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Flashcards in Customer Protection Rule Deck (33)
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1

The provisions of the Customer Protection Rule do not apply to:

I. Broker-dealers that have a ratio of net capital to aggregate indebtedness of more than 12 to 1
II. Broker-dealers that introduce customers on a fully disclosed basis
III. Broker-dealers that effect all financial transactions through a bank account designated as "Special Account for the Exclusive Benefit of Customers"
IV. Broker-dealers with less than $1,000,000 in customer credit balances
a. I and IV only
b. II only
c. II and III only
d. III and IV only

C- SEC Rule 15c3-3 has several exemptions which are addressed in paragraph (k) of the rule. Choices (II) and (III) are the exemptions found under (k)(2)(ii) and (k)(2)(i) of the rule.

2

Emilio Di Matteo works in operations for Equinox Brokerage. On a day-to-day basis his responsibilities include the proper care and protection of securities. His role in the quarterly box count would be which of the following?
a. He may participate in the count.
b. He may not participate in the count.
c. He may not participate in the count, but he may supervise the count.
d. He may participate in the count with a waiver from FINRA

A- Pursuant to SEC Rule 17a13 (5)(d), the examination count, verification, and comparison shall be made or supervised by persons whose regular duties do not require them to have direct responsibility for the proper care and protection of securities.

3

A broker-dealer computes its reserve requirement pursuant to Rule 15c3-3 to be $200,000. The broker-dealer currently has $250,000 on deposit in the Reserve Bank Account. It may reduce its aggregate indebtedness by:
a. $250,000
b. $200,000
c. $75,000
d. $60,000

B- The requirement is $200,000. The broker-dealer may reduce its aggregate indebtedness by this amount only

4


A broker-dealer with a ratio of aggregate indebtedness to net capital of 6 to 1 that carries customer funds of $1,500,000 may compute the amount required to be on deposit in its Reserve Bank Account:
a. Daily
b. Weekly
c. Monthly
d. Weekly or monthly, at its option

B- The broker-dealer is carrying funds in excess of $1,000,000. A weekly calculation is required.

5

A clearing broker has an obligation to file all of the following EXCEPT:
a. A FOCUS Report Part I within 10 business days after the end of the month
b. An audited statement indicating balances in the Reserve Bank Account within five business days of month end
c. A FOCUS Report Part II within 17 business days of the end of the calendar quarter
d. An unaudited statement of financial condition dated six months from the date of the audited statement

B- There is no requirement for a broker dealer to have a special audit of the Reserve Bank Account on a monthly basis

6

Under which of the following circumstances is a broker-dealer excused from complying with the requirement of sending notices to its customers regarding their free credit balances?
I. The broker-dealer has free credit balances in margin accounts only.
II. The broker-dealer has distributed all of the credit balances to its customers within the preceding quarter.
III. The broker-dealer does not hold cash or securities for customers.
IV. The broker-dealer establishes a separate bank account for funds that is clearly designated as a trust account for customers and does not use the funds in any way in the conduct of its business.
a. III only
b. III and IV only
c. I, II, and III only
d. II, III, and IV only

A broker-dealer must send quarterly notices to customers regarding their free credit balances unless they B- do not hold cash or securities for customers or the broker-dealer has established a separate trust account for customer funds that precludes the use of the funds by the broker-dealer.
Choice II is incorrect because a broker-dealer is required to send the report if it held funds during the preceding quarter, even though it is currently not holding such funds.

7

A broker-dealer that sends its customers monthly statements is required to notify customers of their free credit balances:
a. Monthly
b. Quarterly
c. Annually
d. Whenever they make a new transaction

A- Statements regarding customers' free credit balances must be sent quarterly. However, if a broker-dealer sends monthly statements to customers, they must receive a statement of the free credit balances with the monthly statement.

8

A short securities difference would become a credit item in the computation of the Reserve Formula under Rule 15c3-3 if it is unresolved for more than:
a. Three business days
b. Five business days
c. Fifteen calendar days
d. Thirty calendar days

D- Short securities differences are listed as credit items in the Reserve Formula of SEC Rule 15C3-3 if they are unresolved for 30 days.

9

When a customer sells securities through a broker-dealer, a mandatory buy-in is required if the broker-dealer does not receive securities from the customer by the:
a. Third business day after the trade date
b. Fifth business day after the trade date
c. 10th business day after the trade date
d. 10th business day after settlement date

D- Rule 15c3-3 requires a broker-dealer to obtain possession of securities within a reasonable time. If a customer sells securities and fails to deliver the securities within ten business days of the settlement date, the broker-dealer must buy in the customer. Under exceptional circumstances, the broker-dealer may apply to FINRA for an extension.

10


Which of the following broker-dealers may make a computation of the amount to be deposited in the Reserve Bank Account under the alternate method?
I. Ratio of aggregate indebtedness to net capital: 6 to 1
Carries customer free credits equal to: $1,200,000
II. Ratio of aggregate indebtedness to net capital: 9 to 1
Carries customer free credits equal to: $700,000
III. Ratio of aggregate indebtedness to net capital: 7 to 1
Carries customer free credits equal to: $800,000
IV. Ratio of aggregate indebtedness to net capital: 7 to 1
Carries customer free credits equal to: $1,100,000
a. III only
b. II and III only
c. III and IV only
d. I, II, and III only

A- The Reserve Bank Account may be computed on a monthly basis if a broker-dealer's ratio of aggregate indebtedness to net capital does not exceed 8 to 1 and total aggregate customer free credits do not exceed $1,000,000.

11

A broker-dealer's computation of the reserve requirement reveals that it has a deficit in the Reserve Bank Account of $20,000. The broker-dealer must:
a. Notify the SEC immediately by telegram and cease doing business
b. Make the additional deposit in the bank account on the day the computation is made
c. Make the additional deposit in the bank account no later than one hour after the opening of banking business on the day following the computation
d. Make the additional deposit in the bank account no later than one hour after the opening of banking business on the second business day following the computation

D- If a broker-dealer, when making its monthly calculation under the Reserve Formula of Rule 15c3-3, determines that a deposit is required into the Reserve Bank Account, the deposit must be made no later than one hour after the opening of banking business on the secondbusiness day following the computation.

12

Rule 15c3-2 regarding notification to customers concerning their free credit balances requires which of the following actions?
I. The customer must get a written notice of the amount due to the customer
II. The notice must state that the funds are not segregated and may be used by the broker-dealer
III. The notice must state that the funds are payable on demand by the customer
IV. The notice must be sent monthly
a. I and III only
b. II and III only
c. I, II, and III only
d. I, II, III, and IV

C- The quarterly notification to customers regarding their free credit balances must indicate the amount that is owed to the customer, the fact that the funds are not segregated from other funds of the broker-dealer and may be used by the broker-dealer in the conduct of its business, and the fact that the credit balances are payable on demand of the customer.

13

A broker-dealer is excused from sending notices to customers under Rule 15c3-2 if it meets which of the following requirements?
I. The broker-dealer segregates customers' free credit balances in such a way as to preclude their use by the broker-dealer.
II. The broker-dealer establishes a separate bank account for these funds that is clearly designated as a trust account for customer funds.
III. The broker-dealer maintains detailed records of the account including the names of all customers having balances in the account and the amounts of each customer's balance.
IV. The broker-dealer takes no action that would indicate the funds are being used, directly or indirectly, in connection with the broker-dealer's business operations.
a. I only
b. I and II only
c. II, III, and IV only
d. I, II, III, and IV

D- Quarterly notices to customers concerning their free credit balances need not be sent if customer funds are maintained in a separate account clearly designated as a trust account for the customer funds and are segregated in such a way as to preclude their use by the broker-dealer. Detailed records of each customer and the amount of each customer's funds must be maintained.

14

A bank may allow a broker-dealer to withdraw funds and qualified securities from its Reserve Bank Account:
a. On the request of the broker-dealer
b. With the written authorization of the broker-dealer's Examining Authority
c. With the written authorization of the SEC
d. With satisfactory proof of the correctness

A- Funds may be withdrawn from the Reserve Bank Account at any time when calculation of the Reserve Formula indicates there is an excess. No permission is required to make the withdrawal.

15

Pursuant to a securities count that broker-dealers are subject to:
a. A firm may select a sample of securities to be counted
b. Items such as securities pledged or securities borrowed may be ignored
c. A count conducted on May 15 must be followed by a count no later than October 15
d. Securities pledged, loaned, or borrowed must be verified if those securities have been in that status for more than 30 days

D- All securities in the vault must be counted. Verification of securities not in the broker-dealer's physical possession, i.e., securities in transit, transfer, and fails must be verified if they have been in that status for more than 30 days. The difference between May and October is 5 months; the maximum amount of elapsed time between counts is four months.

16

A count of securities under Rule 17a-13 may be made:
a. Only by employees whose regular duties involve direct responsibility for the care and protection of securities
b. By employees whose regular duties involve direct responsibility for the care and protection of securities under the supervision of someone who is outside the area of care and protection of securities
c. Only by employees whose regular duties do not involve direct responsibility for the care and protection of securities
d. By a principal of the member firm

B- The quarterly count of securities required under the provisions of Rule 17a-13 may be conducted by employees who are directly responsible for the handling of the securities if the count is supervised by a person whose regular duties do not involve direct responsibility for the handling of the securities

17


Armstead Brokerage determines that it is missing 1,000 shares of Neshiminy Corp. after it conducted its quarterly securities (box) count. Armstead's responsibility is to:
a. Report within two business days if the securities are not recovered
b. Only report this if there is a suspicion of criminal activity
c. Request duplicate certificates from the transfer agent
d. Report within 10 business days

D- Unlike other circumstances where reporting must occur much sooner (one business day after securities have been determined to be missing for two business days), a reporting institution is given 10 business days to make such a report if the short security difference was discovered as the result of the quarterly box count.

18

A client opens his account with a check for $10,000. The impact on the firm's financials is to:
I. Increase AI
II. Increase capital
III. Increase credits in the Reserve Formula
IV. Increase assets
a. IV only
b. I and II only
c. II and III only
d. I, III, and IV only

D- The firm's free credit balances will increase, so AI increases. Customer free credit balances also impact the Reserve Bank Account for the exclusive benefit of customers. The receipt of the check also increases the firm's assets by $10,000.

19

Which of the following statements is NOT correct regarding subordination agreements between a broker-dealer and an investor?
a. The funds or securities lent to a broker-dealer may be used by the firm almost entirely without restriction.
b. In the event of a broker-dealer default, the loan will be repaid after other parties are paid, assuming the firm has any assets remaining.
c. If the broker-dealer wishes to use the funds for net capital purposes, FINRA must approve the subordination agreement.
d. The repayment of the loan is covered by SIPC

D- The funds and securities lent to a broker-dealer under the terms of a subordination agreement are not considered customer assets and are not covered by SIPC.

20

Which of the following are included as debit items in the reserve formula calculation?
I. Securities borrowed for customer short sales
II. Fails to receive for the account of customers
III. Fails to deliver for the account of customers
IV. Customer secured debit balances
a. II and III only
b. I, II, and IV only
c. I, III, and IV only
d. I, II, III, and IV

C- The debit items that may be included in the reserve calculation include only securities borrowed for customer short sales, fails to deliver for the account of customers, and customer secured debit balances.

21

In regard to the Reserve Bank Account pursuant to Rule 15c3-3, which of the following statements are CORRECT?
I. The account must be maintained separately from any other account of the broker-dealer.
II. The broker-dealer may use the amounts labeled as Total Credits under the Reserve Formula only for the specific purposes indicated under Total Debits.
III. Computations under the Reserve Formula must be made daily.
IV. Deposits required in the Reserve Bank Account must be made on the business day following the computation.
a. I and II only
b. I, II and III only
c. II, III, and IV only
d. I, II, III, and IV

A- Choice (I) is a correct statement. The Reserve Bank Account must be a separate account maintained by the broker-dealer distinct from any other account of the broker-dealer.
Choice (II) is a correct statement and describes the Reserve Formula. The Reserve Formula requires the listing of the credit items. The total value of the credit items must be on deposit at the bank unless the member firm has offsetting debit items. In this case, the amount of the debit items may be deducted from the credit items and the net amount deposited into the Reserve Bank Account. For example, let's assume that the amounts labeled under Total Credits is $100,000. If there were no Total Debits listed, the full amount of $100,000 would have to be deposited. However, the firm may use the Total Credits to apply against the Total Debits and thereby reduce its required deposit. If the Total Debits were $20,000, the firm would be required to deposit only $80,000 in the Reserve Bank Account.
Choice (III) is incorrect as computations must be made either monthly or weekly. If the broker-dealer makes monthly calculations, it must maintain 105% of the required amount on deposit.
Choice (IV) is incorrect as deposits must be made into the account on the second business day following the calculation.

22

A firm conducting a box count must do which of the following?
I. Verify securities pledged where such securities have been pledged for more than 30 days.
II. Count all securities subject to repurchase and reverse repurchase agreements.
III. Conduct another count within 30 days if there are discrepancies.
IV. Record on the books and records all unresolved differences by the time the next FOCUS report is prepared.
a. IV only
b. I and II only
c. II and IV only
d. III and IV only

B- The firm is not required to conduct another box count within 30 days. It must record unresolved differences no later than 7 business days after the count was conducted.

23

A broker-dealer is required under Rule 15c3-3 to obtain from the bank where it maintains its Reserve Bank Account a written notification affirming which of the following?
I. The bank acknowledges that the funds and securities are maintained separately from all other accounts of the broker-dealer.
II. The bank acknowledges that the funds and securities will not be used directly or indirectly as collateral for a loan to the broker-dealer.
III. The bank acknowledges that the funds and securities are not subject to a lien or claim of any kind by the bank.
IV. The bank acknowledges that funds and securities may not be withdrawn from the account without the written consent of the broker-dealer's Designated Examining Authority.
a. I and II only
b. I, II and III only
c. II, III, and IV only
d. I, II, III, and IV

B- The Reserve Bank Account maintained under the provisions of Rule 15c3-3 must be separate from all other accounts of the broker-dealer. The bank must acknowledge that the account is maintained separately from other accounts of the broker-dealer and that the account may not be used as collateral for a loan to the broker-dealer and is not subject to any lien or other encumbrance.
The broker-dealer does not require any permission from the Designed Examining Authority to withdraw funds from the account and the bank does not require written consent from the Designed Examining Authority for such withdrawals.

24


Exeter Brokerage has free credit balances of $700,000. It is currently in SIPC liquidation. Which of the following statements is TRUE regarding the payment of cash to customers?
a. Customers will receive cash payments based upon the free credit balance in their account.
b. An amount of $200,000 will be subject to general creditor provisions.
c. Separately identifiable cash is covered without limit.
d. SIPC will make cash payments based upon the size of the customer account.

A- Each customer's account has SIPC coverage which is limited to a maximum of $500,000 in securities of which no more than $250,000 may be for cash. The trustee appointed by SIPC would review the individual balance of each customer to determine eligibility.

25

If the broker dealer transferred cash from the Reserve Bank Account into its operating account, the impact would be :
a. Increase net capital
b. No effect on net capital
c. Increase aggregate indebtedness
d. Decrease aggregate indebtedness

B- There would be no impact on net capital if a broker-dealer transferred cash from the Reserve Bank Account into the general operating account. The reason to make this transfer would be that the Reserve Formula indicated more debits than credits or that there was an excess on deposit from the prior period's calculation.

26

If a broker-dealer's calculation of its reserve requirement under Rule 15c3-3 indicates a deficit, it must make an additional deposit into its Reserve Bank Account:
a. Immediately
b. No later than one hour following the opening of banking business on the business day following the computation
c. No later than one hour following the opening of banking business on the second business day following the computation
d. No later than the close of business on the second business day following the computation

C- Deposits required for the Reserve Bank Account under the provisions of Rule 15c3-3 must be made no later than one hour following the opening of banking business on the second business day following the computation.

27

When reviewing the debit balances of the firm, your trial balance indicates that $1,045,000 is secured by customer assets. Which TWO of the following statements are TRUE regarding the reserve deposit computation?
I. The $1,045,000 will be used to reduce the reserve deposit requirement.
II. The $1,045,000 must be reduced by 1% when calculating the reserve deposit.
III. The $1,045,000 must take a haircut of 15%.
IV. The securities held by the broker-dealer have value greater than $1,045,000.
a. I and II
b. I and III
c. II and III
d. II and IV

D- When calculating the reserve deposit requirement, even though customer debit balances are secured, they must still be reduced by 1% to allow for returned checks and NSF payments to the firm. In order to be considered secured debits the firm will hold assets in excess of the amounts owed to it. These extra amounts account for market fluctuation of the securities that it holds.

28

A broker-dealer trial balance indicates the following:
Fails to Receive
Customer accounts $700,000
Firm account -- Unsold $250,000
Firm account -- Sold, no offset $150,000
When calculating the reserve deposit, the amount that must be included as a credit item is:
a. $700,000
b. $850,000
c. $950,000
d. $1,100,000

A- Only the $700,000 amount due to customers is included in the Reserve Bank Account computation. The other fails to receive relate to firm accounts and are not included in the Reserve Bank Account.

29

When conducting the last quarterly box count of securities in your possession, the records indicated a shortage of securities with a market value of $135,000. How will this shortage be treated in the reserve deposit computation?
a. It will be ignored since it does not relate to customers.
b. It will reduce the deposit requirement after 7 business days.
c. The amount must be added to the net capital of the firm.
d. The amount must be included in the Reserve Formula after 30 business days.

D- The full value of a short securities difference is included in the Reserve Formula under SEC Rule 15c3-3 after 30 business days.

30

The firm has pledged $375,000 of stock with a bank as collateral for customer margin accounts. When calculating the reserve deposit according to SEC Rule 15c3-3, this amount is considered:
a. A customer secured debit balance
b. An exclusion from the deposit calculation
c. A customer credit item included in the deposit calculation
d. A fail to deliver contract reduced by 1%

C- Loans obtained by the firm that use customer securities as collateral are credit items and are included in the reserve deposit computation.