Unit 1- Uniform Net Capital Rules Flashcards
A broker/dealer that carries customer accounts and makes a market in 8 stocks selling for less than $5 a share must maintain minimum net capital of:
A) $100,000.
B) $1 million.
C) $250,000.
D) $25,000.
The requirement for market makers is $1,000 for each stock selling for $5 or less; $2,500 for each stock selling at more than $5; a minimum requirement of $100,000; and a maximum requirement of $1 million. In this case, 8 stocks × $1,000 = $8,000, which is less than $100,000. Therefore, the minimum net capital required as a market maker is $100,000. However, because the broker/dealer is a carrying firm, its minimum net capital requirement is $250,000.
A broker/dealer making a market in 50 stocks selling for more than $5 a share must maintain minimum net capital of:
A) $125,000.
B) $50,000.
C) $250,000.
D) $1 million.
Click for Answer and Explanation
Answer: A
The requirement for market makers is: $1,000 for each stock selling for $5 or less; $2,500 for each stock selling at more than $5; a minimum requirement of $100,000; and a maximum requirement of $1 million. In this case, 50 stocks times $2,500 equals $125,000.
Under the SEC net capital rules, an introducing broker/dealer that receives customer securities may participate in underwritings provided that:
I participation is on an all-or-none or a best efforts basis.
II it maintains net capital of at least $50,000.
III all customer drafts and checks are forwarded to an escrow agent.
IV all customer drafts and checks are made payable to an escrow agent.
A) I, II, III and IV.
B) I and II.
C) I, II and III.
D) II and III.
Answer: A
A broker/dealer that does not maintain $250,000 of net capital cannot participate as a syndicate member in a firm commitment underwriting. The firm described can participate in best efforts commitments. In addition, the firm must forward all funds promptly to an escrow agent and must make all checks payable to the escrow agent.
A introducing member firm, acting solely as a market maker, makes a market in 20 stocks under $5 bid and 20 stocks over $5 bid. Under SEC rules, this firm has a minimum net capital requirement of:
A) $50,000.
B) $70,000.
C) $250,000.
D) $100,000.
Click for Answer and Explanation
Answer: D
The minimum net capital requirement for market makers is based on the number of markets made. For stocks that have a bid price of $5 or less, a firm needs $1,000 in capital per security. For stocks that have a bid price of more than $5, a firm needs $2,500 in capital per security. The minimum requirement is $100,000 with a maximum of $1 million. The computation is:
20 × $1,000 = $20,000
20 × $2,500 = $50,000
Total= $70,000
If the computation shows less than $100,000, the minimum is $100,000.
An established introducing firm that receives customer securities for prompt forwarding to its clearing agent has a minimum net capital requirement of:
A) $5,000 or 1/15 of AI, whichever is greater.
B) $50,000 or 1/15 of AI, whichever is greater.
C) $5,000 or 1/8 of AI, whichever is greater.
D) $50,000 or 1/8 of AI, whichever is greater.
Answer: B
An introducing firm that receives (but does not hold) customer securities has a minimum capital requirement of $50,000. As the firm in this question is established, it cannot let its AI-to-NC ratio exceed 15:1. Therefore, its minimum net capital requirement is $50,000 or 1/15 of AI, whichever is greater.
A member firm that deals exclusively in investment company securities on both a subscription and wire order basis has a minimum net capital requirement of:
A) $5,000.
B) $30,000.
C) $50,000.
D) $25,000.
Click for Answer and Explanation
Answer: D
The minimum net capital requirement for firms dealing exclusively in investment company securities is either $5,000 (subscription orders only) or $25,000 (wire orders). If a firm does both, its minimum is the higher of the two.
An introducing firm subject to a $50,000 minimum capital requirement is permitted to:
I participate in a firm commitment underwriting as a selling group member.
II make an occasional trade for its own account.
III participate in a firm commitment underwriting as a syndicate member.
IV manage a best efforts underwriting.
A) I and III.
B) III and IV.
C) II and IV.
D) I, II and IV.
Click for Answer and Explanation
Answer: D
Introducing firms (both $5,000 and $50,000) are permitted to make occasional trades for their own accounts and manage best efforts underwritings. Neither is permitted to participate in a firm commitment underwriting as a syndicate member. A $50,000 introducing firm — unlike its $5,000 counterpart — is permitted to participate in a firm commitment underwriting as a member of the selling group.
An introducing member that executes more than 10 transactions per year in its investment account has a minimum net capital requirement of:
A) $5,000
B) $50,000
C) $250,000
D) $100,000
Click for Answer and Explanation
Answer: D
If an introducing member or a firm engaged solely in the sale of investment company products executes more than 10 trades per year in its investment account, it is considered a dealer for net capital purposes. The minimum net capital requirement for a dealer is $100,000.
A $5,000 introducing member firm is prohibited from all of the following EXCEPT:
A) participating in a firm commitment underwriting as a selling group member.
B) purchasing as principal prior to executing the customer’s buy order the same number of shares necessary to complete the order, which is cleared through another broker/dealer.
C) holding customer securities and later forwarding them to its carrying firm.
D) receiving customer checks in the member’s name for prompt forwarding to the carrying firm.
Answer: B
$5,000 introducing firms may, prior to executing a customer’s buy order, purchase as principal the same number of shares or purchase shares to accumulate the number of shares necessary to complete the customer’s order. The order must be cleared through another registered broker/dealer.
A $50,000 introducing member firm is permitted to do all of the following EXCEPT:
A) receive customer checks in the member’s name for prompt forwarding to its clearing firm.
B) receive customer securities for prompt forwarding to its clearing firm.
C) receive customer checks in the clearing firm’s name for prompt forwarding to the clearing firm.
D) participate in a firm commitment underwriting as a selling group member.
Answer: A
Both $5,000 and $50,000 introducing firms may accept checks made out to the clearing firm for prompt forwarding, but neither may accept checks made out in their name. Both may make occasional trades in their investment accounts and manage a best efforts offering, but neither may be in a syndicate engaged in a firm commitment underwriting. There are 2 actions that can be taken by $50,000 firms that are prohibited to $5,000 firms: $50,000 firms may accept customer securities in-house for prompt forwarding and can participate in a firm commitment underwriting as a selling group member.
A member firm, acting solely as a market maker, makes a market in 30 stocks under $5 bid and 30 stocks over $5 bid. Under SEC rules, the minimum net capital requirement for this firm is:
A) $150,000.
B) $250,000.
C) $105,000.
D) $100,000.
Answer: C
The minimum net capital requirement for a market maker is a function of the number of markets made. The minimum is $100,000 and the maximum is $1 million.
30 stocks under $5 bid 30 × $1,000 = $30,000
30 stocks over $5 bid 30 × $2,500 = $75,000
= $105,000
A fully-disclosed broker/dealer receiving customer securities for prompt forwarding to its clearing firm must maintain minimum net capital of:
A) $75,000.
B) $100,000.
C) $50,000.
D) $5,000.
Answer: C
An introducing broker/dealer receiving customer securities, even if promptly forwarded to the clearing firm, must maintain minimum net capital of $50,000.
Net Capital
Question ID: 48691
A first-year clearing firm makes a market in 80 stocks above $5 bid and has AI of $2,800,000. Its minimum net capital requirement is:
A) $350,000.
B) $175,000.
C) $200,000.
D) $250,000.
Answer: A
This clearing firm has a minimum net capital requirement of at least $250,000. As a market maker, the firm must maintain $2,500 of net capital for each security of more than $5 bid; this amounts to $200,000, which is superseded by the $250,000. The other test that must be performed is the AI-to-NC ratio. Since this firm is less than 12 months old, the ratio cannot exceed 8:1. $2,800,000/8 is $350,000, which is the minimum net capital requirement.
Reference: 1.1.2.6 in the License Exam Manual.
A broker/dealer using the alternative method must maintain minimum net capital of at least:
A) $100,000.
B) $175,000.
C) $200,000.
D) $250,000.
Answer: D
Broker/dealers that use the alternative net capital calculation method must maintain a minimum of $250,000 or 2% of aggregate debit balances (as shown in the reserve computation), whichever is greater.
A broker/dealer endorsing unlisted options or effecting more than 10 transactions per year in its investment account must maintain minimum net capital of at least:
A) $150,000.
B) $250,000.
C) $100,000.
D) $75,000.
Answer: C
By effecting more than 10 transactions per year in its investment account or by endorsing unlisted options, a broker/dealer is classified as a “dealer” required to have minimum net capital of at least $100,000.
Net Capital
Question ID: 48751
A broker/dealer engaged exclusively in the sale of mutual funds on a wire order basis must maintain minimum net capital of at least:
A) $100,000.
B) $25,000.
C) $5,000.
D) $50,000.
Answer: B
Mutual fund broker/dealers require net capital of $25,000 if wire order sales are made. If business is done by formal application only, the minimum net capital requirement is $5,000.
Reference: 1.1.2.4 in the License Exam Manual.
A fully-disclosed broker/dealer that does not receive or hold customer funds or securities makes a market in three stocks over $5 bid. Its minimum net capital requirement is:
A) $75,000.
B) $100,000.
C) $5,000.
D) $50,000.
Answer: B
Market making firms that are not carrying firms are subject to a net capital minimum of $100,000 unless the calculation of net capital per stock is greater. In this situation, the three issues of over $5 bid each would require total net capital of $7,500 ($2,500 each), which is less than the $100,000 market maker minimum.
Question ID: 48791
Under net capital rules, a municipal broker’s broker must maintain minimum net capital of:
A) $150,000.
B) $50,000.
C) $100,000.
D) $250,000.
Answer: A
All broker’s brokers must have net capital of no less than $150,000.
Reference: 1.1.2 in the License Exam Manual.
An established general securities broker/dealer makes a market in 400 stocks over $5 bid and 300 stocks under $5 bid. Its minimum net capital requirement is:
A) $50,000.
B) $100,000.
C) $1,300,000.
D) $1,000,000.
Answer: D
The ceiling on capital requirements for market makers is $1 million.
Reference: 1.1.2.6 in the License Exam Manual.
To participate in firm commitment underwritings as a selling group member, a fully-disclosed broker/dealer would be subject to a minimum net capital requirement of:
A) $25,000.
B) $100,000.
C) $50,000.
D) $5,000.
Answer: C
Fully-disclosed broker/dealers may not participate as syndicate members in firm commitment underwritings, but may participate as selling group members-provided they are subject to a $50,000 minimum requirement.
Reference: 1.1.2.2 in the License Exam Manual.
A brokerage firm’s net capital may not be less than what percentage of aggregate debits?
A) 10%.
B) 2%.
C) 5%.
D) 17%.
Answer: B
Under the alternative method, the firm must maintain at least 2% of aggregate debits or $250,000, whichever is greater.
Reference: 1.1.2.7 in the License Exam Manual.
Question ID: 48903
Broker/dealers computing net capital under the alternative method are required to maintain the greater of:
A) $25,000 or 2% of aggregate debits computed under the reserve requirement of SEC Rule 15c3-3.
B) $25,000 or 1,500% of their aggregate indebtedness.
C) $250,000 or 1,500% of their aggregate indebtedness.
D) $250,000 or 2% of aggregate debits computed under the reserve requirement of SEC Rule 15c3-3.
Answer: D
The alternative minimum capital requirement is 2% of aggregate debits in the reserve formula or $250,000, whichever is greater.
Reference: 1.1.2.7 in the License Exam Manual.
Question ID: 48933
A market maker that carries customer accounts and makes markets in 8 stocks selling under $4 a share has a minimum net capital requirement of:
A) $250,000.
B) $8,000.
C) $20,000.
D) $100,000.
Answer: A
The net capital requirement is $1,000 for each stock selling at or under $5 so the total for eight such stocks would be $8,000. However, the minimum net capital requirement for carrying firms is $250,000.
Reference: 1.1.2.1 in the License Exam Manual.
Question ID: 48938
A broker/dealer that sells stocks and bonds, underwrites offerings, sells mutual funds by wire order, and carries customer accounts must maintain a minimum net capital of:
A) $50,000.
B) $100,000.
C) $125,000.
D) $250,000.
Answer: D
A broker/dealer that carries customer accounts must maintain a minimum net capital of $250,000.
Reference: 1.1.2 in the License Exam Manual.
Question ID: 48939
A newly-organized carrying broker/dealer makes a market in 50 stocks selling for more than $5 and has aggregate indebtedness of $1 million. According to SEC Rule 15c3-1, what is the minimum net capital requirement?
A) $250,000.
B) $50,000.
C) $100,000.
D) $125,000.
Answer: A
Based on the number of markets made in securities valued at more than $5, the required net capital is 50 stocks times $2,500, which equals $125,000. The minimum net capital required (based on the number of markets made) is $100,000, so the requirement is $125,000. The broker/dealer is newly formed, so AI cannot exceed eight times net capital. AI equals $1 million; $1 million divided by 8 equals $125,000. The minimum requirement for carrying broker/dealers is $250,000, so this is the minimum net capital requirement.
Reference: 1.1.2.1 in the License Exam Manual.
Question ID: 48941
A fully-disclosed broker/dealer that makes a market in four stocks selling at less than $5 a share and receives and promptly transmits customer funds and securities must maintain minimum net capital of:
A) $5,000.
B) $10,000.
C) $50,000.
D) $100,000.
Answer: D
A fully-disclosed broker/dealer that receives but promptly transmits customer funds and securities must maintain minimum net capital of $50,000. A broker/dealer that is a market maker must maintain minimum net capital of $100,000. The firm must maintain the greater of these two minimums.
Reference: 1.1.2.6 in the License Exam Manual.
Question ID: 48942
A broker/dealer making a market in 50 stocks selling for more than $5 a share must maintain minimum net capital of:
A) $50,000.
B) $250,000.
C) $1 million.
D) $125,000.
Answer: D
$2,500 is required for each of the 50 stocks priced over $5 bid.
Reference: 1.1.2.6 in the License Exam Manual.
Question ID: 49064
A fully disclosed securities firm that writes and endorses nonstandardized OTC put and call options must maintain a minimum net capital of:
A) $25,000.
B) $50,000.
C) $125,000.
D) $100,000.
Answer: D
A broker/dealer writing nonstandardized option contracts must maintain a minimum net capital of $100,000.
Reference: 1.1.2.5 in the License Exam Manual.
Question ID: 49116
A broker/dealer, subject to a $25,000 minimum net capital requirement, is engaged solely in the sale of investment company securities. Under which of the following circumstances could this firm accept and execute a customer order to sell shares of ABC, an NYSE-listed company?
A) Without restriction.
B) As long as the proceeds are immediately invested in CDs insured by the FDIC.
C) Under no circumstances.
D) As long as the proceeds are immediately invested in redeemable investment company securities.
Answer: D
A $25,000 investment company broker/dealer is permitted to handle the sale of securities for the account of a customer to obtain funds for the immediate reinvestment in redeemable investment company securities. This rule presumes the firm has the capability to clear such a transaction.
Reference: 1.1.2.4 in the License Exam Manual.
Question ID: 49117
A broker/dealer, engaged solely in the sale of direct participation programs, does not receive or hold funds or securities nor does it owe funds or securities to customers. Under 15c3-1, this firm has a minimum net capital requirement of:
A) $25,000.
B) $50,000.
C) $100,000.
D) $5,000.
Answer: D
Firms engaged solely in merger and acquisition work or in the sale of direct participation programs have a minimum net capital requirement of $5,000. Those selling DPPs are acting as agents for program sponsors. Customer payments for interests in DPPs are made directly to the program sponsors.
Reference: 1.1.2.8 in the License Exam Manual.
Question ID: 49126
Which of the following broker/dealers are subject to a minimum net capital requirement of $5,000?
A firm engaged solely in merger and acquisition work.
A firm engaged solely in the sale of investment company securities on a subscription basis only.
A fully disclosed firm which does not receive customer funds or securities.
A firm acting as a prime broker.
A) II and IV.
B) III and IV.
C) I, II and III.
D) I and III.
Answer: C
Selling investment company securities on a subscription basis only requires capital of $5,000. This is also true for an introducing firm which does not receive customer funds or securities. Firms engaged solely in M&A work fall into the category of other brokers or dealers under the net capital rule. The requirement for these firms is $5,000. A prime broker carries customer accounts and is therefore subject to a capital requirement of at least $250,000.
Reference: 1.1.2.8 in the License Exam Manual.
Question ID: 49148
A $25,000 broker/dealer subject to a K(1) exemption under SEC Rule 15c3-3 is permitted to:
A) sell stock for a customer as long as the proceeds are immediately reinvested in CDs insured by the FDIC.
B) sell stock for a customer as long as the proceeds are immediately reinvested in redeemable investment company securities.
C) hold customer funds and securities.
D) act as syndicate manager in a firm commitment underwriting.
Answer: B
The K(1) exemption applies to firms doing business in investment company securities, variable annuities, etc. If subject to a $25,000 minimum net capital requirement, the firm could handle the sale of stock for a customer - as long as the proceeds are immediately reinvested in redeemable investment company securities.
Reference: 1.1.2.4 in the License Exam Manual.
Net Capital
Question ID: 49165
Which statement is TRUE regarding the net capital treatment of sole proprietorships?
A) The excess of nonbusiness liabilities over nonbusiness assets must be deducted from net worth in computing net capital.
B) The excess of nonbusiness liabilities over nonbusiness assets must be added to net worth in computing net capital.
C) The excess of nonbusiness assets over nonbusiness liabilities must be deducted from net worth in computing net capital.
D) The excess of nonbusiness assets over nonbusiness liabilities must be added to net worth in computing net capital.
Answer: A
In doing a net capital computation, a sole proprietor excludes any nonbusiness assets and liabilities. However, if those nonbusiness assets and liabilities, when combined, show a negative net worth, this amount (the excess of liabilities over assets) must be deducted from net worth.
Reference: 1.1.2.8 in the License Exam Manual.
Net Capital Computations
Question ID: 48647
For net capital purposes, all of the following are nonallowable assets EXCEPT:
A) goodwill.
B) aged fails-to-deliver.
C) exchange memberships.
D) equity in real estate.
Answer: B
Exchange memberships, equity in real estate, and goodwill are all examples of nonallowable (illiquid) assets. A fail-to-deliver occurs when a customer sells and fails to deliver the securities by settlement date. This is like a receivable, and it is an allowable asset. However, if it is still outstanding on the 5th business day past settlement date, it must be aged (a value reduction for net capital purposes). Though reduced in value, it is still an allowable asset. After 10 business days from settlement, it must be bought in.
Reference: 1.2.3 in the License Exam Manual.
Net Capital Computations
Question ID: 48665
Under the net capital rule, which of the following are considered allowable capital?
I. Common stock.
II. Accounts payable.
III. Subordinated loans.
IV. Long-term debt.
A) II and III.
B) II and IV.
C) I and III.
D) I and IV.
Answer: C
Allowable capital includes net worth (common stock plus retained earnings) and subordinated loans (including secured demand notes).
Reference: 1.2.3 in the License Exam Manual.
Net Capital Computations
Question ID: 48776
A fail to deliver that is aged will:
A) decrease AI.
B) decrease the reserve requirement.
C) decrease net capital.
D) increase AI.
Answer: C
Fails are aged on the fifth business day after settlement date which means the positions are marked to the market and a haircut is taken on the market value of the securities not yet delivered. This will result in a charge to net capital unless the mark to the market is positive and exceeds the haircut amount. In this case there is no charge to net-capital.
Reference: 1.2.3.1 in the License Exam Manual.
Net Capital Computations
Question ID: 48777
A customer has a margin account with a debit balance of $100,000 and common stock with a market value of $80,000. A maintenance margin call for $40,000 has been outstanding for three business days. The charge to the broker/dealer’s capital is:
A) $32,000.
B) $0.
C) $12,000.
D) $20,000.
Answer: B
There is no charge to the broker/dealer’s net capital until the position is on its second maintenance call. When on the second maintenance call, the position is marked to the market and a haircut is taken on the market value.
Net Capital Computations
Question ID: 48907
A customer has a debit balance of $50,000 and securities with a market value of $40,000. A margin call for $20,000 was sent 6 business days ago. The second call was sent 1 business day ago. What is the charge to net capital?
A) $16,000.
B) $0.
C) $12,000.
D) $50,000.
Answer: A
Because the customer account has been issued a second margin call, the unsecured portion of the debit balance is nonallowable and the underlying security position must be haircut.
Reference: 1.2.3.1 in the License Exam Manual.
Net Capital Computations
Question ID: 48908
A customer has a debit balance of $75,000 and securities with a market value of $60,000. A margin call for $30,000 is outstanding for three days. How much is the charge to the broker’s net capital?
A) $33,000.
B) $0.
C) $15,000.
D) $24,000.
Answer: B
No charge is applied to net capital until the second Regulation T extension. Each extension is given a maximum 5-business-day period. Thus, a charge will be taken on the sixth business day. On the sixth day, if the margin call is not met, the charge would be: $75,000 Debit − 60,000 Securities 15,000 Unsecured 9,000 15% Haircut on 60,000 $24,000 Total Deduction
Reference: 1.2.3.1 in the License Exam Manual.
Net Capital Computations
Question ID: 48909
A firm has a fail to deliver that is 17 days old. The contract value is $12,000 and the market value is $10,000. The firm must take a deduction to net capital of:
A) $3,500.
B) $1,000.
C) $3,000.
D) $5,000.
Answer: A
The position must be marked to the market and given a 15% haircut because the fail to deliver is older than four business days.
Reference: 1.2.3.1 in the License Exam Manual.
Net Capital Computations
Question ID: 48912
For net capital purposes, fails to deliver must be:
A) added to aggregate indebtedness after the fourth day.
B) marked to the market and haircut after the fourth day.
C) marked to the market after the fourth day.
D) marked to the market after the seventh day.
Answer: B
Fails to deliver must be marked to the market and appropriately haircut after the fourth business day, meaning the fifth business day after settlement.
Reference: 1.2.3.1 in the License Exam Manual.
Net Capital Computations
Question ID: 48914
Aged fails to deliver result in a(n):
A) reduction in aggregate indebtedness by the appropriate amount.
B) increase in net capital by the appropriate amount.
C) increase in aggregate indebtedness by the appropriate amount.
D) reduction in net capital by the appropriate amount.
Answer: D
Aged fails to deliver must be marked to the market and receive a 15% haircut, resulting in a reduction of net capital.
Reference: 1.2.3.1 in the License Exam Manual.
Net Capital Computations
Question ID: 48920
If a broker/dealer has an aged fail to deliver for common stock at a contract value of $20,000, how must this item be treated for net capital computation purposes?
A) 100% nonallowable asset.
B) Marked to the market plus 15% haircut.
C) Marked to the market.
D) 15% haircut.
Answer: B
Aged fail to deliver contracts are given normal haircuts. Aged fail to deliver items must also be marked to the market.
Reference: 1.2.3.1 in the License Exam Manual.
Net Capital Computations
Question ID: 48925
An undue concentration haircut in a security underwritten by the firm applies when the position has been open:
A) more than 11 business days.
B) less than 7 business days.
C) more than 7 business days.
D) more than 14 business days.
Answer: A
Undue concentration (and concentration haircuts) apply to positions in securities underwritten by the firm when the positions are open for more than 11 business days.
Reference: 1.2.3.1 in the License Exam Manual.
Net Capital Computations
Question ID: 48931
Fails to deliver for common stock are subject to a haircut if they are at least how many days old?
A) 15 days.
B) 30 days.
C) 5 days.
D) 10 days.
Answer: C
A fail to deliver contract that is five business days old (or older) is subject to a haircut in addition to being marked to the market.
Reference: 1.2.3.1 in the License Exam Manual.
Net Capital Computations
Question ID: 48934
For net capital computation purposes, which of the following statements regarding customer debit balances is TRUE?
A) Debit balances in cash accounts are 100% nonallowable.
B) Provided they are fully secured, they are 100% allowable assets.
C) Debit balances are liabilities and are added to aggregate indebtedness.
D) Only customer debit balances in margin accounts are allowable assets.
Answer: B
Customer debit balances in both cash and margin accounts represent money due a broker/dealer. As such, they are receivables in accounting terms (assets). Provided these assets are fully secured (by securities with ample market value to cover the debit), they are 100% allowable for net capital computation purposes.
Reference: 1.2.3.1 in the License Exam Manual.
Net Capital Computations
Question ID: 48936
Which of the following may NOT be considered part of a firm’s net capital?
Equity in real estate. Office furniture. Rent paid in advance. A) I and II. B) II and III. C) I, II and III. D) I only.
Answer: C
Fixed assets and prepaid items may not be counted as part of a firm’s net capital because they are not liquid. Real estate and office furniture are considered fixed assets. Rent paid in advance is a prepaid item.
Reference: 1.2.3 in the License Exam Manual.
Net Capital Computations
Question ID: 48937
All of the following are counted as part of the equity of a broker/dealer EXCEPT:
A) common stock, par account.
B) paid-in surplus.
C) commissions payable.
D) retained earnings.
Answer: C
Commissions payable are a liability of the firm.
Reference: 1.2.1 in the License Exam Manual.
Net Capital Computations
Question ID: 49065
An aged fail to deliver results in:
A) reduced net capital and increased aggregate indebtedness.
B) reduced net capital.
C) increased aggregate indebtedness.
D) reduced net capital and like reduction in aggregate indebtedness
Answer: B
Aged fails to deliver must be marked to the market and given a 15% haircut (assuming common stock). This results in a charge against net capital.
Reference: 1.2.3.1 in the License Exam Manual.
Net Capital Computations
Question ID: 49129
Which of the following balance sheet entries are NOT allowable for net capital purposes?
Pre-paid insurance. Rent deposit. Automobile. Exchange memberships. A) I and IV. B) II and III. C) II and IV. D) I, II, III and IV.
Answer: D
Pre-paid expenses are never allowable assets for net capital purposes, nor are automobiles or aircraft. Similarly, exchange memberships, while a valuable asset, are nonallowable.
Reference: 1.2.3.1.1 in the License Exam Manual.
Net Capital Computations
Question ID: 49166
Which of the following receivables, all less than 30 days old, is nonallowable for capital computation purposes?
A) Floor brokerage earned but not collected.
B) Dividends earned but not collected.
C) Interest earned but not collected.
D) Commissions receivable from a thrift institution.
Answer: D
Under an SEC interpretation, commissions receivable from an S&L or other thrift institutions must be treated as nonallowable assets. Generally, receivables are allowable if 30 calendar days old or less.
Reference: 1.2.3.1.1 in the License Exam Manual.
Net Capital Computations Question ID: 49168 The following selected entries are taken from the trial balance of a carrying firm: DR CR Cash—bank $200,000 Reserve account$180,000 Cust. control $450,000 $190,000 Rent deposit $100,000 F-D—cust. $120,000 S-B—cust. $150,000 Trading inventory$700,000 $175,000 Exchange membership$375,000 Revenue $85,000 Telecom equip. $285,000 Sub loan $350,000 Expenses $60,000 Net worth $900,000
What is this firm’s tentative net capital?
A) $490,000.
B) $615,000.
C) $515,000.
D) $410,000.
Answer: C
Start with net worth, add profit or loss to date (a profit of $25,000) and add subordinated debt to arrive at total available capital which is $1,275,000. Next, back out all nonallowable assets which total $760,000. These items are prepaid rent, exchange membership, and equipment. The result is tentative net capital (TNC) of $515,000. TNC is capital before the application of haircuts.
Reference: 1.2.1 in the License Exam Manual.
Net Capital Computations
Question ID: 49171
On its May 31, 2006, trial balance, a firm has a customer fail to deliver with a contract value of $20,000 and a current market value of $18,000. The trade settled on May 28. Under SEC rules, the charge to net capital is:
A) $0.
B) $2,000.
C) $2,700.
D) $4,700.
Answer: A
Customer fails in common stock are not aged until the 5th business day after the settlement date.
Reference: 1.2.3.1 in the License Exam Manual.
Net Capital Computations
Question ID: 49185
Your firm owns its office building. The original cost was $500,000, and so far, $100,000 has been taken in depreciation. The current mortgage on the property is $325,000. Which of the following best describes the treatment of these items when computing net capital?
A) $75,000 is allowable.
B) $175,000 is allowable.
C) $225,000 is allowable.
D) $325,000 is allowable.
Answer: D
The real estate is being carried at $400,000, which is the original cost less depreciation. It is the equity in real estate that is nonallowable. The equity is $75,000, which is depreciated cost less the current mortgage. Put another way, the amount represented by the mortgage is allowable. Also note that the mortgage, which is a secured liability, is not AI.
Reference: 1.2.3.1 in the License Exam Manual.
Net Capital Computations
Question ID: 49187
An introducing firm is advised by its clearing firm that there are unsecured debits in several introduced accounts. Under SEC rules, the introducing firm must charge its capital:
A) on the day after it becomes a charge to the carrying firm.
B) on the day it becomes a charge to the carrying firm.
C) as of month’s end.
D) as of its next Focus IIA report.
Answer: A
If there are unsecured debits in introduced accounts, both the carrying firm and the introducing firm must charge capital. The introducing firm must deduct the charge on the day after it becomes a charge to the carrying firm. Furthermore, the carrying firm must advise the introducing firm, in writing, on a daily basis of all such deficits to be charged.
Reference: 1.2.3.1 in the License Exam Manual.
Net Capital Computations
Question ID: 49189
On its year-end trial balance, a broker/dealer has a company automobile with a carrying value of $18,000 and a loan balance against it of $6,000.Under SEC rules, which of the following statements are TRUE?
The automobile is an allowable asset. The automobile is a nonallowable asset. The loan balance is AI. The loan balance is not AI. A) I and III. B) I and IV. C) II and IV. D) II and III.
Answer: D
Automobiles are never allowable for capital purposes, and any loans against them are always AI.
Reference: 1.2.3.1.1 in the License Exam Manual.
Haircuts
Question ID: 48533
If a broker/dealer has tentative net capital of $1 million and a stock position of $100,000, the haircut on the stock will be:
A) $15,000.
B) $10,000.
C) $30,000.
D) $36,000.
Answer: A
A haircut of 15% is applied to the $100,000 position, equaling $15,000. There is no undue concentration. Therefore, no additional haircut need be taken.
Reference: 1.3.1 in the License Exam Manual
Haircuts
Question ID: 48634
Under net capital rules, the sale of a long securities difference:
A) increases net capital.
B) increases AI.
C) decreases AI.
D) decreases net capital.
Answer: D
The sale of a long securities difference (which is permitted) will result in a decrease in net worth and net capital. SEC rules require members to charge net worth by the amount of the proceeds of the sale. According to the SEC, the member will sooner or later find out who the owner is and have to buy them back. The prudent move would be to promptly resolve the long securities difference.
Reference: 1.3.1.1 in the License Exam Manual.
Haircuts
Question ID: 48663
A member firm has computed a tentative net capital of $850,000. Which of the following inventory positions would be subject to an undue concentration haircut?
A) $100,000 of U.S. T-bills.
B) $95,000 of ABC common stock.
C) $50,000 of ARTXX, a bulletin board stock.
D) $80,000 of LRKK common stock.
Answer: B
Excluding an ETF, if any single nonexempt security in inventory (long or short) exceeds 10% of tentative net capital, an additional haircut at the same rate (15%) must be taken on the amount the position exceeds the 10% threshold. This rule does not apply to exempt securities.
Reference: 1.3.1.1 in the License Exam Manual.
Haircuts
Question ID: 48688
All of the following securities could be subject to an undue concentration haircut EXCEPT:
A) insured municipal bonds.
B) common stock underlying a secured demand note.
C) U.S. Treasury bonds.
D) AAA-rated preferred bonds.
Answer: C
U.S. government securities are never subject to an undue concentration haircut.
Haircuts
Question ID: 48692
A broker/dealer is short 100 shares of ABC common stock at $50 per share and is long 1 ABC Apr 45 call. The haircut on these positions is:
A) $2,500.
B) $0.
C) $1,500.
D) $2,000.
Answer: B
The firm is fully protected because it has the right to buy back its short position at a $5 per share profit.
Reference: 1.3.2 in the License Exam Manual.
Haircuts
Question ID: 48701
The sale of a long securities difference is:
A) added to AI.
B) deducted from net capital.
C) added to net capital.
D) deducted from AI.
Answer: B
A long securities difference occurs when a broker/dealer’s count of securities exceeds the total shown on the stock record. If the difference is not sold, there is no effect on the firm’s financial statement (the difference is not on the firm’s books). If the difference is sold (not a good choice but permissible), the proceeds of the sale must be charged to net worth and, thus, to net capital.
Reference: 1.3.1.1 in the License Exam Manual.
Haircuts
Question ID: 48722
The basic haircut on a money market fund is:
A) two percent.
B) one percent.
C) three percent.
D) four percent.
Answer: A
Money market funds are subject to a haircut of two percent.
Reference: 1.3.1 in the License Exam Manual.
Haircuts
Question ID: 48741
Acme Broker/Dealer has a net short open contractual commitment on its books for $55,000 worth of ABC stock (NYSE-listed) on a when-issued basis. The market value of the position is $50,000. What is the effect on the broker/dealer’s net capital?
A) $2,500 increase.
B) $5,000 increase.
C) $5,000 decrease.
D) $2,500 decrease.
Answer: D
This open contractual commitment is subject to a mark-to-the-market and a haircut. The mark-to-the-market is a positive $5,000 because this is a short position. The haircut on the market value of $50,000 is $7,500 (15% of $50,000). The total adjustment is a $2,500 decrease to net capital.
Reference: 1.3.1.1 in the License Exam Manual.
Haircuts
Question ID: 48770
A broker/dealer has proprietary positions in various common stocks with an aggregate long market value of $50,000 and an aggregate short market value of $200,000. The haircut on these positions is:
A) $15,000.
B) $22,500.
C) $30,000.
D) $7,500.
Answer: C
The haircut on the proprietary securities of the broker/dealer is based on the greater of the long and short positions. In this case, the short position of $200,000 is subject to a 15% haircut ($30,000). An additional haircut of 15% would apply to any excess of the smaller position over the threshold, which is 25% of the larger position (25% × $200,000 = $50,000). No additional haircut is required since there is no excess over the threshold.
Reference: 1.3.1 in the License Exam Manual.
Haircuts
Question ID: 48775
A broker/dealer has computed tentative net capital of $1,750,000. Which of the positions listed are subject to an undue concentration haircut?
I $200,000 ABC common stock held in syndicate accounts for eight business days.
II $250,000 XYZ common stock held for eight business days.
III $300,000 U.S. Treasury bonds held for 21 business days.
A) I, II and III.
B) II only.
C) I and II.
D) III only.
Answer: B
An undue concentration haircut is necessary if the equity position exceeds 10% of the tentative net capital of the broker/dealer, regardless of how long the stock has been held. The exception to this rule is common stock in a syndicate account, which is subject to undue concentration only after 11 business days. Government securities are not subject to undue concentration haircuts.
Reference: 1.3.1.1 in the License Exam Manual.
Haircuts
Question ID: 48780
Which of the following statements regarding short securities differences are TRUE?
I. Any unresolved difference must be recorded no later than 7 business days after discovery.
II. Any unresolved difference must be set up as a liability on the broker/dealer’s books after 30 days from discovery.
III. Any unresolved difference over 30 days old is an AI item.
IV. Any unresolved difference over 45 days old must be bought in.
A) II, III and IV.
B) I, II, III and IV.
C) I, III and IV.
D) II and III.
Answer: B
All of the statements correctly describe requirements regarding short securities differences.
Reference: 1.3.1.1 in the License Exam Manual.