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Flashcards in FINRA Membership and Conduct Rules Deck (23)
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1

Reclamation is allowed for up to 18 months for:
I. Deliveries made to a wrong party
II. Deliveries of a wrong issue
III. Duplicate deliveries
IV. Securities delivered with a missing or mutilated coupon
a. II and III only
b. I, II, and III only
c. I, II, and IV only
d. I, II, III, and IV

B- Reclamation is allowed for up to 18 months in case of irregularities in deliveries such as delivering a wrong issue, delivering securities to a wrong party, making a duplicate delivery, or the refusal to transfer securities by the transfer agent due to lack of documentation. Choice IV is not correct because securities delivered with a missing or mutilated coupon must be reclaimed within three days.

2

According to MSRB rules, which of the following statements are TRUE concerning reporting methods for call provisions on customer confirmations?
I. If appropriate, a confirmation should contain a caveat stating that the yield realized by a customer may differ from the yield indicated on the confirmation if the securities are called.
II. If appropriate, a confirmation should state that all information about a security's call provision will be supplied by the broker-dealer upon request.
III. Any catastrophe call provisions should be indicated on a customer's confirmation.
IV. If securities are callable, the date of the call and the call price should be disclosed when it is used to calculate yield.
a. III and IV only
b. I, II, and III only
c. I, II, and IV only
d. I, II, III, and IV

C- A confirmation should contain a caveat stating that if the bond is called, the yield realized by a customer may differ from the yield indicated on the confirmation. It should also state that the broker-dealer will supply all information about a security's call provisions upon request. Finally, if securities are callable, the call date and call price should be disclosed. Choice III is wrong because catastrophe call provisions are not included on the confirmation.

3

Under the provisions of Rule 10b-10, a confirmation sent to a customer must disclose:
I. The time of the transaction, or a statement that the time of the transaction will be furnished on request
II. The capacity in which the member acted, as either a broker or a dealer
III. Whether the transaction is solicited or unsolicted
IV. The amount of commission charged on an agency transaction
a. I and II only
b. II and III only
c. II and IV only
d. I, II, and IV only

D- Broker-dealers must send confirmations to customers for each purchase and sale made for the customer. The confirmation must disclose, among other items, if the broker-dealer acted as a broker (agent) or as a dealer (principal). If the broker-dealer acted as an agent for both the customer and for a third party, it must disclose this fact.
The broker-dealer must disclose the amount of commission charged if it acted in an agency capacity. If it acted for both the buyer and the seller in a single transaction, it must disclose this fact to both the buyer and the seller. In addition, the broker-dealer must disclose, or offer to disclose, the time when the transaction occurred and the name of the other party to the transaction.
Whether a transaction is solicited or unsolicited must be indicated on the order ticket, not the confirmation.

4

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.

5

How can customer credits arise?
I. Cash dividends are received.
II. Short selling proceeds are received.
III. Customer makes a Reg T deposit.
IV. Customer grants a subordinated loan.
a. I and II only
b. I and III only
c. I and IV only
d. II, III, IV only

A- When issuers pay dividends, the dividends are allocated to customers according to their specific holdings. Selling short also generates a credit. When a customer pays for her trade, she is reducing her debit, not creating a credit. If a customer granted a subordinated loan, a liability called Subordinated Loan would be created. This is not a customer credit, it's a broker-dealer credit (liability) on its balance sheet.

6

A member firm that is required to make substantial adjustments to its fidelity bond must:
a. Immediately notify the SEC
b. Immediately notify FINRA
c. Within 24 hours notify either the SEC or FINRA
d. Within 30 days notify either the SEC or FINRA

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.

7


If the National Uniform Practice Committee has not determined a settlement date, settlement on when, as, and if issued transactions is:
a. On the day the securities are issued
b. On the business day following the day the seller gives the buyer written notice of intention to deliver the securities
c. On the third business day following the day the seller gives the buyer written notice of intention to deliver the securities
d. On the tenth business day following the day the seller gives the buyer written notice of intention to deliver the securities

B- If the National Uniform Practice Committee has not set a settlement date, the seller may deliver to the buyer on one day's written notice.

8


On Tuesday, July 14, a customer purchases the stock of a company that declared a 10% stock dividend on July 7 that is payable to holders of record on Thursday, July 16. In this case:
a. The buyer will receive a due bill
b. The seller will be required to deliver additional shares
c. The seller will receive the additional shares
d. The seller will receive a due bill

C- In order to be entitled to the dividend, the customer would have had to purchase the stock prior to the ex-dividend date. For cash dividends and for stock dividends of less than 25%, the ex-dividend date is two business days prior to the record date. If the record date is Thursday, July 16, the ex-dividend date would be July 14. A purchase on July 14 would be made on the ex-dividend date and therefore the seller, not the buyer, would be entitled to the dividend.

9

Dealer-to-dealer when-issued confirmations must be sent to a contra-party within:
a. 1 business day of the trade date
b. 2 business days of the trade date
c. 3 business days of the trade date
d. 5 business days of the trade date

A- Dealer-to-dealer confirmations for when-issued transactions must be sent to the contra-party within one business day of the trade date.

10

The following list shows the aggregate indebtedness and net capital of four broker-dealers that clear and carry customer accounts.
Net Capital Aggregate Indebtedness
Broker A $500,000 $6,500,000
Broker B $800,000 $8,300,000
Broker C $320,000 $3,100,000
Broker D $250,000 $1,500,000
Which of the broker-dealers would be allowed to withdraw equity without violating Rule 15c3-1?
I. Broker A
II. Broker B
III. Broker C
IV. Broker D
a. III only
b. IV only
c. II, III, and IV only
d. I, II, III, and IV

A- A broker-dealer may not withdraw equity if the withdrawal would cause aggregate indebtedness to exceed net capital by more than 10 times, or would cause net capital to drop below 120% of the minimum requirement.
Broker A: 1/10th of aggregate indebtedness of $6,500,000 is $650,000. Since the broker-dealer only has $500,000 of net capital, none may be withdrawn.
Broker B: 1/10th of aggregate indebtedness of $8,300,000 is $830,000. This is greater than the current net capital of $800,000. Therefore, no withdrawals may be made.
Broker C: Withdrawals may not drop net capital below 120% of the minimum requirement of $250,000, or $300,000. The withdrawal is also limited to the amount that would reduce net capital to 1/10th of $3,100,000, or $310,000. Therefore, the broker-dealer could withdraw $10,000 ($320,000 - $310,000).
Broker D: Withdrawal of equity capital may not occur if it would reduce net capital to less than 120% of the minimum requirement of $250,000. Since the net capital of the broker-dealer is already less than $300,000, no withdrawals are allowed

11

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.

12

Which of the following statements is/are TRUE about when-issued transactions?
I. Settlement date is set by mutual agreement of the parties to the trade
II. Settlement date is the 5th business day following the trade date
III. Dealer-to-dealer confirmations must be sent one business day following the trade date
IV. Confirmations need not contain a settlement date
a. I only
b. I and III only
c. I, III, and IV only
d. II, III, and IV only

C- For when-issued transactions, settlement is the date agreed upon by the parties. Confirmations must be sent one business day following the trade date but need not contain a settlement date.

13

Interest on municipal securities:
I. Is calculated on a 360-day year basis with each month containing 30 days
II. Is calculated on a calendar-year basis
III. Accrues up to and including the settlement date
IV. Accrues up to but not including the settlement date
a. I and III only
b. I and IV only
c. II and III only
d. II and IV only

B- Interest paid on municipal securities is calculated on the basis of a 360-day year with each month containing 30 days. Interest accrues up to but not including the settlement date.

14

A brokerage firm with a net capital requirement of $250,000 must maintain a fidelity bond coverage of:
a. $250,000
b. $5,000,000
c. $12,000,000
d. $600,000

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.

15

A brokerage firm with a net capital requirement of $50,000 must maintain a fidelity bond of:
a. $60,000
b. $100,000
c. $250,000
d. $600,000

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.

16

A fidelity bond does NOT cover which of the following incidents?
a. Forgery
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.

17

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.

18


Dotcom Securities has recently sent 30,000 shares of Kashmir Inc. to the Brownstein Transfer Company. It has since been notified that the shares never arrived. Which of the following statements is TRUE?
a. Brownstein should notify the authorities within two business days of Dotcom's shipment date.
b. Brownstein must notify Kashmir Inc. that it has not received the company's shares.
c. Dotcom must notify the authorities within two business days of notice of nonreceipt by Brownstein.
d. Dotcom must promptly notify Kashmir, which has two business days to send replacement shares to Brownstein.

C- Dotcom has a reporting responsibility within two business days of a notice of nonreceipt.

19

A broker-dealer may make a withdrawal that exceeds 30% of excess net capital if:
a. A Focus II or IIA is filed within 24 hours
b. Prior approval is granted by the designated examining authority
c. The broker-dealer files the statement required under 17a-5(f)2
d. All of the above

B- The broker-dealer requires approval of its designated examining authority (FINRA). The provision does not apply to withdrawals, advances, or loans of $500,000 or less. A withdrawal is not permitted if the broker-dealer's net capital would be less than 120% of the required minimum.

20

A stock power is also known as a:
a. Power of Authority
b. Power of Attorney
c. Power of Substitution
d. Power of Entitlement

C- A stock power is also known as a Power of Substitution.

21

A FINRA member firm conducting an offering of its own securities is required to return the funds raised in which TWO of the following conditions?
I. Its net capital ratio exceeds 8:1
II. Its net capital ratio exceeds 10:1
III. Its net capital fails to equal 125% of the minimum dollar amount
IV. Its net capital falls below 120% of the minimum dollar amount
a. I and III
b. I and IV
c. II and III
d. II and IV

D- If a FINRA member firm is conducting a public offering of its own securities it is required to deposit the funds in an escrow account. The funds may not be released or used by the member until the following conditions.
• The member is required to notify FINRA immediately when the public offering has been terminated and settlement effected
• The member is required to file with FINRA a net capital computation under the provisions of SEC Rule 15c3-1 as of the settlement date
o If at the time of the calculation the firms net capital ratio is more than 10:1 (AI:NC) or, net capital fails to equal 120% of the minimum dollar amount required under SEC Rule 15c3-1 or, if the firm uses the alternative method its net capital is less than 7% of aggregate debit items as computed under SEC Rule 15c3-3, all funds received from the sale of securities must be returned in full to the purchasers and the offering withdrawn. The proceeds of the sale may be used in computing the firm's net capital.
The firm is also required to disclose in the registration statement the date by which the offering is expected to be completed and the terms upon which the proceeds will be released from the escrow account.

22

Final settlement of a syndicate account must be made no later than how many days following the syndicate settlement date?
a. 30
b. 45
c. 60
d. 90

D- The syndicate settlement date occurs when the issuer delivers (new issue) securities to the account of the underwriting syndicate. According to FINRA rules, the final settlement of the syndicate accounts by the syndicate manager is required no later than 90 days following the syndicate settlement date. Any delay beyond the 90-day settlement date requires the syndicate manager to provide notification to FINRA.

23

Regarding a broker-dealer that changes its fiscal year:
a. The firm is required to notify SIPC
b. The firms DEA must approve the change
c. The SEC must approve the change
d. Notification to the SEC is sufficient

B- Under SEC Rule 17a-5, a broker-dealer that wants to change its fiscal year is required to file notice (not approval) with the SEC. The firm must also provide a detailed explanation of the reasons for the change and the firm's DEA (the designated examining authority which is usually FINRA) must approve the change in fiscal year.