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1

Broker-dealers that carry customer accounts must maintain a minimum dollar amount of net capital of:
a. $25,000
b. $100,000
c. $175,000
d. $250,000


D- Firms that (1) carry customer accounts or broker or dealer accounts; or (2) receive or hold funds or securities for customers, brokers, or dealers must maintain minimum net capital of $250,000.

2

All the following accounts would be included in total assets EXCEPT:
a. Trading account -- Long
b. Prepaid expenses
c. Commission expenses
d. Furniture and fixtures

C- Commission expenses is an item of expense, not a balance sheet asset.

3

Liabilities that are subordinated to the claims of creditors under a satisfactory subordination agreement in accordance with the provisions of Rule 15c3-1 are:
a. Included in aggregate indebtedness
b. Excluded from aggregate indebtedness
c. Deducted from net capital
d. None of the above

B- In accordance with the provisions of Rule 15c3-1, liabilities that are subordinated to the claims of creditors under a satisfactory subordination agreement are excluded from aggregate indebtedness

4

A broker-dealer borrows from a bank using customer and firm securities as collateral. The bank may:
a. Have a lien on firm securities to support customer indebtedness
b. Have a lien on customer securities to support firm indebtedness
c. Commingle customer and firm securities with the written permission of the customers
d. Rehypothecate the securities with the permission of the customer

A-
A broker-dealer may never commingle stock of customers with stock belonging to noncustomers, including the broker-dealer's own stock. If a broker-dealer wishes to borrow against stock that it owns and stock belonging to its customers, the broker-dealer must borrow in two separate loan accounts.
It is possible that one or both accounts may have excess equity. For example, let's assume that a broker-dealer takes $100,000 of its own stock to the bank and borrows $50,000. It also takes $100,000 of stock belonging to customers and borrows $50,000. The bank notifies the broker-dealer that it would be willing to lend an additional $20,000 in each account, and therefore, there is excess collateral value in each account. The bank inquires of the broker-dealer if it should use the excess collateral in each account as a guarantee of the loan in the other account.
For example, if the market value of the broker-dealer's stock remains at $100,000 and the market value of the customer's stock drops to $80,000, the bank would apply the excess collateral in the broker-dealer's account as a guarantee of the customer account. If the market value of the customer's stock remains at $100,000 and the market value of the broker-dealer's stock drops to $80,000, the bank would apply the excess collateral in the customer's account as a guarantee of the broker-dealer's account. The broker-dealer could allow a cross-lien on its account to support the customer's account, but could not grant a cross-lien on the customer's account to support the broker-dealer's account.

5

All the following statements regarding assignments of securities are CORRECT EXCEPT:
a. Separate stock powers must be used for each security that is delivered by a seller to a buyer
b. The transfer agent is the final judge as to whether a security is a good delivery
c. Assignments must be guaranteed by a bank or broker that is acceptable to the transfer agent
d. A security with an assignment that is not acceptable to the transfer agent is a good delivery if acceptable to the buying broker

D- If a security is not acceptable to a transfer agent, it will not be acceptable to a buying broker.

6


A Suspicious Activity Report (SAR) should be filed:
a. Only in the event that the firm has actual knowledge that the client is laundering money
b. For most types of suspicious activity depending on the facts and circumstances
c. Only for transactions of more than $10,000
d. Only for transactions with individuals or entities on the OFAC list

B-
A Suspicious Activity Report (SAR) should be filed for most suspicious transactions depending on the facts and circumstances surrounding the transaction

7

A SIPC trustee determines that customers have valid claims for securities in the possession of a broker-dealer that has become insolvent, but there are no specifically identifiable securities available. In this case:
a. All securities will be sold and the proceeds distributed to the customers
b. The securities will be distributed to the customers on the basis of when they were purchased on a first-in, first-out basis
c. The securities will be distributed on a proportionate basis
d. The trustee will purchase sufficient additional securities to enable a full distribution consistent with the limits of SIPC protection

C-
If securities are in the possession of a failed broker-dealer, and such securities are not specifically identifiable as belonging to a particular customer, the SIPC trustee will distribute such securities to customers of the broker-dealer on a proportionate basis.

8

Use the following information to answer this question.
Pearless brokerage is a market maker in Thornapple securities. Current inventory positions show the following.
Firm trading account long:
100,000 common shares -- @ $22.10
$2,210,000
400 6% convertible bonds due 6/1/08 market value @ 104 $416,000
The total haircut on its inventory positions is:
a. $221,000
b. $331,500
c. $368,940
d. $393,900

D- Since the bonds are convertible and the market is at a premium to their par value, they are subject to the same haircut as the stock into which they are convertible. The total haircut would be 15% on the stock position ($2,210,000 x 15% = $331,500) plus 15% on the market value of the bonds ($416,000 x 15% = $62,400). The total haircut would be $393,900.

9

All the following statements are TRUE under the Code of Arbitration EXCEPT:
a. Customers, but not member firms, may appeal arbitration decisions to a court
b. A person may initiate arbitration by filing a Submission Agreement, a Statement of Claim, and the required deposit fee
c. Respondents may file a counterclaim against the person initiating the arbitration
d. If a customer is involved in an arbitration, a majority of the arbitrators must be from outside the securities industry

A- The Code of Arbitration does not provide for appeals by any party.

10

A broker-dealer is computing the deposit required in its Reserve Bank Account. In regard to its short securities differences, which of the following statements are CORRECT?
I. Short securities differences are posted as credits if they are more than 30 days old.
II. Short securities differences are posted as debits if they are more than 30 days old.
III. Short securities differences are marked to the market.
IV. Short securities differences may be netted against long securities differences.
a. I and III only
b. II and IV only
c. I, III, and IV only
d. II, III, and IV only

A-
Under the Reserve Bank Account, short security differences are marked to the market and posted as credit items if they are over 30 days old.

11

Consider the following information from Shepherd Brokerage in answering this question.
Net customer debits $1,000,000
Loans collateralized by customer securities $600,000
Cash in Reserve Bank Account $300,000
Assume customers liquidate $600,000 of their holdings and the loans collateralized by customer securities are retired. The effect of these transactions would be a(n):
a. Reduction of net customer debits
b. Increase in cash
c. Increase in cash in the Reserve Bank Account
d. Increase capital

A-
Net customer debits would fall by the amount of the securities liquidated. The loans collateralized by customer securities would fall to zero. There is no impact on net capital.

12

Paradite Partners, a registered broker-dealer, has extended a loan to James Copis, its senior executive partner in the amount of $600,000. During the year, Mr. Copis paid back $120,000 of the loan. What effect will the payment on the loan have on the year-to-date retained earnings?
a. Retained earnings will be increased by $120,000.
b. Retained earnings will be decreased by $120,000.
c. Retained earnings will not be affected.
d. Retained earnings will be reduced by $480,000.

C-
Payments on the loan will increase the cash position of the company and reduce the loan outstanding. Since both are balance sheet items and not revenue and expense items, the year-to-date retained earnings will not be affected.

13

During a routine audit, an examiner for a self-regulatory organization has found what she believes is a pattern of excessive corporate underwriting fees charged by the firm's investment banking department. Disciplinary actions for such violations would be imposed under:
a. State blue-sky laws
b. FINRA's Code of Procedure
c. FINRA's Code of Arbitration
d. SEC Corporate Finance Department

B- The underwriting of corporate securities is governed by FINRA rules. Disciplinary actions for violations of FINRA rules are imposed under FINRA's Code of Procedure.

14

Your firm is holding an inventory of short-term corporate debt (commercial paper) maturing in 28 days. The current market value of this position is $186,000. When computing the net capital of the firm, the haircut on this inventory position would be:
a. No haircut since there are only 28 days to maturity
b. A 6.0% haircut since it is commercial paper
c. A 15% haircut because it is a corporate security
d. A 40% haircut since commercial paper has a limited market

A-
Commercial paper with less than 30 days to maturity is not subject to a haircut.

15

A member firm is requested to open an account by a partner of another member firm. Which of the following statements is/are TRUE?
I. The account may be opened, but the partner may not engage in any transactions in securities recommended by the partner's firm.
II. The account may not be opened under any circumstances.
III. The member firm is required to give notice to the other member firm.
IV. The member firm must send duplicate confirmations or statements to the other member firm if requested.
a. I only
b. II only
c. III only
d. III and IV only

D- A member firm that wishes to open an account for an employee or principal of another member firm is required to notify that person's employer. The employer must be sent duplicate statements and confirmations in regard to the account if requested. The member firm opening the account is required to notify the employee that notice will be sent to the employer.

16

At the beginning of the year, the firm pays its annual errors and omissions insurance premium in the amount of $24,000. This amount will be amortized at $2,000 per month throughout the year. When closing the books at the end of June, year-to-date retained earnings will reflect which of the following items?
a. Expenses of $12,000 which reduce year-to-date-retained earnings
b. Prepayments of $12,000 which increase year-to-date retained earnings
c. Expenses of $24,000 which reduce year-to-date-retained earnings
d. Assets of $24,000 which increase year-to-date retained earnings

A- As the prepaid amounts are amortized over the year, the monthly amounts will reduce the prepaid balance and become expenses. The expenses will reduce year-to-date retained earnings. Since the prepaid expense has been amortized for six months at $2,000 per month, the expenses of $12,000 will reduce year-to-date retained earnings.

17

Which of the following activities by a municipal securities broker-dealer that has a financial advisory relationship with municipal securities issuer would be improper?
I. Selling a new security of that issuer as a syndicate member in a competitive underwriting without revealing the firm's advisory capacity to each purchasing customer
II. Purchasing a new security of that issuer as principal in a negotiated underwriting
III. Acting as agent for a customer in purchasing a new security of that issuer from a syndicate in a competitive underwriting
IV. Disseminating nonpublic information to a customer about a prospective exchange offer by that issuer
a. I and III only
b. II and IV only
c. III and IV only
d. I, II, and IV only

D- When a broker-dealer has a financial advisory relationship with an issuer, it should not disseminate nonpublic information in connection with a purchase, sale, or exchange of securities of that issuer. It is also improper to sell a new issue of that issuer as a syndicate member in a competitive underwriting without revealing the firm's advisory capacity to purchasers.
Also prohibited is the purchase of a new security of that issuer as principal in a negotiated underwriting while the financial advisory relationship exists. Purchases as agent are permitted, unless made to contravene the purpose and intent of the rules.

18

The inventory records of your firm indicate that 12,200 shares of Nitsy should be in inventory. When the quarterly box count is completed, the actual inventory is 12,500. The market value of Nitsy is $11.85. As the financial principal of the firm, how will you handle this long securities difference when computing the firm's net capital?
a. Deduct $3,555 from the net capital of the firm.
b. Add $3,555 to the net capital of the firm.
c. Ignore the overage resulting from the box count.
d. Sell the overage and record the proceeds as operating income.


C- Long securities differences for stock that has not been sold have no effect on the net capital of the firm. The broker-dealer will neither add nor deduct the value when computing its net capital. If, however, the securities have been sold, the sale proceeds will be recorded as a special item of revenue and a deduction from net capital is required.

19

A new broker-dealer with $50,000 of net capital can support aggregate indebtedness of:
a. $3,333
b. $6,250
c. $400,000
d. $750,000

C- The net capital rules require that aggregate indebtedness not exceed net capital by more than 8 times for a broker-dealer in its first year of operation. Since the net capital is $50,000, a new broker-dealer could not have aggregate indebtedness exceeding $400,000.

20

If a broker-dealer holds a position in a security with a market value that exceeds 10% of its tentative net capital, this creates a(n):
a. Special reserve requirement
b. Limited market
c. Undue concentration
d. Fail to deliver


C- When a broker-dealer holds a position in a security market value with a market value that exceeds 10% of its tentative net capital, this creates an undue concentration and an additional haircut is required.

21

When a customer pledges stock at a bank in order to obtain a loan to purchase other stock, the amount that may be lent is determined by:
a. Regulation X
b. Regulation U
c. Regulation T
d. The bank's loan officer

B- Regulation U of the Federal Reserve Board regulates the amount that a bank (or any other lender that is not a broker-dealer) may lend to an individual who wishes to borrow from the bank, using stock as collateral, for the purpose of buying more stock. If an individual goes to a bank with $10,000 worth of fully paid stock, and wishes to use the stock as collateral for a loan, the bank must determine if the loan is for the purchase of additional stock. If the loan is for that purpose, the bank is restricted by Regulation U as to the maximum amount of credit that it may extend. The amount that may be lent under Regulation U is the same amount that may be lent under Regulation T, which regulates credit advanced by broker-dealers.

22

Therite Brokerage has the following information in its trial balance as of September 30, 20XX.
Retained earnings, beginning $700,000
Office expenses $110,000
Loan collateralized by firm assets $600,000
Salaries $120,000
Mutual Fund commissions $200,000
Customer credit balances $185,000
The year-to-date retained earnings figure for Therite Brokerage is:
a. $1,915,000
b. $1,085,000
c. $985,000
d. $670,000

D- When calculating year-to-date retained earnings, start with the beginning balance carried over from the previous period, add in revenue items and deduct expense items. The calculation should be: $700,000 plus Commission income of $200,000 less Salaries of $120,000 less Office expenses of $110,000. The net amount is $670,000. The other items, the loan of $600,000 and Customer Credits of $185,000, are balance sheet items and not used in calculating retained earnings.

23

A client buys 1,000 shares of Wellman Brothers for a total cost of $30,000. He does not pay for the trade, and his position is liquidated for $26,000. The difference is a(n):
a. An unsecured credit
b. An unsecured debit
c. Haircut at 10%
d. Part of the firm's tentative net capital

B- This is an unsecured debit. The broker-dealer cannot be sure it can collect this from the client. The net effect is to lower the firm's capital.

24

In which of the following cases would a financial advisory relationship exist according to the MSRB?
I. A broker-dealer, while acting as an underwriter for a municipal offering, gives advice to the issuer regarding the structure of the issue.
II. A broker-dealer gives a municipal issuer advice about a new issue with respect to the issue's timing and terms and is compensated for this advice under a written agreement.
III. A broker-dealer not involved in a new municipal offering informally gives advice to the issuer regarding the timing of the issue for no charge.
a. I only
b. II only
c. I and II only
d. I, II, and III

B- A financial advisory relationship is deemed to exist when a broker-dealer or dealer bank, for compensation or the expectation of compensation, gives an issuer advice about a new issue with respect to the issue's structure, timing, or terms of the offering. However, this does not include situations in which a municipal securities firm gives such advice to an issuer in its role as an underwriter, which is why Choice (I) is not correct. Choice (III) is incorrect because there is no charge.

25

Metcalf Brokerage has calculated its tentative net capital at $2,400,000. Within its common stock trading account is a position consisting of 10,000 shares of Fordham, Inc. stock valued at $34 a share. The additional haircut because of undue concentration would be:
a. $51,000
b. $15,000
c. $13,500
d. $12,450

When a broker-dealer has a common stock position whose market value exceeds 10% of its tentative net capital, an undue concentration haircut must be applied. In the example given, the tentative net capital was $2,400,000 of which 10% would be $240,000. The security position has a value of $340,000, 10,000 shares x $34. There is $100,000 excess, $340,000 - $240,000. There is an exclusion from the undue concentration rule for the market value of 500 shares, or $10,000, whichever is greater. The market value of 500 shares equals $17,000, subtracted from the $100,000 excess equals $83,000. 15% of $83,000 equals $12,450.

26


The sale of 3 Java Shop July 50 uncovered calls for a premium of 4 when the stock is 52 would produce a margin requirement of:
a. $1,200
b. $4,320
c. $2,000
d. $3,720

B- The margin requirement for an uncovered call is 20% of the market value of the stock plus the premium minus the out-of-the-money amount.
20% of $5,200 = $1,040
Add the premium of 400 = $1,440.
Multiply by 3 contracts = $4,320.

27

A broker-dealer has total assets on its trial balance in the amount of $8,395,000. When calculating allowable assets for net capital purposes, all the following would be included EXCEPT:
a. Fails to deliver, 3 days old
b. Syndicate receivables, 4 days old
c. Good faith deposit, underwriting settled for 62 days
d. Commissions receivable, 8 days old

C- Good-faith deposits for an underwriting that has been settled for more than 60 days are not allowable assets. The other receivables are within the appropriate time frames for consideration as allowable assets

28

Which TWO of the following statements are CORRECT regarding maintenance of records required under Rule 17a-4?
I. In an omnibus account, records must be kept by the carrying member.
II. In an omnibus account, records must be kept by the introducing member.
III. In a fully-disclosed account, records must be kept by the carrying member.
IV. In a fully-disclosed account, records must be kept by the introducing member.
a. I and III
b. I and IV
c. II and III
d. II and IV

C- There are two types of clearing accounts that a nonclearing broker-dealer may maintain with a clearing broker-dealer. They are fully disclosed accounts and omnibus accounts.
In a fully disclosed account, the clearing broker-dealer will maintain all the records for the customer. The nonclearing firm will introduce the customer's account to the clearing firm, and the clearing firm will execute the orders, send the customer confirmations and statements, and take care of all the other required record keeping.
In an omnibus account, the nonclearing (introducing) firm will maintain all its own records. The clearing firm will only execute orders and clear them. All other details will be handled by the introducing firm.

29

Which of the following entries are assets?
I. Fails to Deliver
II. Fails to Receive
III. Trading Account of Firm -- Common Stock -- Long
IV. Trading Account of Firm -- Common Stock -- Short, Sold to Customers
a. I and III only
b. II and III only
c. I, II, and III only
d. II, III, and IV only

A- Fails to Deliver and the Trading Account -- Long represent balance sheet assets.

30

Disbrow Securities sells $1,400,000 face amount of municipal securities to Elger Securities. Upon settlement, there is a $300 difference in the amounts computed by the firms. According to the MSRB:
I. Elger can reject the bonds
II. Elger must accept and the parties must reconcile any money differences within 10 business days following settlement
III. The trade can be cancelled if one party objects
IV. The calculation of the seller determines the amount of payment to be made
a. IV only
b. I and III only
c. II and III only
d. II and IV only

D- The MSRB has published a table indicating the maximum differences per transaction that would be sufficient to cause rejection of a delivery. For transactions of $1,000,000 and over, the minimum difference is $500. If the difference is $300, Elger may not reject the delivery. Both firms should attempt to reconcile any money differences within 10 business days of settlement. Ultimately, calculation of the selling party is used to determine monetary amounts. The trade could only be canceled if both parties mutually agree.