Chapter 6

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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.


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