Flashcards in Exam 4 Deck (205)
A broker-dealer is required to disclose which TWO of the following items in the Financial and Operational Data of FOCUS Part II?
I. Corporate fails to deliver 5 business days or older
II. Corporate fails to deliver 11 business days or older
III. Municipal fails to deliver 15 business days or older
IV. Municipal security fails to deliver 21 business days or older
a. I and III
b. I and IV
c. II and III
d. II and IV
D- Under the Financial and Operational Data for the broker dealer, fails to deliver 11 business days or older for corporate securities, and 21 business days for municipal securities are disclosed.
Persons required to sign the FOCUS Report include the:
I. Principal Executive Officer
II. Principal Financial Officer
III. Principal Operations Officer
a. I only
b. I and II only
c. II and II only
d. I, II, and III
D- All three of these designated officers are required to sign the FOCUS Report.
A broker-dealer calculating net capital under the alternative method has aggregate debit items of $12,600,000. According to Rule 17a-11, a report must be filed if the firm's net capital falls below:
D- Under the alternative computation, if the net capital falls below 5% of the aggregate debits, an early warning notice must be sent to the appropriate regulatory authorities. In this case, 5% of $12,600,000 is $630,000
A broker-dealer computes net capital under the alternative method. It has aggregate debit items of $15,000,000. Which of the following would represent its minimum net capital requirement?
B- Under the alternative computation, minimum net capital is 2% of the aggregate debit items, as found in the reserve calculation. 2% of $15,000,000 is $300,000.
Engulf Securities has acquired Lethargic Investments Inc. on November 5. Lethargic had filed FOCUS Part II on October 17. Engulf is required to file FOCUS Part II no later than November 17. Which of the following statements is/are TRUE?
I. An audited statement of financial conditions will be required for the November 17 filing.
II. The November FOCUS Part II filing will not include Lethargic Investments.
III. The November FOCUS Part II filing must include Lethargic Investments.
IV. The auditor's statement will be required based on the earliest fiscal year end of Engulf or Lethargic.
a. I and III only
b. II only
c. III and IV only
d. II and IV only
D- Engulf Securities' required FOCUS Part II filing date is 17 calendar days after the quarter's end (October 31). Engulf acquired Lethargic Investments on November 5. Engulf would not include Lethargic in the FOCUS Part II filing. When a broker-dealer acquires or succeeds another broker-dealer, the annual audited financial statement is required based on the earliest fiscal year-end of either broker-dealer.
Visigoth LLC is an introducing broker-dealer and has a minimum net capital requirement of $5,000. Visigoth clears through Charlemagne Securities Inc. A customer has made a payment for a security transaction. The check has been made payable to Visigoth LLC. Which of the following statements indicates the proper course of action?
a. Visigoth may accept the check and forward it to Charlemagne Securities, but must inform its customer, in writing, of the correct payment procedure.
b. Visigoth must return the check to the customer and instruct him to make payment directly to Charlemagne Securities.
c. Visigoth may accept and deposit the check provided it promptly transmits the funds to Charlemagne Securities.
d. Visigoth must notify Charlemagne Securities while the clearing member will decide whether the check must be returned or may be forwarded.
A- The net capital requirement of a broker-dealer that receives, but does not hold, customer funds or securities is $50,000. However, an allowance for the unusual cases (such as described in this question) permits a broker-dealer maintaining less than $50,000 net capital to accept customer's checks for payment, which have erroneously been sent to the introducing broker-dealer. The broker-dealer who accepts the customer's check is required to provide written instructions to its customer indicating the proper method of future payments.
Wireless Security Trading (WST) has begun an investor education campaign by purchasing a recreational vehicle and outfitting it as a working trading floor. The cost of the vehicle and equipment is $450,000. WST paid $150,000 and obtained a loan on the RV for $300,000. How will WST account for this investment?
I. A $150,000 nonallowable asset
II. A $450,000 nonallowable asset
III. No increase to aggregate indebtedness
IV. A $450,000 increase to aggregate indebtedness
a. I and III only
b. I and IV only
c. II and III only
d. II and IV only
C- Automobiles, boats, and aircraft are 100% nonallowable assets. Any broker-dealer liability secured by these assets will not be part of the broker-dealer's aggregate indebtedness.
Flint, Stone & Sparks Investments is a general securities broker-dealer. Its most recent inventory revealed a short securities difference of $75,000 and a long securities difference of $10,000. It is now 30 days after the securities count. The securities representing the short difference are now valued at $80,000. The value of the long securities difference is now $7,000. Which of the following statements is TRUE?
a. The firm's aggregate indebtedness has increased by $65,000.
b. The firm's aggregate indebtedness is unchanged.
c. The firm's net capital must be reduced by $73,000.
d. The record breaks must be reported to the broker-dealer's DEA within 24 hours.
B- Unresolved short securities differences do not become part of a broker-dealer's aggregate indebtedness after 30 days. The broker-dealer is required to establish a reserve to replace the missing securities. Replacement is required within 45 calendar days of the inventory.
All of the following statements regarding filing requests for extensions of a broker-dealer's audited financial statements are TRUE EXCEPT:
a. The request must include a letter from the broker-dealer's independent auditor
b. A request must be made at least three business days preceding the due date of the report
c. The request must state the amount of additional time requested, but may not exceed 45 days
d. The request must describe the measures to be implemented to assure there will be no further delay recurrences
C- A request for an extension may not exceed 30 days from the due date of the report. The report containing the audited financial statements is due within 60 days of fiscal year-end. An extension could extend the filing period to a maximum of 90 days past year-end. A broker-dealer is required to send a copy of its audited statement of financial condition to its customers no later than 45 days after the filing of its annual report
A broker-dealer must retain all of the following records for 6 years, EXCEPT:
a. Currency Transaction Report
b. Municipal securities customer complaints
d. Margin agreements
A- Currency Transaction Reports (CTRs) (reports for currency transactions exceeding $10,000) must be retained for 5 years. Municipal securities broker-dealers must retain customer complaints for 6 years, while under FINRA rules, records of written customer complaints must be retained for 4 years. Daybooks (also known as blotters, diaries, or journals) and customer agreements (which include margin agreements) are 6-year records
Which of the following actions, conditions, or verifications are required during a broker-dealer's inventory count as specified in SEC Rule 17a-13?
I. A physical examination and count of all securities held
II. A verification of all securities in transit
III. An accounting of all securities held in approved depositories
IV. A verification of all securities subject to repurchase agreements
a. I only
b. I and II only
c. I, II and III only
d. I, II, III, and IV
D- The broker-dealer's quarterly inventory (box count) according to Rule 17a-13 requires a physical count of all securities held by the broker-dealer. It also requires the verification of securities in transfer or transit, as well as securities held in a control location. This would include depositories. A fail to deliver, a fail to receive, and securities subject to repurchase or reverse repurchase agreements must be verified. Securities loaned, pledged, and borrowed must also be verified during the box count.
Which of the following forms is used for reporting to the SIC?
a. Form X-17f-1A
b. Form 17a-11
c. Form 15c3-3
d. Form X-17A-5
A- According to SEC Rule 17-f-1, reports to the Securities Information Center are required on Form X -17f-1A. Choices (b) and (c) relate to important SEC Rules. 17a-11 requires reporting for net capital violations, early warning and supplemental reporting for noncurrent books and records, and material deficiencies in the method of a broker-dealer's accounting. Rule 15c3-3 is the Customer Protection Rule. There are numerous X-17A-5 forms. They are more commonly referred to as FOCUS reports.
Which of the following points are NOT associated with a minor rule violation (MRV)?
a. A maximum fine of $2,500
b. Egregious misconduct involving customers
c. Record-keeping irregularities
d. Technical deficiencies
B- Minor Rule Violations (MRVs) include technical violations of rules such as reporting and record-keeping deficiencies. The maximum fine is $2,500. Actions of an egregious nature involving customers are not minor violations and would begin with a prehearing conference followed by a hearing, decisions, and (possible) sanctions. It is also worth noting that FINRA does not issue injunctions, nor may its sanctions include imprisonment.
Half and Nelson Leverage Capital Inc. currently maintain long call positions in the following securities:
120 at-the-money contracts LHVZ Oct 65 @ 3.50
16 in-the-money contracts PLUM Nov 45 @ 12.10
320 out-of-the-money contracts SLIB Nov 70 @ 1.20
What is the broker-dealer's required haircut on these positions?
C- Haircuts on long option positions are 50% of the market value of the premium.
120 contracts x $350 = $42,000 x 50% = $21,000
16 contract x $1,210 = $19,360 x 50% = $9,680
320 contracts x $120 = $38,400 x 50% = $19,200
Total haircut = $49,880
Andrews, Lowell, Barbican & Co., a registered broker-dealer has the following positions in J. Verne Publishing (JVP):
5,000 shares of JVP, current market value 67.50
50 short JVP covered calls, exercise price 65 @ 4.75
What is the total haircut on this stock and option position?
C- Covered calls require a 15% haircut on the stock position, which is reduced by the amount that the options are in-the-money. In this case the option contracts are in the money by 2.50 points, which amounts to $250 per contract. The calculations for the haircuts are:
5,000 x $67.50 = $337,500 x 15% = $50,625
$50,625 - ($250 x 50) =
$50,625 - $12,500 = $38,125
Total Haircut = $38,125
Stallion, Trotter and Gelding Investments have the following proprietary positions:
Long 1,000 shares of Horsefeathers Mattresses Inc. (HFM) at 42
Long 10 HFM Apr 40 puts @ 1.75
What is the required haircut based on this hedged stock position?
B- The haircut on a hedged position is the lesser of 15% of the market value of the stock ($42 x 1,000 = $42,000 x 15% = $6,300) not to exceed the out-of-the-money amount of the option. In this example, the maximum loss is 2 points per share. This amounts to a maximum potential loss of $2,000.
Ali, Frazier & Co. is an introducing broker-dealer that has a PAIB with the member firm that conducts its clearing. Ali, Frazier & Co. has the following proprietary positions in Manila Paper and Corrugated Box Co. (MPB):
Short 500 shares of MPB at 37
Long 5 MPB Feb 35 calls @ 4.75
What is the required haircut for this stock and option position?
A- A short stock and long call create a hedged position. The haircut is based on the lesser of 15% of the contract value of the stock position ($37 x 500 = $18,500 x 15% = $2,775) or the maximum potential loss for the position. Since the call option can be exercised at 35, the stock can be acquired at a price lower than the contract sale value of the stock (37). The position would result in a gain upon exercise of the option. As such, the haircut is 0.
Jay Quest is a general securities principal at Race and Banyan Investments. It is brought to his attention that today account G31-5668 deposited $3,000 at the OSJ at 9:35 a.m. At 11:15 a.m., $5,500 was deposited into the account. Finally, at 3:30 p.m., $7,000 was deposited into the account. All deposits were made in cash. Which of the following deposits must be reported?
a. None of the deposits
b. Each deposit over $5,000
c. The third deposit only
d. All of the deposits
D- Deposits of currency exceeding $10,000 on a single day must be reported to the Department of the Treasury on FinCEN Form 104. The deposit of amounts smaller than $10,000 would be aggregated and, in this case, reported as $15,500. The practice of depositing amounts below the reporting threshold is called structuring.
A member firm must review the adequacy of its fidelity bond based on its net capital requirement:
a. Annually, on the anniversary date of the issuance of the bond
b. Quarterly, on the fifteenth day of the last month in the quarter
c. Biannually, on a date set by FINRA
d. Only if the firm falls below its net capital requirement within the year
A- A member firm is required to review its fidelity bond annually on the anniversary date of the issuance of the original bond. The firm must review its highest net capital requirement for the past 12 months and use that amount to determine the fidelity bond requirement for the upcoming 12 months.
A brokerage firm with a net capital requirement of $250,000 must maintain a fidelity bond coverage of:
D- A broker-dealer that has a net capital of between $250,000 and $300,000 must maintain a minimum fidelity bond coverage of $600,000. The maximum amount of coverage is $5,000,000 for member firms whose net capital exceeds $12,000,000.
A brokerage firm with a net capital requirement of $50,000 must maintain a fidelity bond of:
B- A broker-dealer that has a net capital of less than $250,000 must maintain a minimum coverage which is the greater of 120% of the members net capital requirement or $100,000. 120% of $50,000 is $60,000, which is less than $100,000.
Prime Partners Brokerage has a tentative net capital of $2,500,000. In its inventory, Prime Partners is long 8,125 shares of Chester's Chestnuts Inc. common stock at $40. What is Prime Partners' obligation when computing its net capital?
a. Use the standard haircut for its inventory.
b. Use a smaller haircut for its inventory.
c. Make an undue concentration deduction.
d. Make a long securities difference record.
C- The standard haircut for common stock held in a broker-dealer's inventory is 15%. However, if the inventory contains one security that accounts for a significant percentage of the market value of its total inventory, this puts the firm at extra risk if that security suddenly declines in value. Therefore, Rule 15c3-1 assesses an extra net capital charge, which is known as an undue concentration deduction. It applies if any long or short position is greater than 10% of the broker-dealer's tentative net capital. The undue concentration rule requires an additional deduction on the amount in excess of the 10% threshold. In our example, Prime Partners has a tentative net capital of $2,500,000 and 8,125 shares of Chester's Chestnuts, Inc., at $40 (a $325,000 value). The value of the common stock is greater than 10% of the tentative net capital.
Which of the following statements is TRUE regarding an introducing broker-dealer with a net capital requirement of $5,000?
a. It may accept customer funds and securities for immediate transfer.
b. It may not receive customer funds or customer securities.
c. It may accept customer funds but not customer securities.
d. It may accept customer securities but not customer funds.
B- An introducing broker-dealer that does not receive customer securities or customer funds is subject to a $5,000 minimum net capital requirement. An introducing broker-dealer that receives customer securities for immediate transfer to a clearing firm is subject to a minimum net capital requirement of $50,000. A broker-dealer that receives customer securities and customer funds is a general securities firm and is subject to a minimum net capital requirement of $250,000.
A fidelity bond does NOT cover which of the following incidents?
b. Loss of securities
c. Errors and omissions
d. Fraudulent trading
C- FINRA members that are not members of an exchange are required to carry a blanket fidelity bond covering officers and employees that provides against losses (on premises or in transit), misplacement, forgery and alteration (including check forgery), loss of securities (including securities forgery), and fraudulent trading.
If a broker-dealer allows its customers to receive or transmit wire transfers, it must collect information about transfers for:
D- Broker-dealers who transfer or transmit funds (wire transfers) must collect information about any transfer of $3,000 or more, including the names of the transmitter and the recipient. Firms must also verify the identity of the transmitters and recipients who are not established customers.
Linda Holt is a registered representative at Peabody Financials. She has a client who makes transactions in his account that seem contradictory to his financial objectives. She thinks that the transactions may be related to illegal activity. Linda must file a Suspicious Activity Report when a transaction or group of transactions equals or exceeds:
D- A firm must file a Suspicious Activity Report (SAR) whenever a transaction (or group of transactions) equals or exceeds $5,000 and the firm suspects one of the following actions:
• The client is violating federal criminal laws.
• The transaction involves funds related to illegal activity.
• The transaction is designed to evade the reporting requirements (structured transactions).
• The transaction has no apparent business or other legitimate purpose, and the broker-dealer cannot determine any reasonable explanation after examining all the available facts and circumstances surrounding the transaction.
A broker-dealer must deposit payments associated with a contingency underwriting in an escrow account. Which of the following statements is TRUE?
a. The funds may be deposited in a money-market fund.
b. The funds must be deposited in an account established with a bank.
c. The funds may only be invested in T-bills.
d. The funds must be deposited in the Special Reserve Account.
B- The purchase payments associated with a contingency offering must be transmitted promptly to a bank that has agreed in writing to hold all such funds in escrow.
Leveraged Capital LLC is a general securities broker-dealer. On March 10, its net capital was $560,000 of which $420,000 was debt capital. 50 days later, the broker-dealer has the same debt to equity ratio. A violation of the debt to equity ratio will occur in:
a. 40 days
b. 41 days
c. 90 days
d. 91 days
B- A broker-dealer's debt to equity ratio may not exceed 70% debt for a period greater than 90 days. Leveraged Capital's debt to equity ratio has been 75% debt ($420,000 / $560,000) and 25% equity for 50 days. If the debt ratio were not reduced, a violation would occur in 41 days.
Broker-dealer Z receives notification from its insurance carrier that its fidelity bond policy is being cancelled. Which of the following statements is TRUE?
a. Z has 30 days to obtain coverage from another carrier in order to continue carrying customer accounts
b. Immediately notify FINRA
c. The CFO of Z must sign a letter distributed to customers of Z informing them of this occurrence
d. Z must take a capital charge on its next FOCUS filing
B- A member firm must review its fidelity bond coverage annually based on its net capital requirement for the previous 12 months. If, after the review, the firm determines that there must be an adjustment to the amount of its fidelity bond, a change must be made. If the change is substantial, FINRA must be notified immediately.