Chapter 6
accounts not covered in an SIPC liquidation include
accounts of officers or partners of the failed firm; persons who own 5% or more of the equity of the failed firm; and other members with proprietary accounts maintained at the failed firm
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.
Under SEC Rule 15c-3-3, all of the following are good control locations
an omnibus account maintained at another broker/dealer; DTC, and a commercial bank. Savings and loans, and credit unions are NOT good control locations.
FINRA rules require member firms to review their surety bond coverage
annually
Trial balances
are a 3-year record
Under SEC Rule 17a-3, the required blotters
are receipts and deliveries of securities, receipts and disbursements of cash, and purchases and sales of securities
A member firm decides to reduce its excess SIPC coverage. Under FINRA rules, the firm must notify its customers of the reduction
at least 30 days before the reduction
the following records must be retained for 3 years
audio tapes of orders handled by the trading room; fingerprint cards for terminated personnel; and copies of retail communication
If an introducing firm wants to become self-clearing, it must
become affiliated with DTCC; receive written permission from its DEA; and meet higher net capital requirements
the following would indicate that a member firm is experiencing serious operational or financial problems
being 5 days late in clearing transactions, 95 days in which the firm's debt equity ratio exceeds 70%, AI-to-NC ratio is 14:1
the following records must be retained for 6 years
blotters, the general ledger, the stock record, customer ledgers, and customer account information
Purchase and sale of securities must be posted to a broker/dealer's blotter no later than the
business day following the trade date
If a member has a deductible provision in its fidelity bonding policy that is greater than the maximum permitted under FINRA rules, the difference must be
charged to net worth for capital computation purposes
An undue concentration haircut could apply to proprietary positions in all of the following securities
convertible corporate debt, non-convertible corporate debt, and investment grade preferred stock
According to SEC rules, all of the following must be maintained for a 3-year period
copies of confirmations of purchases and sales; records regarding compensation and compensation agreements between associated persons and broker/dealers; and records regarding instant messages
Under SEC 15c3-3, the Customer Protection Rule, a carrying firm must reduce to its possession or control fully-paid-for customer securities and excess margin securities
daily
Under SEC rules, a carrying firm must determine if there is any excess or deficit in customer segregation accounts
daily
Under net capital rules, the sale of a long securities difference
decreases net capital
SEC rule 17f-1
designated the Securities Information Center as the central reporting institution for keeping records of lost, counterfeit, missing or stolen securities
The amount of a firm's fidelity bond must be recalculated
each year upon the expiration of the bond
If a firm fails to make a required deposit into the special reserve account, it must notify the SEC and its SRO
electronically, followed promptly by written notice
Under the customer protection rule, all of the following must be reduced to possession or control
excess margin securities; fully paid-for common stock; and fully paid-for municipal bonds
Assets that cannot be readily sold for fair value are
excluded in the computation of net capital
If a member finds itself in financial difficulty, it may be required by FINRA to do all of the following
file special financial and operating reports; reduce its inventory of securities; or accept no new customer accounts.
A temporary subordinated loan can be taken out
for unusual circumstances, such as an underwriting. A broker/dealer may NOT take out one if its capital is under 120% of the minimum requirement, or if its AI-to-NC ratio is over 10:1. A temporary loan CANNOT be used to cure a capital deficiency.
If a clearing firm receives a customer's complaint regarding the activities of an associated person at one of its introducing broker/dealers, the clearing firm must
forward the complaint to FINRA; notify the customer that the complaint was received and forwarded; and forward the complaint to the introducing firm
For net capital purposes, all of the following are nonallowable assets
goodwill, exchange memberships, equity in real estate
Unsold, a long securities difference
has no effect on net worth
The face amount of a fidelity bond a member firm must purchase is 120% times its
highest net capital requirement over the preceding 12 months
A member firm must compute its fidelity bonding insurance requirement based on its
highest required net capital over the preceding 12 months
If a member's blanket fidelity bond coverage is substantially modified, cancelled or terminated, FINRA must be advised
immediately
If the market value of securities underlying a secured demand note should decline sharply, FINRA must be notified
immediately
Under SEC rules, if books and records are not current, the violation must be reported to the regulatory authorities
immediately
Red flags that a customer may be engaged in money laundering
include a lack of concern regarding risk, commissions, and other transaction costs, and a large number of wire transfers to or journal entries between unrelated third parties
an introducing broker/dealer that does not hold any customer funds or securities
is a fully disclosed, introducing broker/dealer; is exempt from the reserve requirements of SEC Rule 15c3-3; and Soft dollar commission sharing arrangements do not require a special reserve account
The k 1 exception
is available for broker/dealers whose line of business is limited to the sale and redemption of redeemable securities of registered investment companies and insurance company separate accounts
The k,2,i exception
is for introducing firms that do not carry margin accounts, and all transactions are processed through a special bank account for the exclusive benefit of customers
The k 2,ii exception
is for introducing firms who clear on a fully disclosed basis and who promptly transmit all customer funds and securities to the clearing firm which carries all customer accounts
give-up clearing arrangement
is one in which an introducing firm gives up the name of its clearing firm to other members through which it executes trades
A permissive prepayment can only occur if
it does NOT cause the firm's AI-to-NC ratio to exceed 10-1 or its capital to fall below 120% of minimum; the loan has been outstanding for at least 1 year; and written approval from its DEA.
An established firm is in early warning when
its capital falls below 120% of minimum or its AI-to-NC ratio exceeds 12 to 1
A broker/dealer registered with the SEC for ten years would be required to have on file
its charter or articles of incorporation
An established firm is in early warning if
its computed capital falls below 120% of the minimum or its AI-to-NC ratio exceeds 12:1.
Under SEC Rule 15c3-1, a broker/dealer is prohibited from prepaying a subordinated loan without the prior written approval of
its designated examining authority
SEA Rule 15c3-3 requires that all carrying firms
make a reserve computation and maintain a special reserve account, regardless of the size of deposits
No member or AP may submit for payment a check or other form of negotiable paper drawn on a customer's checking or savings account, without that person's express written authorization
may include the customer's signature on the negotiable instrument. This provision does not require members to preserve copies of negotiable instruments signed by customers.
A member firm wishes to change its fiscal year-end date. Under SEC 17a-5, the request must be directed to the
member's designated examining authority
Under SEC Rule 15c-3-3, a member firm wishes to change its exemptive status from k(1) to k(2)(ii). Under SEC rules, the request must be directed to the
member's designated examining authority
A broker/dealer would be deemed irresponsible in its duty to maintain and demonstrate compliance with net capital rules if it did not perform a trial balance at least
monthly
Temporary subordinated loans
must be filed with FINRA at least 10 days before use; and may not be prepaid if such prepayment would cause the firm's AI to NC ratio to exceed 10:1
The SEC's market access rule 15c3-5 requires broker-dealers that have access to trading securities on an exchange or ATS provided by a broker-dealer operator and provides that access to a customer through the use of its MPID
must establish and maintain supervisory procedures; The Chief Executive Officer must annually certify that such risk management controls and supervisory procedures comply with the rule; This certification must be maintained for 3 years.
Once a firm discovers that it is in early warning
notification must be made to the regulatory authorities within 24 hours. This notice must be made electronically
The trustee for a bankrupt broker/dealer must
notify customers of the bankruptcy; handle the broker/dealer's liquidation; distribute all property specifically identified as belonging to customers; review the firm's books and records.
Members are required to provide information about SIPC to new customers
on account opening and annually thereafter
If a broker/dealer discovers that stock is lost or missing but does not suspect it is stolen, it must report the incident to the Securities Information Center
on the 3rd subsequent business day
an introducing firm subject to a $50,000 minimum capital requirement, is permitted to
participate in a firm commitment underwriting as a selling group member; make an occasional trade for its own account; manage a best efforts underwriting
Under SEC rules supervising a quarterly securities count must be made or supervised by
persons whose regular duties do not require them to have direct responsibility for the care and custody of securities, or the making or preservation of records relating to the count
Correspondent firms clearing transactions on a fully disclosed basis are required to
promptly transmit all customer funds and securities to the clearing firm
Focus IIA reports must be filed
quarterly
Under SEC 17a-13, carrying firms must count all securities positions
quarterly
A $5,000 broker/dealer may NOT
receive customer securities in-house for prompt forwarding to its carrying firm
the following records must be retained for 3 years
records relating to suitability determinations made in connection with members offering their own securities; trial balances; and records relating to stabilization activities under Regulation M.
SEC Rule 15c3-3
referred to as the Customer Protection Rule; concerned primarily with the reserves a member has; and regulations governing the care and safekeeping of customer securities.
FINRA Rule 4311
requires clearing members to notify, in writing, introducing firms' chief compliance and chief executive officers of the exception reports offered to introducing members by July 1 each year
The insurance coverage cap provided by SIPC is $500,000 per
separate customer
SEC rules require
that exception reports be maintained for 18 months
Rule 17a-5 requires that if the accountant or the broker /dealer terminates the association
the SEC and FINRA must be notified within 15 business days
If criminal activity is suspected with respect to missing securities, notification must be made to each of the following
the SIC and the transfer agent must be notified within 1 business day. The FBI must be notified immediately.
A subordinated loan agreement must be filed with
the broker/dealer's examining authority
Receipts and deliveries of securities and receipts and disbursements of cash must be posted on the blotter
the business day following receipt or delivery
the following conditions are required for the prepayment of a subordinated loan
the loan has been outstanding for at least 1 year; the member firm's AI-to-NC ratio must not exceed 10:1 as a result of the prepayment; and the member firm has received written approval from its designated examining authority
Under SEC rules, if a member wishes to withdraw capital in any 30-day period that exceeds 30% of its excess net capital
the member must notify the SEC at least 2 business days before the withdrawal
Employees of a FINRA member firm must be finger printed if involved in any of the following
the transfer of securities; cashiering; and sales
thinly traded means
there are 3 or fewer market makers
Audited annual reports must be filed by broker/dealers if
they are registered under the Securities Exchange Act of 1934
a firm's blotters
they reflect the receipt and delivery of securities; they reflect the purchase and sale of securities; they must be maintained for a period of 6 years; they must be posted no later than T+1 or event date +1.
Unless otherwise directed by the SEC, carrying firms must perform a reserve computation
weekly
If securities that were reported to the SIC as being lost are subsequently recovered, a report must be filed with the Securities Information Center
within 1 business day
If securities are discovered missing from the cashier's desk and evidence of vandalism leads you to suspect criminal activity, you must make a report
within 1 business day of discovery
When securities previously reported as lost are recovered or found, recovery must be reported
within 1 business day of recovery
If securities are discovered missing as a result of a securities count, a report must be made to the Securities Information Center
within 10 business days of the count, if not resolved
If a member firm terminates its independent accounting firm, the SEC and the SRO must be notified
within 15 business days of termination date; must include reasons for the termination, a summary of disputes the member had with its former accountant within the past 2 years, and a statement from the accounting firm declaring if it agrees or disagrees with the member's interpretation.
market makers must maintain minimum net capital of
$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
Under SEC Rule 15c3-1, the minimum net capital requirement for a broker/dealer that acts as a prime broker is
$1,500,000
An introducing member that executes more than 10 transactions per year in its investment account has a minimum net capital requirement of
$100,000
Under SEC rules, the minimum net capital requirement for a firm operating under a k(2)(i) exemption is
$100,000
A member firm that deals exclusively in investment company securities on a wire order basis has a minimum net capital requirement of
$25,000
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
$25,000
A member firm which has implemented and documented an internal risk management system and elects to use the alternative standard has a minimum net capital requirement of at least
$250,000
Under SEC Rule 15c 3-1, the minimum net capital requirement for a carrying firm is
$250,000
For an established carrying firm, the minimum net capital requirement is
$250,000 or 1/15 of AI, whichever is greater
Under SEC Rule 15c3-1, the minimum net capital requirement for an established carrying firm is
$250,000 or 1/15 of AI, whichever is greater
A member firm that deals exclusively in investment company securities on a subscription order basis has a minimum net capital requirement of
$5,000
Under SEC rules, the minimum net capital requirement for a member firm engaged solely in merger and acquisition work is
$5,000
An established introducing firm that receives customer securities for prompt forwarding to its clearing agent has a minimum net capital requirement of
$50,000 or 1/15 of AI, whichever is greater
A subordinated loan agreement can NOT be prepaid for a period of
1 year
Subordinated loan agreements must have a minimum term of
1 year
Drafts of subordinated loan agreements for a cash borrowing expected to have a minimum maturity of one year must be submitted to FINRA how many business days prior to the proposed effective date?
10
A draft agreement of a temporary subordinated loan agreement must be filed with FINRA
10 business days before the effective date
Under the customer protection rule, SEC Rule 15c3-3, securities due from customers to complete sell orders must be bought in promptly how many business days after the settlement date
10 days
The regular haircut on actively traded common stock is
15%
An established member firm CANNOT let its AI exceed its net capital by more than
15:1
All records, whether required to be maintained for three or six years, must be readily accessible for the most recent
2 years
In its notice to the SEC and FINRA regarding termination of its independent accountant, a member must address all accounting and auditing disputes with its former accountant over the prior
24 months
Under the customer protection rule, if credits exceed debits in the reserve computation, the difference must be on deposit in the special reserve account within 1 hour of the bank opening on the
2nd business day following computation
Under SEC Rule 17f-2, an associated person is exempt from the fingerprinting requirement if they submit illegible fingerprint cards on at least how many occasions?
3
Communications must be maintained on file for
3 years
Records relating to terminated representatives must be retained for how many years
3 years
Under SEC rules, subsidiary ledgers must be retained for
3 years
Compliance and supervisory manuals must be kept for
3 years after the termination of their use
Where a written authorization from a customer is separate from the negotiable instrument being presented for payment on a customer's checking account, the member must preserve the authorization for a period of
3 years following the date the authorization expires
Under SEC rules, the haircut on a thinly traded, OTC Equity Security is
40%
Under the customer protection rule, unresolved short securities differences must be bought in how many days after discovery
45
Under SEC rules, temporary subordinated loans may not have a maturity exceeding
45 days
An introducing firm that does NOT receive or hold customer securities has a minimum net capital requirement of
5,000
The trade blotter and general ledger of a registered broker-dealer must be maintained by the firm for
6 years from post date
Customer account records (such as the new account form) must be maintained for not less than
6 years — the 6 years start when the account is closed
Financial statements audited by a PCAOB-registered public accounting firm must be filed by broker/dealers with the regulatory authorities within how many days of the year-end date
60
In its first year of operation, a member firm cannot let its AI exceed its net capital by more than
8:1
Under Sec 17a-11, a member is in violation of the net capital rule if its debt equity ratio exceeds 70% for a period of more than how many days
90
Under the requirements of SEC notification Rule 17a-11, the following must report
A first-year broker/dealer with a AI-to-NC ratio of 9:1; An established broker/dealer with a AI-to-NC ratio of 13:1; and A carrying firm with AI of $1,000,000 and NC of $250,000
SEC rules require broker/dealers to maintain and keep
All manuals describing policies and practices with respect to compliance and supervision for 3 years after the termination of their use; and Reports created to review unusual activity in customer accounts for 18 months
Your firm is the sole market maker in a common stock For net capital purposes, the value of your inventory is
As the sole market maker, there is no one else to purchase your inventory in the event your firm gets into difficulty. Therefore, it is a nonallowable asset for capital computation purposes.
A carrying firm must provide its customers with information on the following semiannually and annually
Balance sheet and Net capital
In which situations must an established carrying firm make immediate notification to the regulatory authorities?
Books and records are not current; and Debt/equity ratio is at 80% for 100 days.
A customer has both a special cash account and a margin account at a member firm. Are the accounts covered under SIPC?
Both the cash account and margin account are combined for coverage purposes
Under the net capital rule, the following are considered allowable capital
Common stock and Subordinated loans
SEC rules require broker/dealers to maintain and keep
Copies of Form BD, and all amendments, for the life of the broker/dealer; All reports which a securities regulator has requested as a result of an examination for 3 years after the date of the report;
Documents that must be retained for three years include:
Customer communications, bank statements, canceled checks, and FOCUS reports.
temporary subordinated loans
Firms are permitted no more than 3 per year; and The maximum duration is 45 days
A carrying broker/dealer must have physical possession or control over
Fully paid securities; and Excess margin securities
a fidelity bond
Insurance bond that protects broker/dealers from losses due to theft or embezzlement by employees
Clearing firms are required to notify their correspondent introducing firms of the exception reports they have available by what date each year
July 1
SIPC uses which of the following to determine the value of customer claims when a broker/dealer becomes insolvent
Market value on the date a federal court is petitioned to appoint a trustee
Under SEC notification rule 17a-11, broker/dealers are required to transmit to the Commission and FINRA a report within 48 hours following which notification?
Material inadequacies or weaknesses in the accounting system or that its books and records are not current
the following terms best describe the characteristics of CD-ROMs used for record retention purposes
Non-rewriteable and Non-erasable
When member firms discover or are notified by their independent public accountant that there exists a material inadequacy or weakness in their accounting or safekeeping systems, processes and procedures, all member firms must do what?
Notify regulatory authorities within 24 hours; followed up with a transmission of a report within 48 hours of the notice, stating the steps taken or that will be taken to correct the situation
The SIPC sign must be displayed in
OSJs; Supervising branch offices; and Nonsupervising branch offices
An introducing firm, subject to a minimum net capital requirement of $50,000, may do the following
Participate as a selling group member in a firm commitment offering; Receive customer checks made out to the clearing firm; and Receive customer securities for prompt forwarding to the clearing firm.
Under SEC rules, temporary subordinated loans may NOT be used for
Participation as a member of a selling group; and Offsetting a capital deficiency.
An inquiry of SIC must be made for
Registered stock received from a new customer
the following would be unacceptable collateral for a secured demand note
Restricted 144 stock; Margin securities; and Unregistered stock.
The Special Reserve Bank Account is used to comply with
SEC Rule 15c3-3
Reports concerning lost or stolen municipal securities are filed with
SIC
The determination of a broker/dealer's financial failure is made under the provisions of the
Securities Investor Protection Act of 1970
If a member firm, for 15 consecutive business days, has a computed net capital less than 150% of its minimum requirement
The firm may not open new accounts; and The firm may not hire additional representatives.
the following records is to be kept for the life of the firm
The stock certificate book, articles of incorporation or partnership agreement, and minutes of the directors' meetings.
clients NOT covered by SIPC in a broker/dealer bankruptcy
They become general creditors
Under SEC rules, deposits may be made into the Special Reserve Bank Account with all of the following qualified securities
US treasury securities, Participation certificates and mortgage-backed securities guaranteed by the Government National Mortgage Association, and Debt securities stripped and guaranteed by the US Government
When computing its reserve requirement monthly
a broker/dealer must have on deposit 105% of the calculated amount
For net capital purposes
a dealer is a firm that effects more than 10 transactions per year in its investment account. The capital requirement for dealers is $100,000
Provided that proper regulatory approval has been granted, securities are considered to be under the control of a broker/dealer if they are in the custody of
a foreign depository; a foreign custodian bank; and a foreign clearing agency
the alternative method net capital requirement
a member must maintain minimum net capital of $250,000, or 2% of debits in the reserve formula, whichever is greater. Early warning is 5% of debits.
Under FINRA rules, a member may be approaching financial or operational difficulties if it has experienced
a reduction in excess net capital of 25% in the preceding 2 months or 30% in the preceding 3 months.
