Chapter 13 Record Keeping and Financial Responsibility Flashcards
(24 cards)
Net Capital
Net Capital is a measurement of the financial health of a firm
SEC rules determine Net Capital requirements (not FINRA)
A B/D’s net capital requirement will vary based on business activities
The following circumstances may indicate problems for B/Ds:
•The inability to clear and settle its transactions promptly
•Books and records NOT being maintained on a timely basis
Regulators may ask firms that are experiencing operational difficulties to liquidate securities for cash
Minimum Net Capital Requirements
Requirement: Type of Firm:
Prime Brokers - $1.5 M
Carrying Firms – $250K
Non-Carrying Firms– $50K
Carrying Firms – 250 K - Self-clearing B/Ds who conduct general securities business and receive/hold customer funds and securities
Non-Carrying Firms– $50K - Introduce accounts to another B/D on a fully disclosed basis; receives (does NOT hold) customer securities; promptly transmits them to a clearing B/D
Financial Reports
A firm’s principal (chief) executive officer, principal (chief) financial officer, and principal (chief) operations officer are all required to sign a FOCUS report
FOCUS reports are sent to the SEC and the firm’s primary regulator
For Carrying B/Ds
FOCUS Part I - Monthly
FOCUS Part II - Quarterly
For Introducing (Non-Carrying)
B/Ds FOCUS Part I - Not required
FOCUS Part IIA - Quarterly
Customer Protection Rule
On a daily basis, B/Ds are required to obtain and maintain physical possession or control of all fully paid and excess margin securities belonging to customers
Customers
Any person for whom the B/D holds funds or securities or any omnibus account maintained by a B/D on behalf of customers
Excludes B/Ds, general partners, directors, principal officers or subordinated lenders
Excess margin securities
Security’s value exceeding 140% of customer’s debit balance
Customer Protection Rule
Special Reserve Bank Account
Special Reserve Bank Account
Kept separate from all other B/D accounts and established for exclusive benefit of customers
Contains 100% of the difference between customer-related credits and debits
Calculation is generally conducted weekly(Friday) with necessary deposit made on the second business day (Tuesday) following the calculation
Deposit must be made in cash orqualifying U.S. government securities
Customer Free Credit Balance
Represents customer proceeds resulting from sales, dividends, or interest payments that have not been withdrawn or invested
Whenever account statements are sent to a customer (at least quarterly), B/Ds must send the customer a notice regarding his free credit balance
This notice must indicate:
•The total amount due which is payable on demand •That funds are not segregated and may be used in the conduct of the B/D’s business
B/D Books and Records
Lifetime
Six Years
Three Years
B/D Books and Records
Lifetime -Corporate or partnership documents
Six Years –Blotters (records of original entry), ledgers, municipal complaints
Three Years - Tickets, confirms, statements, Forms U4 and U5, employee records, advertising, sales literature, correspondence, trial balances
Red Flag Issue
A newly established firm has received no complaints for the time it has been in business. What is the procedure regarding the complaint file?
4 Years
B/D Books and Records
For the first __________, all records must be maintained in an easily accessible location
Prior to utilizing any form of electronic storage media, a B/D must notify its SRO
B/D Books and Records
For the first two years, all records must be maintained in an easily accessible location
Prior to utilizing any form of electronic storage media, a B/D must notify its SRO
-If the electronic storage media to be used is other than CD-ROM, the B/D must give its SRO 90-days advance notice
-Electronic storage media must have:
•Tamper-evident features OR
•The ability to record all changes made to its contents
Customer Confirmation
Sent at, or prior to, the completion of the trade –which is usually, but not always, the settlement date
Info included:
Trade date, description, price, number of shares or units purchased or sold, time of trade, and name of contra party (or that time/name will be made available on written request), CUSIP number, and any odd-lot differential or fee
Firm capacity
- If acting in agency capacity, commission must be disclosed
- If acting in principal capacity, mark-up only disclosed for:
- Trades involving listed securities
- Riskless principal trades
Customer Taxation Records
B/Ds must provide a report to customers regarding their proceeds upon the sale of assets. A report of cost basis may be provided if available.
Mutual fund tax reporting
Income and gains are taxable to investors and reported on Form 1099-DIV
Limited partnership tax reporting
Form K1 reports passive income and losses
s
Customer Complaint
A grievance delivered in any written form including letters, e-mails, IMs, or text messages
Complaints must be forwarded to a supervisor for review/investigation
Files, including copies, are maintained in an OSJ along with a report indicating action taken to resolve the complaint
Records are retained for four years
Quarterly reports are sent to FINRA (not SEC) providing statistical and summary information about complaints
RRs should not open mail, due to the fact that they may intercept and hide complaints
s
Red Flag Issue
You receive a letter from a customer alleging that an RR has made a series of unauthorized trades. The RR contests that the trades were placed in the wrong account and have already been cancelled and re-billed. The RR instructs you to disregard the correspondence since the error has been corrected. What should you do?
Ignore and follow normal escalation procedures
Red Flag Indicators
Client inquiries about the following items may be indicators of potential fraud:
- No specified statement period, or a statement period that does not follow a consistent pattern
- Income that appears on a statement, but has not been deposited in the account
- Account number, registered representative, or firm of record does not match previous statements
- Fees, including commissions, handling charges or other costs that seem excessive or are unfamiliar
- Performance that seems unrealistic (e.g., return is always positive)
- Trading activity that does not match or is not reflected on account statements
- Positions that do not match from one statement to another
- Trade confirmation indicates a trade is unsolicited, but customer states the RR recommended the trade
13-1 Under Rule 15c3-2, a notice to customers regarding their free balance must be provided:
b. Quarterly
13-2 How often are firms required to post entries on blotters?
What are blotters?
a. Daily
Blotters are books of original entry created for:
- purchases and sales of securities
- receipts and deliveries of sec
- receipts and disbursement of cash
13-3 For how many years must records related to order tickets be kept in an easily accessible location?
b. Min two years
13-4 Which party is responsible for maintaining client records if an introducing firm is operating on a fully disclosed basis?
b. clearing broker
13-5 How often must a summary of complaints be reported to FINRA?
d. quarterly
13-6 Which of the following choices tracks the life of a trade?
c. OATS reports
Order Audit Trail System records
- origination receipt
- transmittal
- modification, cancellation, and execution
13-7 Who approves a posting to the firm’s error account?
b. principal
13-8 Mr. Smith is travelling to Italy and would like to have his client statement held by the firm. The firm may honor this request:
c. up to 3 months upon written request
13-9 Mutual fund exchanges are tax _____
c. Taxable
13-10 What tax form is sent out to limited partners by the sponsor of a limited partnership?
K-1 annually
