Chapter 2 - Recordkeeping, financial requirements, and reporting Flashcards Preview

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Flashcards in Chapter 2 - Recordkeeping, financial requirements, and reporting Deck (35)
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1
Q

Rule 17a-3 & 17a-4

A

SEC Rule 17a-3 sets forth the requirements for a broker-dealer reporting, timing, and content.

Records include:

  • blotters
  • general ledger
  • customer accounts
  • subsidiary records
  • securities position book
  • order tickets
  • confirmation & notices
  • monthly trial balances
  • employment actions

Rule 17a-4 Sets the retention requirements for these records.

2
Q

Records to maintain for 3 years

A

Records to maintain for 3 years

  • retail communication
  • institutional communications
  • all changes to the text and content of the firm’s website
  • order tickets
  • confirmations
  • option records
  • FOCUS reports
  • monthly trial balances
  • subsidiary ledgers
  • Long and short securities differences
  • Compliance and policy & procedure manuals
  • U4, U5, Fingerprints, and employment applications for terminated employees
3
Q

Records to maintain for 6 years

A

Records to maintain for 6 years

  • Blotters
  • general ledgers
  • customer ledgers
  • customer account records
  • stock records/position records
4
Q

Records to maintain for life of the firm

A

S.P.A.M.

  • S - stock certificate records
  • P - partnership records
  • A - articles of incorporation
  • M - minutes of the meetings of board
  • Form BD
5
Q

Other Record retention requirements

A
  • 18 months: exception reports from clearing firms
  • 4 years: written customer complaints under FINRA rules
  • 6 years: written customer complaints under MSRB rules
  • 5 years: suspicious activity report (SAR) >$5,000
  • 5 years: Information collected to verify customer identity
  • 5 years: currency transaction reports (CTR form 112)
6
Q

General securities broker-dealers minimum Net Capital

A

General securities broker dealers caring customer accounts have a financial responsibility or minimum net capital of $250,000.

7
Q

Minimum net capital for broker dealers who generally do not carry customer accounts

A

Broker dealers who generally do not carry customer accounts have a financial responsibility or minimum net capital of $50,000. These are known as fully disclosed or introducing broker dealers.

8
Q

Minimum Net Capital for market makers in over the counter (OTC) securities

A

Greater of the following:

$100,000, up to a maximum of $1,000,000

— or —

$2500 for each security it makes a market in with a bid price more than five dollars, and $1000 for each security with a bid price of $5 dollars or less.

9
Q

Aggregate indebtedness

A

Money owed to customers, customer related deaths, accounts, and taxes payable. Other debt incurred by the broker dealer is not included. In order for a broker dealer to remain in business, the ratio of aggregate indebtedness to net capital cannot exceed:

  • 8:1 for firms in their first year of business
  • 15:1 for firms older than one year
10
Q

Rule 17f-1

A

Outlines the requirements for reporting an inquiry with respect to missing, lost, counterfeit, or stolen securities.

11
Q

Form X-17a-5

A

The fundamental reporting form used by broker-dealers to report financial conditions to the regulatory agencies. Also known as the FOCUS report, it is filed electronically and has the following parts:

  • Part I - summary of key financial ratios and numbers that is filed monthly within 10 business days after the end of the month.
  • Part II - balance sheet, income statement, and net capital computation that is filed quarterly within 17 business days from the end of each calendar quarter.
  • Part II-A: less comprehensive version than Part II that is filed quarterly.
  • Supplemental statement of income (SSOI)
12
Q

Early warning rule

A

The early warning rule is intended to give the SEC early notice of impending financial difficulty of a broker dealer by requiring any broker dealer subject to rule 15c-3-1 to notify the SEC and the examining authority of the broker-dealer within 24 hours.

13
Q

Fidelity bonds

A

FINRA member firms are required to obtain a fidelity bond that covers the firms officers and employees. The purpose of the fidelity bond is to protect the firms customers from fraudulent acts, loss of securities, check forgery, insecurities forgery. The fidelity bond does not cover broker dealer bankruptcy or losses incurred as a result of errors or omissions. The minimum required fidelity bond coverage is 120% of the firms net capital.

14
Q

Blotter

A

All transactions, receipts, disbursements. Must be prepared no later than following business day (T+1).

15
Q

General ledger

A

Assets, liabilities income, expenses. Must be prepared monthly (10 business days)

16
Q

Customer accounts

A

Purchase and sales receipt, delivery account forms.

17
Q

Subsidiary records

A

Prepared from blotter. Includes: - securities in transfer - Dividends and interest received - securities borrowed and loaned - monies borrowed, monies is loaned - securities failed to receive or deliver

18
Q

Securities position ledger

A

All long and short positions. Must be prepared no later than settlement date + 1.

19
Q

Order tickets

A

A record detailing the terms and conditions of an order to purchase or sell a security. Records must be maintained whether or not the order is executed.

20
Q

Capital required to qualify

A
21
Q

Capital required to qualify >$250,000

A
22
Q

Allowable vs non-allowable assets

A

What can be liquidated quickly vs not quickly.

Total Assets - Non-allowable Assets = Tentative Net Capital

23
Q

Haircut

A

A haircut is a deduction taken from the market value of securities in inventory for the purpose of determining net capital. It is taken to allow for volatility. Haircut deductions are 15% of net long or short positions.

24
Q

Undue Concentration (calculation)

A

Example:

Tentative Net Capital = $2,000,000
20,000 shares of XYZ at $20 = $400,000 (> 10% ($200,000))
Standard haircut (15%) on first 10% = $30,000 ($200,000 x 15%)
Undue concentration (30%) on amount exceeding 10% = $60,000 ($200,000 x 30%)
Value of XYZ for Net Capital = $310,000 ($400,000 - $90,000)

25
Q

Additional Haircut Rules

A
26
Q

Box counts

A

All broker-dealers that maintain custody of securities must conduct a quarterly count of the securities it has in their possession or control.

  • No sooner than 2 months
  • No later than 4 months
  • Securities in transit or transfer
27
Q

Short & long securities difference

A
28
Q

Exemptions from SIC

A
29
Q

Customer protection rule

A
  • Small broker-dealers less than $1 million owed to customers and AI:NC <8:1 may calculate monthly
  • (credit items - debti items) x 105% = amount to be deposited into special reserve account
  • Most broker-dealers calculate weekly
  • Deposit 100% by 10 AM (48 hours after calculation)
30
Q

FOCUS reports

A

All firms are required to file an annual audited FOCUS

31
Q

Required notifications

A
32
Q

FINRA financial requirements

A
33
Q

Subordinated loan & Secured Demand Note

A

A satisfactory subordinated loan can be used for any general purpose.

Test point: if a subordinated loan exceeds 70% of total on 91st day the firm is in capital violation and effectively shut down.

Secured demand note:

  • lender pledges stock
  • must be freely transferable
  • for a stated amount and interest rate
  • dividends are owed to lender (good test point)
  • 30% haircut
34
Q

Temporary subordinated loan

A
35
Q

Fidelity bond coverage

A