. In general, aggregate indebtedness (AI) includes liabilities that are not secured by a specific asset of the broker-dealer. Liabilities that are secured by a broker-dealer's assets are usually excluded from AI. Credit balances in customers' and noncustomers' accounts having short positions in securities, as well as credit balances in customers' and noncustomers' accounts are both defined as aggregate indebtedness. Amounts payable against securities loaned which have not been sold, as well as fixed liabilities adequately secured by assets used in the ordinary course of business are both excluded from the definition of AI. The following chart summarizes what is included and excluded from the definition of aggregate indebtedness.

Question 289

In regard to a secured demand note, which of the following statements are CORRECT? 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. The broker-dealer has the right to keep cash dividends paid on the securities pledged as collateral. The lender has the right to substitute other securities for those pledged as collateral. 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

Answer 289

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.

Question 290

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: On the day the deficiency occurs Prior to noon on the business day after the deficiency occurs Prior to noon on the second business day after the deficiency occurs On the fifth business day after the deficiency occurs

Answer 290

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.

Question 291

A clearing broker-dealer must file a notice under the provisions of Rule 17a-11 if which of the following situations occur? ``` Its aggregate indebtedness is 11 times its net capital. Its net capital is $275,000. Its books are not current. 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 ```

Answer 291

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.

Question 292

When a subordinated loan matures, a broker-dealer: Must return the principal amount of the loan to the lender 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 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 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

Answer 292

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.

Question 293

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? He may participate in the count. He may not participate in the count. He may not participate in the count, but he may supervise the count. He may participate in the count with a waiver from FINRA.

Answer 293

A. 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.

Question 294

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

Answer 294

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.

Question 295

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: Daily Weekly Monthly Weekly or monthly, at its option

Answer 295

B. The broker-dealer is carrying funds in excess of $1,000,000. A weekly calculation is required.

Question 296

A broker-dealer is required under the provisions of Rule 17a-13 to do which of the following? Physically count and examine all securities held by the broker-dealer. 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. 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. 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

Answer 296

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.

Question 297

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

Answer 297

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.

Question 298

Which of the following statements are TRUE about the MSRB's underwriting fee? It must be paid to the MSRB no later than 30 days following the date the invoice is sent Securities with a final stated maturity of less than nine months from their issuance are not subject to this fee No part of any of the underwriting fees may be passed on to an issuer It may be credited toward the $500 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

Answer 298

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 ( commercial paper as defined by MSRB rules) or municipal fund securities (529 plans) are not subject to this fee. No part of any of the underwriting fees may be passed on to an issuer. The MSRB member firm pays the fee, not the issuer or customers. The underwriting fee may not be used to offset the continuing registration requirement for which there is an annual fee of $500.

Question 299

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? Under no circumstances With the permission of the broker-dealer's Examining Authority If the reduction does not cause aggregate indebtedness to exceed net capital by 1,200% or more 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

Answer 299

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.

Question 300

A broker-dealer maintains the following long and short positions in municipal bonds. Long Short $1,000,000 ABC 5% of 2025 $400,000 DEF 5% of 2025 The haircut applicable to its security positions would be: $92,500 $82,500 $75,000 $70,000

Answer 300

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.

Question 301

Notification must be sent to the SEC for which of the following? Change in a broker-dealer's fiscal year Extension of time to submit the annual report Change in the broker-dealer's fixed date for filing an annual report All of the above

Answer 301

A. Choices (b) and (c) are submitted to the broker-dealer's Designated Examining Authority.

Question 302

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: The withdrawal does not cause the capital to fall below 120% of the required minimum. The AI/NC ratio does not exceed 8:1 after the withdrawal. Net capital does not fall below the amount of subordinated loans outstanding. 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

Answer 302

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.

Question 303

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

Answer 303

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.

Question 304

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: Underwriting spread Initial offering price for each maturity in the issue Amount of any fee received by the dealer as agent for the issuer 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

Answer 304

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.

Question 305

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: Each account is covered separately Both accounts are considered as a single customer Only the cash account is covered Only the margin account is covered

Answer 305

B. If a customer maintains a cash and a margin account, both would be combined to determine the coverage under SIPC

Question 306

During a close-out procedure, the freeze period is determined by the: Bond issuer Buyer of the bonds Paying agent for the issue Seller of the bonds

Answer 306

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.

Question 307

A bank may allow a broker-dealer to withdraw funds and qualified securities from its Reserve Bank Account: On the request of the broker-dealer With the written authorization of the broker-dealer's Examining Authority With the written authorization of the SEC With satisfactory proof of the correctness of the withdrawal as indicated by a computation of the Reserve Formula under Rule 15c3-3

Answer 307

A. Funds may be withdrawn from the Reserve Bank Account at any time when calculation of the Reserve Formula indicates there is an excess. No permission is required to make the withdrawal.

Question 308

Broker A enters into a transaction to buy municipal securities from Broker B. Broker A sends a confirmation to Broker B that it bought the securities at 98. Broker A then receives a confirmation from Broker B stating that the sale price was 99. Which of the following statements is/are TRUE? Either party may void the transaction. If Broker A wants to void the transaction and Broker B disagrees, Broker B may take legal rescourse. The problem may be submitted to arbitration. Broker B's sales price stands unless overturned by arbitration. I only II and III only I, II, and III only I, II, III, and IV

Answer 308

C. If a trade is confirmed by both parties but a discrepancy exists, either party may void the transaction. However, if either party disagrees with voiding the transaction, legal recourse may be taken. Typically, such a discrepancy will be taken to arbitration if a compromise cannot be reached.

Question 309

Annual reports required under Rule 17a-5 must comply with which of the following requirements? The report must be prepared by an independent public accountant. The report must contain an oath or affirmation by a partner or officer that the information is true and correct. The report must contain a supplement regarding the status of the membership of the broker-dealer in SIPC. The report must be filed with the SEC in Washington, D.C., with the SEC regional office where the broker-dealer has its principal place of business, and with 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

Answer 309

D. All of the elements listed in the answer are correct statements

Question 310

A broker-dealer is operating pursuant to Section (k)(2)(i) under SEC Rule 15c3-3. Which of the following is NOT TRUE concerning the activities of the firm? The firm may not carry more than 100 margin accounts for retail customers. Any funds or securities received in connection with the activities of the firm must be promptly transmitted. The firm may not hold customer funds or securities. All financial transactions between the firm and its customers must be effected through a special bank account.

Answer 310

A. A broker-dealer operating under Section (k)(2)(i) of SEC Rule 15c3-3 is not required to maintain the Reserve Bank Account as stipulated in the Customer Protection Rule. Although regarded as a carrying firm by SEC net capital rules, the broker-dealer must promptly transmit any funds or securities that it receives in connection with its activities and must conduct all transactions between itself and customers through a Special Bank Account. This firm may not hold customer funds or securities,and is not permitted to carry any margin accounts for customers.

Question 311

A client wants to write uncovered options. In addition to obtaining a signed option agreement your firm should obtain: A minimum equity of at least $25,000 A signed margin agreement Form W-9 Fully paid stock as collateral

Answer 311

B. Uncovered options must be executed in a margin account. If the client has not previously established a margin account, she must do so.

Question 312

The 5% Policy applies to which of the following? ``` Agency sales in the OTC market Principal transactions in municipal bonds Mutual fund sales New issues of corporate securities I only I and IV only II and III only I, II, and III only ```

Answer 312

A. The 5% Policy applies to both agency and principal OTC transactions. However, it does not apply to any sale under a prospectus, such as a mutual fund or a new issue, or to transactions in governments or municipals.

Question 313

Which of the following statements is NOT TRUE regarding a temporary subordinated loan? It may not be used as part of the broker-dealer's capital. A firm is limited to executing three such agreements in a 12-month period. The loan may not have more than 45 days to maturity. The proceeds of the loan are to be used for underwriting purposes only.

Answer 313

A. Temporary subordinated loans are short-term loans that are used for underwriting purposes. A broker-dealer is limited to executing no more than three such loans per year, with maturities of no greater than 45 days. These loans are acceptable as capital in the broker-dealer's financial structure.

Question 314

Which TWO of the following statements regarding disciplinary proceedings under the Code of Procedure are TRUE? Original jurisdiction rests with a Hearing Panel. Original jurisdiction rests with the National Adjudicatory Council. Appellate jurisdiction rests with a Hearing Panel. Appellate jurisdiction rests with the National Adjudicatory Council. I and III I and IV II and III II and IV

Answer 314

B. Under the Code of Procedure, original jurisdiction rests with a FINRA Hearing Panel. It is the Hearing Panel that holds hearings, considers complaints, and assesses penalties. If a respondent disagrees with the findings of the Hearing Panel, the respondent may appeal to the National Adjudicatory Council, which has both appellate and review jurisdiction.

Question 315

Proxy material, annual reports, and other information sent by corporations to member firms who hold stock in street name for their customers: Must be forwarded to the beneficial owners at their expense Must be forwarded to the beneficial owners at the member firm's expense Must be forwarded to the beneficial owners with the corporation paying the expenses Need not be forwarded to the beneficial owners

Answer 315

C. Proxy material and other information regarding securities held by a broker-dealer in street name must be forwarded to the beneficial owners. The issuing corporation pays any expenses involved

Question 316

Good-faith deposits arising in connection with an underwriting of stock: Are not an allowable asset Are an allowable asset only if the underwriting has not settled Are an allowable asset if 11 days or less have elapsed from the settlement of the underwriting with the issuer Are an allowable asset if less than 30 days have elapsed from the settlement of the underwriting with the issuer

Answer 316

C. A good faith deposit represents the cash deposit made by a broker-dealer that is bidding for an underwriting. Once the underwriting is completed, the issuer that is holding the good-faith deposit will return it to the broker-dealers. If the deposit has not been returned within 11 days of the settlement of the underwriting, the full amount of the deposit must be deducted from capital.

Question 317

If a broker-dealer engages in more than 10 transactions in any one calendar year for its own investment account, its net capital requirement is: $50,000 $100,000 $250,000 $500,000

Answer 317

B. A dealer is required to maintain net capital of at least $100,000. A dealer is defined as a firm executing 10 or more transactions in its investment account over the course of a calendar year.

Question 318

Relative to the stock record book (position record), the long side shows: Long securities differences Ownership of the securities Location of the securities Debit balances in long margin accounts

Answer 318

B. The long side of the stock record shows ownership of securities.

Question 319

Which of the following statements is TRUE regarding the audited statement to be furnished to customers? It must be sent to customers no more than 60 days after the date of the audit. It must be furnished to customers no more than 105 days after the date of the audit. It is identical to the audited annual report filed with the SEC. It must indicate that an income statement is available for inspection at the regional office of the SEC.

Answer 319

B. A broker-dealer must furnish an audited annual report to its customers no more than 105 days after the date of the audit. The report contains a Statement of Financial Condition, not the income statement.

Question 320

Pembridge Brokerage has a fail to deliver on its books. The fail is three days old. The contract value is $45,000, and the market value is $40,000. The security is heavily traded on the Nasdaq system. The haircut on this fail to deliver is: $6,750 $0 $11,000 $1,000

Answer 320

B. Since this fail to deliver contract for a Nasdaq security is three days old, there is no haircut required. A fail to deliver for an equity security is considered to be aged when it becomes five days old. At that point the haircut is applied to the market value of the contract ($40,000) with an adjustment for any differential between market value and contract value. In this case, there is an unrealized loss of $5,000, which would be added to the initial haircut, which is $6,000, for a total haircut of $11,000.

Question 321

Rule 17a-3 requires a broker-dealer to obtain from all partners, officers, and employees handling funds or securities a questionnaire indicating which of the following? Educational institutions attended by the individual and if she graduated from the institution A listing of her business connections over the past 10 years and her reason for leaving A record of denial of membership in any national securities exchange A record of arrest or indictment for any crime involving the purchase, sale, or delivery of securities I and II only I, II, and IV only II, III, and IV only I, II, III, and IV

Answer 321

D. All the items indicated in this question are included in the questionnaire that the broker-dealer must obtain from its partners, officers, and employees who handle cash or securities.

Question 322

A clearing agreement should specify the responsibilities of each party with regard to all the following actions EXCEPT: Opening, approving, and monitoring customer accounts Extension of credit Frequency of the net capital computation Safeguarding customer funds

Answer 322

C. A broker-dealer would have to calculate its net capital whether it was a clearing firm or not. This is not a requirement for the purposes of a clearing agreement, which is specified under FINRA rules

Question 323

Records must be kept for three years for all of the following documents EXCEPT for: Trial balances A fail to deliver ledger A securities in transfer ledger A general ledger

Answer 323

D. The general ledger must be retained for six years.

Question 324

Which of the following orders are considered discretionary under the FINRA Conduct Rules? A customer instructs a registered representative to purchase as many shares of XYZ Corporation as the representative feels is appropriate whenever the price is right. A customer instructs a registered representative to sell 300 shares of ABC Company that are long in the customer's account when the representative thinks the time and price is appropriate. A customer gives a member firm a check for $25,000 and instructs the firm to purchase bank stocks and insurance company stocks when the price appears to be favorable. A customer instructs a registered representative to buy 1,000 shares of ACME Corporation at a time and price that the registered representative determines. III only I and III only II and IV only I, II, III, and IV

Answer 324

B. If the customer order specifies the security, the number of shares, and whether it should be purchased or sold, the broker-dealer may determine price and/or time without having discretionary authorization on the account.

Question 325

A broker-dealer has a short contractual commitment for $6,000 in ABC common stock, a non-exchange-listed OTC security. The current market value is $7,000. The haircut would be: $3,100 $2,800 $2,100 $1,800

Answer 325

A. The haircut is 30%, since ABC is not a Nasdaq or NYSE listed security. There is also a loss of $1,000. The broker-dealer will receive $6,000 when it delivers the stock, which currently has a market value of $7,000. Therefore, the net haircut is $3,100 (30% of $7,000, plus the $1,000 unrealized loss).

Question 326

The long side of the stock record maintained by a broker-dealer pursuant to Rule 17a-3 indicates: The ownership of stock maintained by the broker-dealer The location of stock maintained by the broker-dealer The number of shares owned by the broker-dealer in a beneficial capacity The number of shares owned by the broker-dealer in a beneficial or nominal capacity

Answer 326

A. The long side of the stock record book reflects ownership of securities

Question 327

Which of the following percentages is not a published haircut value for equity securities according to SEC Rule 15c3-1? 15% 30% 40% 50%

Answer 327

D. According to SEC Rule 15c3-1, the haircut for an equity security with a ready market is 15%. If a limited market is deemed to exist for the security, the haircut is 40%. Where there is no ready market for the security, the haircut is 100%. In the case of equity securities being pledged as collateral on a secured demand note, the applicable haircut on those securities is 30%.

Question 328

Which of the following activities by a municipal securities broker-dealer that has a financial advisory relationship with municipal securities issuer would be improper? Selling a new security of that issuer as a syndicate member in a competitive underwriting without revealing the firm's advisory capacity to each purchasing customer Purchasing a new security of that issuer as principal in a negotiated underwriting Acting as agent for a customer in purchasing a new security of that issuer from a syndicate in a competitive underwriting Disseminating nonpublic information to a customer about a prospective exchange offer by that issuer I and III only II and IV only III and IV only I, II, and IV only

Answer 328

D. When a broker-dealer has a financial advisory relationship with an issuer, it should not disseminate nonpublic information in connection with a purchase, sale, or exchange of securities of that issuer. It is also improper to sell a new issue of that issuer as a syndicate member in a competitive underwriting without revealing the firm's advisory capacity to purchasers. Also prohibited is the purchase of a new security of that issuer as principal in a negotiated underwriting while the financial advisory relationship exists. Purchases as agent are permitted, unless made to contravene the purpose and intent of the rules.

Question 329

A client buys 1,000 shares of Wellman Brothers for a total cost of $30,000. He does not pay for the trade, and his position is liquidated for $26,000. The difference is a(n): An unsecured credit An unsecured debit Haircut at 10% Part of the firm's tentative net capital

Answer 329

B. This is an unsecured debit. The broker-dealer cannot be sure it can collect this from the client. The net effect is to lower the firm's capital.

Question 330

In which of the following cases would a financial advisory relationship exist according to the MSRB? A broker-dealer, while acting as an underwriter for a municipal offering, gives advice to the issuer regarding the structure of the issue. A broker-dealer gives a municipal issuer advice about a new issue with respect to the issue's timing and terms and is compensated for this advice under a written agreement. A broker-dealer not involved in a new municipal offering informally gives advice to the issuer regarding the timing of the issue for no charge. I only II only I and II only I, II, and III

Answer 330

B. A financial advisory relationship is deemed to exist when a broker-dealer or dealer bank, for compensation or the expectation of compensation, gives an issuer advice about a new issue with respect to the issue's structure, timing, or terms of the offering. However, this does not include situations in which a municipal securities firm gives such advice to an issuer in its role as an underwriter, which is why Choice (I) is not correct. Choice (III) is incorrect because there is no charge.

Question 331

Metcalf Brokerage has calculated its tentative net capital at $2,400,000. Within its common stock trading account is a position consisting of 10,000 shares of Fordham, Inc. stock valued at $34 a share. The additional haircut because of undue concentration would be: $51,000 $15,000 $13,500 $12,450

Answer 331

D. When a broker-dealer has a common stock position whose market value exceeds 10% of its tentative net capital, an undue concentration haircut must be applied. In the example given, the tentative net capital was $2,400,000 of which 10% would be $240,000. The security position has a value of $340,000, 10,000 shares x $34. There is $100,000 excess, $340,000 - $240,000. There is an exclusion from the undue concentration rule for the market value of 500 shares, or $10,000, whichever is greater. The market value of 500 shares equals $17,000, subtracted from the $100,000 excess equals $83,000. 15% of $83,000 equals $12,450.

Question 332

The Reserve Bank Account established pursuant to Rule 15c3-3 may be used by a broker-dealer: For any valid purpose relating to customer accounts Only for receipt and disbursement of customer funds As collateral for a bank loan to finance customer debit balances None of the above

Answer 332

D. The Reserve Bank Account is used for the protection of customer funds only. The broker-dealer may not use the assets in the account for any purpose other than as a reserve for customer protection.

Question 333

A broker-dealer changes from an introducing firm to a clearing firm. The item that would NOT be affected by this change would be: Net capital requirement Calculation of reserve requirement Frequency of FOCUS filing Subordinated loan eligibility for capital

Answer 333

D. Whether a firm is a clearing broker or introducing broker would have no bearing as to whether a subordinated loan is or is not eligible for capital purposes.

Question 334

Answer this question based on the following data for Winthrop Associates. ``` Cash in Reserve Bank Account $250,000 Long stock inventory (Nasdaq) $200,000 Furniture and fixtures $100,000 Fails to receive $75,000 Bank loans $50,000 Retained earnings $300,000 Common stock $125,000 ``` The net capital for Winthrop Associates is: $425,000 $325,000 $295,000 $250,000

Answer 334

C. Add the retained earnings and common stock: $300,000 plus $125,000 = $425,000. This is the beginning equity. Subtract nonallowable assets of $100,000 (furniture and fixtures) to equal $325,000 of tentative net capital. Then deduct haircuts of $30,000 on the long stock position. The net capital of the broker-dealer would be $295,000.

Question 335

Answer this question based on the following data for Winthrop Associates. ``` Cash in Reserve Bank Account $250,000 Long stock inventory (Nasdaq) $200,000 Furniture and fixtures $100,000 Fails to receive $75,000 Bank loans $50,000 Retained earnings $300,000 Common stock $125,000 ``` Based on your net capital calculation in question 69, what would Winthrop Associates be required to do? Notify their DEA Liquidate inventory Introduce another broker-dealer Make an additional deposit to the Reserve Bank Account

Answer 335

A. Winthrop is a clearing broker dealer with a $250,000 net capital requirement. If they do not have at least 20% more than $250,000, they are required to notify their DEA within 24 hours under SEC rules. If they had $300,000 net capital, they would not be required to notify their DEA.

Question 336

A customer opens a margin account at a broker-dealer with a purchase of $40,000 and meets the Regulation T requirement by depositing a $20,000 check in her account. The firm obtains a loan from a bank for the remaining portion of the purchase and pledges the customer's securities as collateral for the loan. What portion of this transaction would be included when calculating aggregate indebtedness? $40,000 $20,000 $10,000 $0

Answer 336

B. The firm has incurred a liability to the lending institution in the amount of $20,000 and has secured this loan by pledging customer securities as collateral. If the firm defaults on the loan, the lender will sell $20,000 of the securities in order to recover the loan which it has extended. This amount would need to be included when calculating the aggregate indebtedness of the firm.

Question 337

A broker-dealer only needs to give a privacy notice to a consumer if it: Shares nonpublic client information with nonaffialiated third parties Sells nonpublic client information to nonaffiliated third parties Shares nonpublic client information with its affiliates Discloses nonpublic client information to any insurance companies or banks with which it is affiliated.

Answer 337

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

Question 338

Which of the following persons must be registered as an associated person under MSRB rules? A municipal securities salesperson who also trades for her own account A senior officer at a bank who makes policy decisions that have an indirect impact on the day-to-day conduct of the bank's municipal securities dealer activities A person who computes only details of pricing on municipal transactions A person who is licensed to sell investment company products and variable contracts

Answer 338

A. A municipal securities salesperson who also trades for her own account must be registered as an associated person. Choice (b) is wrong because the senior officer's policy decisions have only an indirect impact on day-to-day operations. If the decisions had a direct impact, then she would be considered an associated person. Choice (c) is wrong because this is a clerical position, and in Choice (d), being registered by FINRA to sell investment company products and variable contracts has no connection with being registered as an associated person under MSRB rules.

Question 339

Which of the following items would be included in the firm's aggregate indebtedness? Fails to deliver more than 5 days old Fails to receive for customer accounts Customer debit balances Firm trading, sold short to customers

Answer 339

B. Fails to receive for customer accounts is part of the AI of the firm. Fails to deliver and customer debits are debit items on the trial balance and not part of AI. Firm trading, sold short to customers, is a credit item that is collateralized by the firm's own assets, and therefore, is not part of aggregate indebtedness.

Question 340

Which TWO of the following accounts are discretionary under MSRB rules? An account in which the dealer has a standing order to buy a specific security whenever the dealer finds it An account in which the dealer sometimes, but not always, makes the investment decisions An account in which the professional's discretion is limited to the price at which a customer's order for a definite amount of a specified security is executed An account in which the dealer selects a particular security to be bought or sold based on general customer criteria I and II I and III II and III II and IV

Answer 340

D. Under MSRB rules, a discretionary account is the account of a customer in which the municipal securities firm is authorized to determine what municipal securities will be purchased, sold, or exchanged by or for the account.

Question 341

Mutilated certificates do NOT constitute a good delivery between municipal securities dealers UNLESS they are validated by the: ``` Delivering dealer Registered owner Paying agent Trustee I or II only I or IV only II or III only III or IV only ```

Answer 341

D. Mutilated certificates do not constitute good delivery unless validated by the trustee, registrar, transfer agent, paying agent, issuer, or an authorized agent or official of the issuer.

Question 342

Brighton Brokerage owns 5 unlisted call options on Chamberlain Corp. The strike price is 65. The stock is currently 63, and Brighton paid $3,000 to establish the position. The treatment of the calls for net capital purposes is: There is a haircut of 15% There is a 50% haircut No value is given The firm will deduct 20% of the value of the shares, less the out-of-money amount

Answer 342

C. This topic is addressed under adjustments to net worth in the Net Capital Rule. If an unlisted call or put is out of the money, it is given no value. In this case the value of the stock is less than the exercise price, therefore the calls are given no value

Question 343

The stock loan department records indicate that the broker-dealer has borrowed $240,000 worth of common stock for delivery against customer short sales. When computing the net capital of the broker-dealer, the haircut on the securities borrowed would be: No haircut would be required 15% of the market value of the stock 50% of the market value of the stock 100% of the market value of the stock

Answer 343

A. When borrowing stock from another broker-dealer, the firm is required to deposit 100% of the market value of the borrowing in cash. This deposit will be marked to the market on a daily basis. Since the lending firm is holding the cash equal to the market value of the stock, no haircut would be required.

Question 344

When conducting the last quarterly box count of securities in your possession, the records indicated a shortage of securities with a market value of $135,000. How will this shortage be treated in the reserve deposit computation? It will be ignored since it does not relate to customers. It will reduce the deposit requirement after 7 business days. The amount must be added to the net capital of the firm. The amount must be included in the Reserve Formula after 30 business days.

Answer 344

D. The full value of a short securities difference is included in the Reserve Formula under SEC Rule 15c3-3 after 30 business days

Question 345

A broker-dealer's privacy notice must state all the following EXCEPT: The kind of personal information that the firm collects The names of any other financial institutions with which the firm is affiliated The fact that clients may opt out of having their information shared with others The types of third parties to which the firm may disclose information

Answer 345

B. A privacy notice must include the information contained in all choices except (b).

Question 346

The firm has pledged $375,000 of stock with a bank as collateral for customer margin accounts. When calculating the reserve deposit according to SEC Rule 15c3-3, this amount is considered: A customer secured debit balance An exclusion from the deposit calculation A customer credit item included in the deposit calculation A fail to deliver contract reduced by 1%

Answer 346

C. Loans obtained by the firm that use customer securities as collateral are credit items and are included in the reserve deposit computation.

Question 347

A broker-dealer may enter an order to sell a stock long if: The security is carried in the customer's account at the brokerage firm The broker-dealer has reason to believe that the customer owns the stock and will deliver it promptly The customer owns a currently effective call option on the stock and will exercise the call promptly The customer owns a bond convertible into the stock and will tender the bond for conversion promptly I only II only I and II only I, II, III, and IV

Answer 347

C. A broker may mark an order "long" only if the stock is in the possession of the broker, or if the broker has reason to believe that the customer owns the stock and will deliver it promptly. A customer who owns a call option must have exercised the option prior to selling the stock long. A customer who owns a convertible bond must have tendered the bond for conversion prior to selling long.