U2 - Key Points Flashcards
To reinforce frequently tested elements of Unit 2 - Kaplan.
What is the formula for net capital?
Net Worth + Sub Debt - Haircuts = Net Capital
What is the standard haircut on actively traded common stocks?
15%
What is the haircut for stock with a limited trading market?
40%. Limited Trading Market is It is a market where there is only one or 2 independent market makers submitting regular quotations
What is the haircut for stocks where there is no ready market (unregistered warrants and unregistered stock)?
100%-no addition to net capital is made
What is the net capital requirement for members elect to compute their net capital under the “Alternative Standard”?
$250,000
For established firms, the ratio of AI to net capital cannot exceed how much?
15 to 1
For firms in their 1st year of operation, ratio AI to net capital cannot exceed
8 to 1
An alternative way of seeing the 15:1 AI: NC ratio for a clearing firm on the exam would be?
$250,000 or 6 2/3% of aggregate indebtedness, whichever is greater
What is the minimum term for subordinated loan?
One year
Subordinated loans must be
A minimum term of one year
For specific amount
Proceeds of the loan must be used in the business and are subject to the risk of the business
What is a secure demand note agreement?
The lender gives the member negotiable securities to pledge on its own behalf to a bank for a loan. Typically common stock is pledged. Bank loans 70% of the value of the securities to the firm.
What is a TEMPORARY subordinated loan?
Short-term loan normally use in conjunction with firm commitment under writings. 45 days in length
Member firms are permitted to how many subordinated loans in a 12 month period?
3
Subordinated loan agreements must be filed with FINRA how many days before or after the anticipated effective date?
10 days before
What is a form called that shows the financial condition of the member and includes a net capital computation and related operational information?
FOCUS report
How often does a FOCUS I report need to be filed with FINRA?
Monthly
How often does a FOCUS II report need to be filed with FINRA?
Quarterly
If a member firm TERMINATES its membership in any national securities exchange or withdrawals from any SRO, it must file a FOCUS II or FOCUS IIA within how many days of termination?
2 Days!
How many days after a month or quarter must a FOCUS report I or II be filed?
17 business days
What does Rule 17a-11 required member firms to do?
The Net Capital Rule. Reports are made electronically, to both the SEC and FINRA, if a member has violated the net capital rule, is close to violating the net capital rule or is experiencing operational problems.
If a firm’s books and records are not current when does notification to the SEC and FINRA need to be made?
Immediately.
If the firm’s debt to equity ratio exceeds 70% for more than 90 days when does the firm need to report to both the SEC and FINRA?
Immediately.
If the firm has material inadequacies in its accounting system, when does it need to report both the SEC and FINRA?
Within 24 hours.
If the firm’s AI to NC ratio exceeds 15:1 or 8:1 (for a first-year member), when does it need to report to both the SEC and FINRA?
Immediately.
A member is in early warning if…?
120% of its minimum requirement; or its AI to NC ratio exceeds 12:1
If a member firm and the customer cannot resolve the complaint where does it need to be referred and by when?
Within 15 days of the end of each calendar quarter. Sent to the Director of Arbitration of FINRA
What is the retention period for copies of customer complaints?
4 years.
If the complaint involves allegations of theft, misappropriation of funds or securities, or forgery, the member must report this to FINRA when?
Promptly, but not later than 30 days.
When our repurchase agreements permitted?
Only in cases where the underlying securities are EXEMPT -such as US government or municipal bonds.
According to the Code of Procedure the respondent has how many days to respond to a formal complaint from the Department of Enforcement?
25 days.
If the respondent does not answer a formal complaint from the Department of Enforcement within the initial 25 day., how long does it have to respond to a 2nd notice?
14 days.
If the complaint involves a minor rule violation (MRV) and the respondent does not dispute the allegation what is the maximum fine that can be imposed?
$2500.
FINRA will release information to the public through BrokerCheck on any disciplinary decision that imposes a monetary fine of how much?
$15,000 or more.
Why was the Code of Arbitration established?
To resolve money disputes between members, members against associated persons and between members and their customers.
When the director of arbitration of FINRA sends a statement of claim to a respondent, how long does it respondent have to respond both to the director and the claimant?
45 days (a written reply from the claimant must be received within 10 days)
How many, and what type of, arbitrators are involved for INDUSTRY cases between 50,000 and $100,000?
1 non-public arbitrator.
How many, and what type of, arbitrators are involved for INDUSTRY claims over $100,000 or non-specified amount?
- Non-public arbitrators.
For disputes between broker-dealers and brokers with claims between 50,000 and $100,000 how many, and what type, of arbitrators are used?
1 public arbitrator
In disputes between brokers in between or among broker-dealers for claims of more than $100,000 or unspecified or non monetary claims how many, and what type, arbitrators are used?
- 1 non-public and 2 public arbitrators.
What is the statute of limitations if no claim is made for complaints?
6 years.
Monetary awards coming from an arbitration decision must be paid within how many days?
30 days.
How frequently does the CEO need to certify that it’s firm has processes in place to establish, maintain, review, test its supervisory procedures?
Annually. It must complete at least one meeting with the Chief Compliance Officer for the 12 months preceding certification.
Who does the CEO submit its annual certification of compliance to and WHEN is it due?
To the firm’s Board of Directors and Audit Committee. Within 45 days of the certification.
How many limited partnerships are required for a DPP and why are they done?
Just one or more limited partnerships are required. To try to increase liquidity.
Confirmations for DVP trades are to be delivered to customers by when?
No later than T +1.
What is the minimum EQUITY requirement for a Prime Broker?
$500,000
What is the amount of customer securities that can be pledged by a firm to a bank for a loan?
The firm can hypothecate 140% of the customer debit balance. It can never borrow more than 100% of the debit balance.
The “easy to borrow list” must be updated by a member firm how frequently?
Daily.
A short seller is required to remit cash dividends that the buyer has received from the issuer to whom?
To the stock lender.
A pattern day trader is one who executes how many trades within how many days?
4 or more day trades in 5 business day period.
What is the minimum equity requirement for pattern day traders?
$25,000
If the customer of a firm has an active portfolio margin account and, it is issued a maintenance call when must the call be satisfied?
Within 3 business days.
What is the buying power for regular customers with margin accounts?
2 times the SMA amount.
What is the buying power for pattern daytraders?
4 times the maintenance margin excess.
What is the haircut to net capital for broad-based, high capitalized ETF’s?
10%. Less than common stock.
When are accounts valued for SIPC coverage purposes?
The date that a protective decree is filed. Note that it is not the day a customer files form. $500k max per customer. $250k max cash. Long equity only.
Which rule is Rule 15c3-1?
The Net Capital Rule
What is the net capital requirement for a carrying firm?
$250,000 or 6 2/3% of aggregate indebtedness (AI)-whichever is greater.
What is the minimum net capital requirement for introducing firm that may not receive customer securities, cannot participate in a firm commitment underwriting and may not receive customer checks made out to themselves?
$5000.
What is the minimum net capital requirement for introducing firms that can receive, but not hold, customer securities for proper forwarding and can participate in a firm commitment underwriting as a selling group member?
$50,000
What is the minimum net capital requirement for member firms that deal solely in the sale of mutual funds, unit trust or variable annuities?
Either $5000 or $25,000. $5000 applies for those firms that sell only on a subscription basis.
What is the minimum net capital requirement for a market maker?
$100,000
How is net capital requirement computed for market makers?
For stocks with the bid price of $5 for loss-$1000 in net capital per security and; for stocks with the bid price of more than $5-$2500 in net capital per security.
Remember, the minimum net capital requirement for a market maker is $100,000
The firm that is engaged solely in merger and acquisition work or the sale of limited partnerships has a net capital requirement of how much?
$5000
Was the haircut for an IPO? What is the haircut for an additional issue offering?
30% for an IPO. 15% for an additional issue offering.
If a members independent accountant resigns or is fired, the member must electronically notify SEC and FINRA within how many days of the termination date?
15 days.
When is a member in “early warning”?
It’s net capital falls below 120% of its minimum requirement or its AI to NC ratio exceeds 12:1.
An established carrying firm, subject to a $250,000 minimum net capital requirement, would be an early warning if it’s computed net capital fell below how much?
$300,000.
120% times $250,000.
When do early warning reports need to be made to FINRA?
Within 24 hours.
Broker-dealers that carry securities are required to make a count of those securities how frequently?
Quarterly.
If securities are discovered missing as a result of the quarterly securities count, the member has how many days to report to the SIC?
10 business days
An exception to the SIC inquiry rule is if the security has any of the following characteristics:
Received directly from the issuer
Received from another reporting institution (member firm),
Received from existing customer of the firm and its registered in the customers name.
Part of a transaction valued at $10,000 or less.
Exception reports ordered from a clearing firm must be retained for how long?
18 months
Whether a record retention requirement is 6 years or 3 years, how many years must be in a readily accessible location?
2 years.
Blotters, general ledgers, stock records (showing the ownership of the securities and where they are held) need to be retained for how long?
6 years.
Customer ledgers (statements) and customer account records must be retained for how long?
6 years.
Communications with the public, focus reports, trial balances, Form U4 and U5, fingerprint cards and customer confirmations need to be retained for how long?
3 years.
Rule 15C3-3 is known as what rule?
The Customer Protection Rule. Deals primarily with the possession or control requirements and the reserve requirement of firms.
How often does a member carrying firm need to calculate the reserve requirement?
Each week, as of the close of business on Friday.
If carrying firms in their weekly calculation find that customer credits exceed debits these firms need to deposit excess funds to where?
A Special Reserve Bank Account for the exclusive benefit of customers within one hour after the banks open on the 2nd business day following computation (generally by 10 AM on Tuesday)
What are acceptable deposits into a Special Reserve Bank account?
Qualified securities. Treasury bills, treasury notes, treasury bonds and Ginnie Mae mortgage-backed securities (this is not Fannie Mae).
If a member firm has a net capital requirement of $350,000 it must maintain a fidelity bond of?
$700,000. This is per a table that exists.
Note that a member firm must maintain minimum coverage of no less than 120% of its net capital REQUIREMENT.
Your firm is a sole market maker for a stock. You own $300,000 of that stock inventory. How much is credited to net capital?
Because you are the sole market maker there is likely no ready market. There is, therefore, a 100% haircut.
Investment advisors must be federally registered if the amount of assets under management is at least how much?
$110 million
Per the Investment Company Act of 1940, mutual funds must send financial statements to their shareholders how frequently?
Quarterly.
When does a member firm need to notify the regulatory authorities if their debt/equity ratio exceeds 70% for longer than 90 days?
Immediately.
If the firm’s net capital falls below 120% of minimum or its Aggregated Indebtedness to Net Capital exceeds 12:1, when does it need to be reported?
Within 24 hours. This constitutes Early Warning
A member firm must compute its fidelity bonding insurance requirement based on?
Highest REQUIRED net capital over the PRECEDING 12 months.
Certain firms are exempt from the computational requirements of the Customer Protection Rule (SEC Rule 15c3-3). These exemptions, which are available to non-carrying firms are for what kind of firms?
1) Firms whose transactions are limited to the sale and redemptions of redeemable securities (disease investment companies). They promptly transmit all funds and deliver all securities received. Known as a k(1) exemption.
2) firms that carry no margin accounts and probably forward all customer funds and securities. Known as a k(2)(i) exemption.
3) firms that are introducing broker-dealers the clear all customer transactions only fully disclosed basis with a clearing firm. Known as a k(2)(ii) exemption.
Under SEC rules, the minimum net capital requirement for a firm operating under a k(2)(i) exemption is?
$100,000
Under the customer protection rule, securities due from customers to complete sell orders must be BOUGHT IN promptly how many business days after the settlement date?
10 days.
When must member firms make payment to the sponsor of a mutual fund for shares purchased by its customers?
Within 3 business days of trade date or within one business day of receipt from the customer-whichever is later.
Under the Code of Procedure, a pre-hearing conference must be held within how many days of receipt of the respondent’s answer to the complaint?
21 days.
Under Regulation S how long are shares generally restricted for resale to a US residents during the “seasoning period”?
12 months.
Under the Code of Procedure when final disciplinary actions are levied (other than a bar or expulsion) by FINRA when do the rule violations take effect?
If a default decision is not appealed within the 25 day., That decision becomes the final disciplinary action. The sanctions then become effective on a date to be determined by FINRA staff.
Note that for a bar or expulsion that becomes effective immediately upon the default decision becoming the final disciplinary action of FINRA.
What are 2 characteristics of a restricted margin account?
Equity is below the initial requirement and the debit balance is greater than the loan value.
Loan value is 50% of current market value.
Issuers of listed securities are required to advise the exchange of an upcoming record date in at least how many days in advance of that record date?
10 days.
If a members fidelity bond is substantially modified, canceled or terminated when must it notify FINRA and by what process?
Immediately in writing.
According to the Investment Company Act of 1940, an investment company is considered diversified when it meets the “75-5-10” test. What does that represent?
That at least 75% of the funds total assets are invested in securities issued by companies other than the investment company itself or affiliates.
No more than 5% of the funds total assets are invested in securities of any one issuer and
The fund may not own more than 10% of the outstanding VOTING securities of any one issuer.
Note: the 5% and 10% limitations are part of the 75% invested. There are no conditions attached the remaining 25%.
What is the net capital requirement for an investment company
$100,000.
How frequently does mutual fund have to update its prospectus?
The SEC requires a prospectus that is in use for more than 9 months cannot contain financial information more than 16 months old.
What is the definition of an affiliated person?
The person who directly or indirectly owns, controls, or holds with power to vote, 5% or more of the outstanding voting securities of any company.
Any officer, director, partner, copartner or employee,
Or an investment advisor of a member of the advisory board of an investment company.
If a person is only a member of the Board of Directors or advisory board or owns securities of a fund, are they considered to be “interested persons”?
No. If that is the sole reason they are NOT considered INTERESTED PERSONS.
To initially CHARGE an asset based (12b-1) fee, the fund must have a majority vote of whom?
ALL of the following: Shareholders, Board of Directors, and a majority vote of the outside, independent, directors.
How frequently do 12b-1 fees need to be RE-APPROVED?
Annually.
Once in place, how frequently do 12b-1 fees need to be REVIEWED?
Quarterly.
For a company to qualify as a REIT, it must meet what qualifications?
Must have a minimum of 100 shareholders, invest at least 75% of its total assets in real estate assets,
Derive at least 75% of its gross income from rents from real property or interest on mortgages financing real property and
Pay annually at least 90% of its taxable income in the form of shareholder dividends.
Investment advisors with under 100 million of assets under management REGISTER where?
At the state level.
Is a principal REQUIRED to be at an OSJ? If so, how many principals are required at each OSJ?
At least 1 at an OSJ.
Are principals required to be located at branch office locations?
No.
Can a registered representative who is qualified act as a branch manager? If so, is there any other supervision required?
Yes. The location, however, must be under the supervision of an OSJ.
What is the definition of a “public arbitrator”?
Someone who has not now or ever been associated with or registered as a broker insecurities or futures or with an entity that is organized under the exchange act, investment Company act of 1940, or an investment advisor. Etc.
Can an attorney or an accountant be considered a public arbitrator?
Yes, however, if, for a total of 15 years or more, they devoted 20% or more of their professional time annually to broker-dealers, investment advisors, etc. they may not be considered a non-public arbitrator.
To qualify for a simplified arbitration, the total claim dispute cannot exceed how many dollars?
$50,000. A single public arbitrator reviews all of the evidence and renders a binding decision within 30 business days.
If a monetary award is given as part of the arbitration process when must it be paid?
Within 30 days of the decision date.
What is the minimum net capital requirement for firms acting as a PRIME BROKER?
$1.5 million
What is the minimum net capital requirement for EXECUTING BROKERS in a prime brokerage relationship?
$1 million
What is the net capital requirement for member firms solely engage in merger and acquisition work or the sale of limited partnerships?
$5000.
What is the net capital requirement of carrying and/or clearing members in a joint back office (JBO) arrangement?
$25 million
Can a member firm guarantee the obligations or liabilities of another person? If so, how is notification made?
Yes. The modification is made in writing to FINRA at least 10 business days prior to entering the arrangement.
Is an audited FOCUS report required?
Yes. All broker-dealers registered with the SEC are required to file audited FOCUS II or IIA within 60 days of the year-end date with a FOCUS III facing page.
What is Rule 15c3-3?
The Customer Protection Rule
What type of underwriting activity can a $5000 or $50,000 introducing firm engage in?
They can manage a best efforts offering, but neither may be in the syndicate engaged in a firm commitment underwriting
A firm may be experiencing financial distress if it experiences what % of reduction in excess net capital over what time frame?
If it experiences a 25% reduction in excess net capital during the preceding 2 months, or 30% over the preceding 3 months.
What is the retention period required for any type of books and records for which there is period mentioned under the FINRA or SEC rules?
6 years.
How frequently must trial balances be prepared to maintain and demonstrate compliance with net capital rules?
Monthly.
Clearing firms are required to notify their correspondent introducing firms of the exception reports they have available by what date each year?
July 1
SEC rules allow broker-dealers to re-hypothecate customers margin securities. What percentage of margin securities may they use?
A BD may use margin securities equal to 140% of the customers debit balance as collateral for bank loans.
If a member terminates its independent accounting firm, the SEC and the SRO must be notified when?
Within 15 days of the termination date.
If a firm, who has previously reported that securities were lost, recovers those securities they need to report that within how many days?
Within 1 business day of recovery.
Under SEC rules, if a member wishes to withdraw capital in any 30 day period that exceeds 30% of its access net capital, the member must notify the SEC when?
At least 2 business days BEFORE the withdrawal.
If securities are discovered missing after a broker-dealer conducts a physical securities count (required quarterly), the broker has how many days in which to resolve the difference before reporting it?
10 business days.
What is the haircut to net capital for narrow based or sector focused ETF’s?
If it’s narrow/sector it’s a 15% haircut!
Under what circumstances may a fund company direct trades to specific BDs.
None! A member is prohibited from selling the fund shares if they have reason to believe that a directed relationship is in place.
Under what certain circumstances may FINRA have the right to prohibit a member firm from EXPANDING it’s business. What are the criteria involved?
1) Net Capital is less than 150% of it’s minimum requirement,
2) AI-to-NC ratio exceeds 10:1
FINRA can require a firm to REDUCE it’s business if either of the following are in place?
1) Net Capital is less than 125% of it’s minimum requirement,
2) AI-to-NC ratio exceeds 12:1
The Investment Company Act of 1940 requires that fund companies send statements to their customers how frequently?
Semi-annually
PRE-Payment of a subordinated loan is ok IF:
PRE-Payment of a subordinated loan is ok IF: 1) loan has been in place for 1 year AND 2) pre-payment doesn’t cause the firm’s Net Capital to exceed of 10:1 ratio OR if it’s Net Capital is not less than 120% of minimum requirement.
RE-Payment of a subordinated loan is ok IF:
1) loan has been in place for 1 year AND 2) pre-payment doesn’t cause the firm’s Net Capital to exceed 12:1 ratio OR if it’s Net Capital is not less than 120% of minimum requirement.
Are Unit Trusts considered OPEN Ended or CLOSED Ended?
CLOSED!
When is the sales charged assessed when a customer signs a letter of intent?
At time of INITIAL purchase.
12b-1 fees can be used to pay for what?
Advertising, cost of mailing prospectuses, compensation for sales.
Investment advisory fees CANNOT be paid with 12b-1 fees.
Who bears the cost of trailer commissions associated with fund sales?
Shareholders.
What’s needed to TERMINATE a 12b-1 fee?
Majority vote of the shareholders OR majority vote of OUTSIDE directors.
An INTRODUCING firm which operates on a fully disclosed basis with it’s clearing firm and doesn’t hold funds or securities of customers has to calculate it’s reserve requirement how frequently.
Not at all. Their EXEMPT.
