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1

Annual reports required under Rule 17a-5 must comply with which of the following requirements?
I. The report must be prepared by an independent public accountant.
II. The report must contain an oath or affirmation by a partner or officer that the information is true and correct.
III. The report must contain a supplement regarding the status of the membership of the broker-dealer in SIPC.
IV. The report must be filed with the SEC in Washington, D.C., with the SEC regional office where the broker-dealer has its principal place of business, and with the broker-dealer's 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

D-
All of the elements listed in the answer are correct statements.

2

A broker-dealer has a debt-equity totaling $250,000, of which $50,000 is equity and $200,000 is a subordinated loan. Under what circumstances could the broker-dealer consider the subordinated loan to be part of its equity capital?
I. Under no circumstances may a subordinated loan be considered part of equity capital.
II. The lender must be a partner or stockholder.
III. The loan must have an initial term of three years or longer.
IV. The loan may not have any provision for accelerated maturity.
a. I only
b. II only
c. II and IV only
d. II, III, and IV only

D-
A subordinated loan is considered to be part of a broker-dealer's net capital if the lender agrees to a minimum duration of one year. If the broker-dealer wishes to consider the subordinated loan to be part of its equity as well as part of its net capital, the lender must be a partner or stockholder. The loan must have a minimum duration of three years, and there may be no provision for accelerated maturity.

3


The haircut on common stock positions is:
a. 15% of the long position
b. 15% of the greater of the long or short position
c. 15% of the long position and 15% of the short position
d. 15% of the greater of the long or short position and 15% on the amount that the lesser position exceeds 25% of the greater position

D-
The haircut on common stock is generally 15% of the greater of the long or short position. In addition, to the extent that the smaller position exceeds 25% of the greater position, there is an additional haircut of 15% on the excess. The following examples will explain how this works.

A broker-dealer has a long position of $400,000 and a short position of $50,000. The long position is greater than the short position, and the haircut would be 15% of $400,000 ($60,000). As the short position is less than 25% of the long position, there is no additional haircut.

A broker-dealer has a long position of $250,000 and a short position of $400,000. The short position is greater than the long position, and the haircut would be 15% of $400,000 ($60,000). The long position exceeds 25% of the short position (25% of $400,000 equals $100,000). On the excess short position of $150,000, there is an additional haircut of $22,500 (15% of the excess).

4


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.

5


A municipal securities broker-dealer is NOT required to preserve for any length of time:
I. Copies of the Daily Bond Buyer containing a notice of sale to which the broker- dealer responded
II. Copies of an industry publication in which the broker-dealer published a quote
III. News service printouts of articles mentioning the firm by name
IV. Standard and Poor's or Moody's securities manuals containing the ratings of bonds that were recommended by the firm
a. I only
b. I and II only
c. III and IV only
d. I, II, III, and IV

D-
MSRB rules do not require members to maintain a file of industry-related publications such as the Bond Buyer. Ratings manuals and new service printouts also need not be maintained.

6

A carrying broker-dealer would like to compute its SEC Rule 15c3-3 Reserve Bank Account requirement on a monthly basis. Which of the following statements is CORRECT?
a. The firm must obtain permission from any SEC district office one week prior to its first such computation.
b. The Designated Examining Authority of the firm must be notified.
c. The customers of the firm must be notified in writing of this event.
d. The firm has a ratio of aggregate indebtedness to net capital of 9.5:1, which will not preclude it from conducting the calculation monthly.

B-
If a broker-dealer wants to perform this computation on a monthly rather than a weekly basis, it must satisfy certain financial tests. These include maintenance of an A.I. to N.C. ratio of no greater than 8:1. The Designated Examining Authority of the broker-dealer must be advised of this election.

7

A broker-dealer that does not carry customer accounts must file which of the following?
I. Focus Report Part I monthly
II. Focus Report Part II quarterly
III. Focus Report Part IIA quarterly
IV. Annual reports
a. II and IV only
b. III and IV only
c. I, II, and IV only
d. I, II, III, and IV

B-
Broker-dealers who do not carry customer accounts must file the reports as indicated in this question.

8


Customer X deposits $3,000 in cash in her account at 9:30 a.m. At 5:00 p.m. on the same day, she deposits another $8,000 in money orders. The firm needs to file:
a. A CTR
b. A CMIR
c. A W-9 Form
d. Nothing

A-
The firm needs to file a Currency Transaction Report (CTR) FinCEN Form 104 since customer X deposited more than $10,000 in cash and cash equivalents during the course of one business day. ($3,000 plus $8,000 equals $11,000.) A Currency and Monetary Instrument Transportation Report (CMIR) must be filed whenever anyone physically transports or receives currency or monetary instruments in an amount of $10,000 or more into or out of the United States.

9


A broker-dealer is operating pursuant to Section (k)(2)(i) under SEC Rule 15c3-3. Which of the following is NOT TRUE concerning the activities of the firm?
a. The firm may not carry more than 100 margin accounts for retail customers.
b. Any funds or securities received in connection with the activities of the firm must be promptly transmitted.
c. The firm may not hold customer funds or securities.
d. All financial transactions between the firm and its customers must be effected through a special bank account.

A-
A broker-dealer operating under Section (k)(2)(i) of SEC Rule 15c3-3 is not required to maintain the Reserve Bank Account as stipulated in the Customer Protection Rule. Although regarded as a carrying firm by SEC net capital rules, the broker-dealer must promptly transmit any funds or securities that it receives in connection with its activities and must conduct all transactions between itself and customers through a Special Bank Account. This firm may not hold customer funds or securities,and is not permitted to carry any margin accounts for customers.

10


A security sold before it trades ex-dividend and delivered after the record date shall be accompanied by:
a. Tax stamps
b. A QT notice
c. A DK notice
d. A Due bill

D-
The due bill evidences that the buyer has rights to the distribution and the seller has the obligation.

11


If the collateral value of securities pledged on a secured demand note falls below the principal amount of the note:
a. The broker-dealer must immediately notify the lender and the Designated Examining Authority
b. The broker-dealer must immediately liquidate a sufficient amount of securities to raise the collateral value of the cash plus the remaining securities to the amount of the secured demand note
c. The broker-dealer must comply with the requirements of (a) and (b) only if the collateral value of the securities drops below 50% of the amount of the note
d. None of the above are correct

A-
If the collateral value of securities pledged on a secured demand note falls below the principal amount of the note, the broker-dealer must immediately notify the lender and the Designated Examining Authority.

12

Which of the following activities would be prohibited under MSRB Rule G-37?
I. A dealer making a $10,000 charitable donation to the Adopt A Greyhound foundation at the request of an issuer official
II. A Municipal Finance Professional (MFP) attending a $200 a plate fundraising dinner for the mayor of her town
III. A Municipal Finance Professional (MFP) making phone calls to his friends to attend the fund raiser
IV. A Municipal Finance Professional (MFP) doing volunteer work at a municipally-owned shelter
a. I only
b. III only
c. I and III only
d. II and IV only

B-
Charitable contributions (Choice I) are not covered under pay to play rules. Volunteer work (Choice IV) is acceptable with the exception of political fund-raising activities. Choice (III) would be considered a solicitation of a political contribution and is therefore prohibited.

13


A broker-dealer has a fail to deliver on its books. It is based on a common equity security trading on the New York Stock Exchange. The contract value is $60,000, and the market value is $65,000. The haircut on this position is:
a. $14,750
b. $4,750
c. $14,000
d. $4,000

B-
The haircut is taken when the fail to deliver is aged, which is greater than four days old. The charge is applied to the market value of the fail and then adjusted for any difference between market value and contract value. In this case, since the market value is greater than the contract value, this unrealized gain is subtracted from the initial haircut. A 15% haircut on $65,000 is $9,750, less $5,000 for a total haircut of $4,750.

14


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.

15



All of the following are filed with the SEC EXCEPT:
a. FOCUS Report Part I
b. FOCUS Report Part II
c. A summary of SRO assessments
d. A notification regarding the hiring of an auditor

C-
Focus I and Focus II are filed on a monthly and quarterly basis, respectively with the SEC and the FINRA. Assessments payable to an SRO (FINRA) are not filed with the SEC.

16


Place in the proper order from first to last the sequence in which various records would be prepared if a client makes a stock purchase:
a. Purchase and sales deptartment, order ticket, transfer agent, fail to receive
b. Order ticket, purchase and sales, transfer agent, fail to receive
c. Fail to receive, purchase and sales, order ticket, transfer agent
d. Order ticket, purchase and sales, fail to receive, transfer agent

D-
The trade is initiated with the order ticket then recorded in the purchase and sales department. If the stock is not delivered by the settlement date, the transaction becomes a fail to receive. When the securities are finally delivered, they can be sent to the transfer agent.

17


All of the following securities may be used as collateral in a margin account EXCEPT:
a. Convertible bonds that have been transferred from a UTMA account into the name of the owner who has just reached the age of majority
b. Mutual funds purchased more than one month ago that are subject to a contingent deferred sales charge for the next three years
c. Treasury bills that mature in less than 30 days
d. Shares of a new offering of a Nasdaq stock that have just been allocated to a customer by a syndicate member

D-
Broker-dealers that are participating in a distribution of new securities may not extend credit on those securities until they have been held by the customer for 30 days. Regarding choice (b), note that mutual fund shares sold by a dealer may be used as collateral in a margin account after they have been held by the customer for 30 days.

18

A client wants to write uncovered options. In addition to obtaining a signed option agreement your firm should obtain:
a. A minimum equity of at least $25,000
b. A signed margin agreement
c. Form W-9
d. Fully paid stock as collateral

B-
Uncovered options must be executed in a margin account. If the client has not previously established a margin account, she must do so.

19


Fred Burroughs is a client of Marlboro Brokerage. He purchased 100 shares of Mysteria Industries. Marlboro acted as his agent and purchased the shares from Harrison Brokerage. Harrison does not deliver the stock to Marlboro on the settlement date. Marlboro's stock record will reflect:
a. Long 100 shares in inventory
b. Long 100 shares owned by Burroughs and fail to deliver
c. Nothing until the delivery is made
d. Long 100 shares (owned by Burroughs) and fail to receive 100 shares

D-
The stock record reflects the ownership and location of the securities. Mr Burroughs is long the shares, and the location is fail to receive.

20


A broker-dealer may enter into a temporary subordination agreement for purposes of:
a. Engaging in an underwriting
b. Raising equity to correct a deficiency in its Reserve Bank Account under Rule 15c3-3
c. Raising equity to correct a deficiency in its net capital ratio under Rule 15c3-1
d. Increasing its net capital to 120% of the minimum required under Rule 15c3-1

A-
Temporary subordination agreements, which may not exceed 45 days in duration, are limited to underwritings only.

21


According to MSRB rules, subsidiary records are intended to reflect municipal securities:
In transfer
To be issued
Borrowed or loaned
Not completed by the settlement date
I and III only
II and IV only
I, III, and IV only
I, II, III, and IV

C-
MSRB rules state that subsidiary records should reflect municipal securities in transfer, municipal securities borrowed or loaned, municipal securities to be validated, and municipal securities transactions not completed by the settlement date. Securities to be issued will not be reflected in subsidiary records.

22


Which of the following items would not be considered part of the beginning capital of a broker-dealer?
a. Retained earnings
b. Bank loans secured by customers securities
c. Paid in capital
d. Common stock account

B-
Bank loans secured by customer securities do not contribute to the beginning capital of the broker dealer.

23

Reclamation based on the fact that a municipal security was delivered after publication of notice of call may be made:
a. Within 10 days
b. Within 30 days
c. Within 60 days
d. With no time limit

D-
There is no time limit, however, this rule does not apply if the entire issue has been called for redemption or if the security involved was traded as a called security.

24

The 5% Policy applies to which of the following?
I. Agency sales in the OTC market
II. Principal transactions in municipal bonds
III. Mutual fund sales
IV. New issues of corporate securities
a. I only
b. I and IV only
c. II and III only
d. I, II, and III only

A-The 5% Policy applies to both agency and principal OTC transactions. However, it does not apply to any sale under a prospectus, such as a mutual fund or a new issue, or to transactions in governments or municipals.

25

A broker-dealer has various equity positions in its trading account. When determining the haircut:
a. Long and short positions are netted
b. The greater of the long or short position is charged
c. Each long and short position is separately treated
d. All equity positions in the trading account receive the same percentage haircut

B-
In the firm trading account when dealing with equities, the haircut is applied to the greater of the long or short position. If the lower side exceeds 25% of the value of the higher side, an additional charge must be applied.

26


Which of the following statements is NOT TRUE regarding a temporary subordinated loan?
a. It may not be used as part of the broker-dealer's capital.
b. A firm is limited to executing three such agreements in a 12-month period.
c. The loan may not have more than 45 days to maturity.
d. The proceeds of the loan are to be used for underwriting purposes only.

A-

Temporary subordinated loans are short-term loans that are used for underwriting purposes. A broker-dealer is limited to executing no more than three such loans per year, with maturities of no greater than 45 days. These loans are acceptable as capital in the broker-dealer's financial structure.

27


A customer has purchased stock worth $25,000 in her special cash account. If the stock has a market value of $100, how many shares of stock must the broker-dealer have under its control under the provisions of Rule 15c3-3?
a. 250
b. 125
c. 100
d. 25

A- The broker-dealer must obtain possession of all the fully paid stock of the customer.

28


Which of the following statements is TRUE of a carrying broker-dealer with $200,000 of net capital?
a. It need not file a notice of capital deficiency unless the deficiency persists for more than 90 days.
b. The broker-dealer must file an Early Warning notice within 24 hours.
c. The broker-dealer must immediately file a notice stating its net capital and required net capital.
d. The broker-dealer must file a notice only if instructed by its Designated Examining Authority.

C- Since this broker-dealer's net capital is less than the minimum dollar requirement, it must immediately file a notice of net capital deficiency. The notice must include the broker-dealer's net capital and its required net capital.

29


Which TWO of the following statements regarding disciplinary proceedings under the Code of Procedure are TRUE?
I. Original jurisdiction rests with a Hearing Panel.
II. Original jurisdiction rests with the National Adjudicatory Council.
III. Appellate jurisdiction rests with a Hearing Panel.
IV. Appellate jurisdiction rests with the National Adjudicatory Council.
a. I and III
b. I and IV
c. II and III
d. II and IV

B- Under the Code of Procedure, original jurisdiction rests with a FINRA Hearing Panel. It is the Hearing Panel that holds hearings, considers complaints, and assesses penalties. If a respondent disagrees with the findings of the Hearing Panel, the respondent may appeal to the National Adjudicatory Council, which has both appellate and review jurisdiction.

30

Which of the following statements are TRUE regarding the activities of introducing broker-dealers subject to a $50,000 net capital requirement?
I. They do not have fails to deliver on their books.
II. They may not act as a market maker.
III. They may charge commissions on an exchange-traded issue.
IV. They may participate in all types of underwritings.
a. I, II, and III only
b. I and III only
c. II, III, and IV only
d. III and IV only

B- Only clearing broker-dealers have fails to deliver and fails to receive on their books. An introducing broker-dealer would require $100,000 to act as a market maker. Firm commitment underwriting requires $100,000 of net capital. Introducing broker-dealers can always charge a commission on a trade.