Chapter 13 Record Keeping and Financial Responsibility Flashcards Preview

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Flashcards in Chapter 13 Record Keeping and Financial Responsibility Deck (24)
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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


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


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



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



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
1. origination receipt
2. transmittal
3. 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