Chapter 16 study notes

Question 1

BD Net Equity Calculation

Answer 1

Book Equity + Year to Date Results
- Satisfactory Subordinated Loans = Total Capital
Total Capital - Non-Allowable Assets = Tentative Net Capital
Tenative Capital - Haircuts (Reductions on Securities Positions) = Net Capital

Question 2

Net Capital

Carrying firm

Answer 2

250K

Question 3

Net Capital

Carrying firm that does not hold customer assets or securities

Answer 3

100K

Question 4

Net Capital

Prime Broker

Answer 4

1.5 Million

Question 5

Net Capital

Block positioner Or BD executinf for a Prime Brokerage Agreement

Answer 5

1 Million

Question 6

Net Capital

Firm Commitment Underwriter

Answer 6

100 K

Question 7

Net Capital

Market Maker

Answer 7

100K or
2,500 pre stock above 5 and 1,000 for stock below 5
cap is 1 mill

Question 8

Net Capital

Introducing firm

Answer 8

5K

Question 9

Net Capital

Introducing firm that receives and forwards assets ans securities

Answer 9

50K

Question 10

Net CApital

Mutual Fund Firm

Answer 10

5K

Question 11

Net Capital

M&A and DPP firm

Answer 11

5K

Question 12

aggregate indebtedness

Answer 12

In general, aggregate indebtedness
includes liabilities that are not secured by a specific asset of the broker-dealer.
Liabilities that are
secured by a broker-dealer’s assets are usually excluded from AI.

Question 13

broker-dealer’s AI/NC ratio is calculated from

Answer 13

calculated from a trial balance. The trial balance is a listing of all
accounts in a firm’s general ledger, divided into two groups—debits and credits. From the trial
balance, the broker-dealer can construct its income statement, balance sheet, and other financial
statements, as well as its net capital. The trial balance must be prepared monthly.

Question 14

AI to Net Capital Ratio

Answer 14

1/15 of its aggregate indebtedness.

First-Year Requirement 1/8

Question 15

Net CApital under

Alternative Net Capital Requirement

Answer 15

Under this approach, a broker-dealer is required to maintain net capital of $250,000 or 2% of the
aggregate debit items, whichever is greater.

Question 16

Summary of Net Capital Requirements

Answer 16

1. Net capital of at least 1/15 of AI (1/8 of AI in the first year of operation)
2. The minimum dollar requirement, depending on the type of business
3. The market-maker requirement, depending on the number of stocks in which markets are
   made

Question 17

common stock haircut

Answer 17

15%

Question 18

TOC Stock Haircut with less then 3 mm

Answer 18

40$

Question 19

Undue Concentration Deduction

Answer 19

if any long or short position is more than 10%
The undue concentration
rule requires an additional deduction on the amount in excess of the 10% threshold. If the security
falls under the general rule for haircuts, the percentage applied is 15%

Question 20

Haircut

Secured demand note agreement

Answer 20

However, securities normally subject to a 15% haircut (such as
common stock) are subject to a deduction of 30% when used to back a secured demand note.

Question 21

broker-dealer’s equity must be

Answer 21

at least 30% of its debt-equity total.

Question 22

A broker-dealer’s debtequity

total is

Answer 22

equal to its net worth plus the amount of its satisfactory subordination agreements.

Question 23

Focus REports

Answer 23

Carrying and non carryin file focus report 2 quarterly within 17 days of quarter end.
Carrying firms file focus report 1 monthly within 10 business days of month end.

Question 24

Annual Report

Filing

Answer 24

The annual report must be filed no later than 60 days after the date of the financial statements

Question 25

Statements to Customers

Answer 25

Broker-dealers that hold client funds or securities are considered to have customers. Audited annual statements must be sent to customers within 105 days after the brokerdealer files the annual report with the SEC.

Question 26

Net Capital | Violation

Answer 26

If a broker-dealer has a ratio of aggregate indebtedness to net capital exceeding 12 to 1, or if the dollar amount of net capital is less than 120% of its minimum net capital requirement, it must notify the SEC and its DEA within 24 hours.

Question 27

Non-Current Books and Records

Answer 27

If a broker-dealer fails to maintain books and records as required by SEC rules, it must give notice to the SEC and its DEA that day. The broker-dealer must file a report within 48 hours detailing the steps that are being taken to correct the situation. This report must be transmitted by overnight delivery.

Question 28

Material Inadequacies

Answer 28

If a broker-dealer discovers, or is notified by an independent public accountant, of the existence of any material inadequacy in the broker-dealer’s accounting system, internal accounting controls, or procedures for safeguarding securities, the chief financial officer of the broker-dealer must send telegraphic or facsimile notice to the SEC within 24 hours and must file a report within 48 hours stating what steps are being taken to correct the situation. The broker-dealer’s designated examining authority must also be notified.

Question 29

Tests for | Members Experiencing Financial and/or Operational Difficulties

Answer 29

 Reduction in excess net capital by 25% in the preceding two months or 30% or morethe preceding 3 months  The broker-dealer is not in compliance with Customer Protection rules or cannot show that it is.  The broker-dealer is unable to clear and settle transactions in a timely manner.  Books and records have not been maintained under SEC regulations.  The broker-dealer is not in compliance with net capital requirements or cannot show that it is.  The firm has experienced a substantial change in the manner in which it processes its business, which may increase the potential risk of loss to customers

Question 30

Special REserve Calculation Time Frames

Answer 30

Computations must be made weekly, as of the close of the last business day of the week BD's are allowed to make the computation monthly. If they deposit equal to at least 105% of the amount otherwise required. This method is only available to broker- dealers whose ratio of aggregate indebtedness to net capital does not exceed 8 to 1 and that do not carry customer free credits exceeding $1,000,000.

Question 31

Making Inquiries of the SIC | Exemptions

Answer 31

1. Is received from the issuer or issuer’s agent 2. Is received from another reporting institution or Federal Reserve Bank 3. Is registered in the name of the (existing) customer or that person’s nominee 4. Was previously sold to the customer by the firm, as verified by the firm’s internal records 5. Is received as part of a transaction that has an aggregate face value of $10,000 or less in the case of bonds, or market value of $10,000 or less in the case of stocks If stock that is delivered by a customer is registered in street name rather than the customer’s name, inquiry is required. If stock is delivered by a party who is not currently a customer of the brokerdealer, inquiry is required.

Question 32

Disclosure of Financial Condition

Answer 32

Member firms are required to send balance sheets to customers every six months and (upon request) make available to customers a copy of the firm’s most recent balance sheet. A customer is defined as any person having funds or securities in the possession of the member firm.