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Flashcards in Net Capital Computation Deck (83)
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1

If there is a deficiency in the value of securities pledged on a secured demand note, the broker-dealer must begin selling the securities if the lender fails to deposit additional collateral:
a. On the day the deficiency occurs
b. Prior to noon on the business day after the deficiency occurs
c. Prior to noon on the second business day after the deficiency occurs
d. On the fifth business day after the deficiency occurs

B- If the collateral value of securities pledged on a secured demand note drops below the amount of the note, the broker-dealer must immediately notify the lender and the Examining Authority. The lender will be required to deposit additional cash or securities prior to noon on the next business day. If the lender fails to deposit additional cash or securities by noon of the next business day, the broker-dealer must liquidate sufficient shares to raise the collateral value to the required amount

2

In regard to fails to deliver on municipal securities, which TWO of the following statements are CORRECT?
I. The securities are subject to a haircut when they are 11 days old.
II. The securities are subject to a haircut when they are 21 days old.
III. The haircut on fails to deliver is the same as the amount applied to securities held in the broker-dealer's proprietary account.
IV. The haircut is 5% regardless of the maturity date.
a. I and III
b. I and IV
c. II and III
d. II and IV

C- A fail to deliver on a municipal security becomes aged when it is 21 days old. For corporate securities a fail to deliver is aged when it is five days old. In both cases, a haircut is applied in the same amount as is applied to a broker-dealer's proprietary position.

3


Receivables due from participation in municipal securities underwritings:
a. Are not allowable assets in computing net capital
b. Are allowable assets under all circumstances
c. Are allowable assets if they are less than 115 days old
d. Are allowable assets if they are 60 days old or less

D- Receivables due from municipal securities underwritings are not allowable assets if they are more than 60 days old.

4

A broker-dealer has tentative net capital of 1,500,000. In its trading account is a position of 20,000 shares of Executron Inc. at $10. The haircut on this position would be:
a. $225,000
b. $36,000
c. $30,000
d. $37,500

B- The applicable charge is based on the $200,000 value of the equity position, which is $30,000 ($200,000 x 15%). Keep in mind that the standard common stock haircut is 15%, assuming a ready market exists. Since this position exceeds 10% of the tentative net capital of the firm, an undue concentration charge is also applied. The undue concentration charge is applied to the amount that exceeds 10% of the tentative net capital. In this example, the amount subject to the undue concentration charge is $50,000. This amount is then reduced by the greater of $10,000 or the value of 500 shares. As a result, the $50,000 is reduced to $40,000, and this amount is subject to an additional15% (or $6,000) charge. This leaves a total haircut for this equity position of $36,000 ($30,000 + $6,000).

5

When a subordinated loan matures, a broker-dealer:
a. Must return the principal amount of the loan to the lender
b. May not repay the principal amount of the loan if it would cause aggregate indebtedness to exceed 1,500% of net capital, or the dollar amount of net capital to fall below 120% of the minimum dollar requirement of Rule 15c3-1
c. May not repay the principal amount of the loan if it would cause aggregate indebtedness to exceed 1,200% of net capital, or the dollar amount of net capital to fall below 120% of the minimum dollar requirement of Rule 15c3-1
d. May not repay the principal amount of the loan if it would cause aggregate indebtedness to exceed 1,000% of net capital, or the dollar amount of net capital to fall below 120% of the minimum dollar requirement of Rule 15c3-1

C- A subordinated loan may not be repaid at maturity if repayment would cause aggregate indebtedness to exceed net capital by more than 1,200% or if the dollar amount of net capital falls below 120% of the minimum requirement. A subordinated loan may not be prepaid prior to maturity if prepayment would cause aggregate indebtedness to exceed net capital by more than 1,000% or if the dollar amount of net capital falls below 120% of the minimum requirement.

6


A broker-dealer is a sole proprietorship with net capital of $400,000 and aggregate indebtedness of $1,500,000. The broker-dealer carries customer accounts but clears its trades through a bank and claims an exemption from Rule 15c3-3 under paragraph (k). The maximum amount of equity that may be withdrawn by the broker-dealer is:
a. $300,000
b. $250,000
c. $150,000
d. $100,000

B- A withdrawal of capital is not allowed if it would cause the ratio of aggregate indebtedness to net capital to exceed 10 to 1, or if it would cause net capital to decline below 120% of the minimum. A withdrawal of $250,000 would leave $150,000 of net capital. This would give the broker-dealer a ratio of 10 to 1 ($1,500,000 of aggregate indebtedness divided by $150,000 of net capital). Net capital would also exceed $120,000, which is 120% of the minimum requirement of $100,000.

7

A broker-dealer may not allow the withdrawal of equity capital if it would cause which TWO of the following situations to occur?
I. The aggregate indebtedness would exceed the net capital by 1,200%, or the net capital would fall below 120% of the minimum dollar requirement.
II. The aggregate indebtedness would exceed the net capital by 1,000%, or the net capital would fall below 120% of the minimum dollar requirement.
III. The dollar amount of subordinated agreements would exceed 70% of the total of debt and equity.
IV. The dollar amount of subordinated agreements would exceed 60% of the total of debt and equity.
a. I and III
b. I and IV
c. II and III
d. II and IV

C- A broker-dealer may not withdraw equity capital if such withdrawal would cause aggregate indebtedness to exceed net capital by more than 1,000% or if such withdrawal would cause the dollar amount of net capital to fall below 120% of the minimum dollar requirement. For example, if a broker-dealer has aggregate indebtedness of $1,000,000 and net capital of $100,000, its ratio would be 10 to 1. No withdrawal of capital would be allowed as this would cause the ratio to exceed 10 to 1.
Equity capital may not be withdrawn if such withdrawal would cause subordinated loans to exceed 70% of the debt-equity total.

8

In regard to a subordinated loan that is considered part of a broker-dealer's capital, which of the following statements are CORRECT?
I. The lender must be a stockholder or partner of the broker-dealer.
II. The lender must agree that all claims for payment are subordinated to the claims of present and future creditors.
III. The minimum amount of the loan must be $5,000.
IV. The lender must agree that the proceeds of the loan are part of the broker-dealer's capital.
a. II and IV only
b. I, II, and III only
c. II, III, and IV only
d. I, II, III, and IV

A- In order for a subordinated loan to be considered as part of a broker-dealer's capital, certain conditions must be met. Among the conditions are that the lender agrees that the proceeds of the loan are part of the broker-dealer's capital and the lender agrees that any claim for repayment is subordinated to the claims of all present and future customers. There are no minimum or maximum amounts for subordinated loans. The lender need not be a stockholder or partner of the broker-dealer unless the broker-dealer wishes to consider the loan to be part of its equity capital

9

A broker-dealer holds securities on a secured demand note with a collateral value that is less than the amount of the note. Under what circumstances may the broker-dealer reduce the amount of the note?
I. Under no circumstances
II. With the permission of the broker-dealer's Examining Authority
III. If the reduction does not cause aggregate indebtedness to exceed net capital by 1,200% or more
IV. If the reduction does not cause aggregate indebtedness to exceed net capital by 1,000% or more
a. I only
b. II only
c. II and III only
d. II and IV only

D- If a broker-dealer wishes to reduce the amount of a loan on a secured demand note, it may do so only with the permission of its Examining Authority. Such reduction will not be allowed if it will cause aggregate indebtedness to exceed net capital by 1,000% or more.

10

A broker-dealer maintains the following long and short positions in municipal bonds.
Long
$1,000,000 ABC 5% of 2025
Short
$400,000 DEF 5% of 2025
The haircut applicable to its security positions would be:
a. $92,500
b. $82,500
c. $75,000
d. $70,000

D- The haircut on municipal bonds is applied to the greater of the long or short position. For municipal bonds with maturities of 20 years or more, the haircut is 7% on the greater position. 7% of $1,000,000 equals $70,000.

11

Which of the following statements regarding temporary subordination agreements under Rule 15c3-1 is/are CORRECT?
I. The agreement must have a minimum duration of 45 days.
II. The agreement may be established for the purpose of engaging in the underwriting of securities.
III. The agreement may be established for the purpose of reducing the ratio of aggregate indebtedness to net capital below the reporting level of Rule 17a-11.
IV. The agreement may be established to increase the dollar amount of net capital to the minimum requirement of Rule 15c3-1.
a. II only
b. I and II only
c. II, III, and IV only
d. I, II, III, and IV

A- Regular subordination agreements must have a minimum duration of one year. However, temporary subordination agreements are permitted to facilitate underwritings or used for other extraordinary activities if the duration of the agreement does not exceed 45 days. Temporary subordination agreements may not be used to raise permanent capital in order to comply with the provisions of Rule 15c3-1.

12


The proceeds of a subordination agreement may be considered as part of the equity capital of a broker-dealer if which of the following criteria are met?
I. The lender is a partner or stockholder of the broker-dealer.
II. The agreement has a minimum duration of three years.
III. The agreement does not provide for repayment if it would cause aggregate indebtedness to exceed net capital by eight times.
IV. The agreement does not contain a provision for accelerated maturity.
a. I, II, and III only
b. I, II, and IV only
c. II, III, and IV only
d. I, II, III, and IV

The minimum duration of a subordinated loan is normally one year. Subordinated loans may be considered to be part of a broker-dealer's capital if they are qualified. If a broker-dealer wishes to consider the proceeds of a subordinated loan to be part of its equity as well as part of its capital, then the lender must be a partner or stockholder, the agreement may not provide for accelerated maturity, and the minimum duration must be three years.

13


Notification must be sent to the SEC for which of the following?
a. Change in a broker-dealer's fiscal year
b. Extension of time to submit the annual report
c. Change in the broker-dealer's fixed date for filing an annual report
d. All of the above

A- Choices (b) and (c) are submitted to the broker-dealer's Designated Examining Authority.

14

Review the Fail Run at Holdover Brokerage.

Fail to Deliver Past Settlement Date Market Price Contract Price
1000 sh. Blumquist 6 business days $24 $20
1000 sh. Ragamuffin 7 business days $28 $31

Fail to Receive
1500 shares Incipient 9 business days $16 $18
Which of the following statements is/are TRUE regarding the fails?
I. There is a $7,600 charge for the fail in Blumquist.
II. There is no charge for the trade in Blumquist.
III. There is $7,200 charge for the fail in Ragamuffin.
IV. There is a $4,400 charge for the trade in Incipient.
a. I only
b. I and II only
c. II and III only
d. II and IV only

C- Blumquist Calculation:
15% times $24,000 = $3,600 minus excess of market over contract = 0. A broker-dealer cannot have a negative haircut, so there is no fail to deliver charge on this position.
Ragamuffin: 15% times $28,000 = $4,200 plus $3,000 'the excess of contract price over market price) = $3,000. There is no charge for the fail to receive.

15

A customer has a margin account with a debit balance of $75,000, and the broker-dealer holds stock worth $60,000. The broker-dealer has issued a margin call for an additional $20,000. The broker-dealer must deduct from net capital:
a. $75,000
b. $60,000
c. $20,000
d. $15,000

D- A broker-dealer is required to reduce its net capital by the full amount of a customer's unsecured debit balance which is $15,000.

16


Constable Securities, a partnership, computes its net capital under the alternative method. A partner is contemplating a withdrawal of $250,000. Before the withdrawal is made the firm should verify that:
I. The withdrawal does not cause the capital to fall below 120% of the required minimum.
II. The AI/NC ratio does not exceed 8:1 after the withdrawal.
III. Net capital does not fall below the amount of subordinated loans outstanding.
IV. Net capital does not fall below 5% of aggregate debit items pursuant to SEC Rule 15c3-3.
a. I and II only
b. I and IV only
c. I and III only
d. III and IV only

B- These are some of the conditions that must be met before equity capital may be withdrawn by a stockholder or partner. If a broker-dealer is subject to the aggregate indebtedness provisions, the AI/NC ratio may not exceed 10:1, not 8:1. Constable would not be subject to the AI/NC ratio anyway, as it computes under the alternative method.

17

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.

18

On a secured demand note, the value of the note may not be more than what percentage of the market value of common stock pledged to back the note?
a. 30%
b. 50%
c. 70%
d. 85%

C- Securities that are pledged on a secured demand note are usually subject to the same haircuts that apply to securities held in a broker-dealer's proprietary accounts. However, if common stock is pledged as collateral to back a secured demand note, it is subject to a haircut of 30%, rather than 15%. Therefore, the value of the note may not exceed 70% of the value of the stock.

19

In determining whether an undue concentration charge applies in the net capital computation, the broker-dealer would NOT need to determine:
a. Capital after deductions but before the application of haircuts
b. The number of shares of a specific equity security in the trading account
c. For any equity security in the trading account, whether a limited market or a ready market exists
d. The market value of the shares of a specific equity security in the trading account

C- In determining if an undue concentration charge needs to be applied, the firm must determine its tentative net capital, which is capital after deductions but before haircuts. If any single position in the trading account exceeds 10% of the tentative net capital of the broker-dealer, the concentration charge is applied. The number of shares and the market value of the shares is necessary in making this determination.

20

Good-faith deposits arising in connection with an underwriting of stock:
a. Are not an allowable asset
b. Are an allowable asset only if the underwriting has not settled
c. Are an allowable asset if 11 days or less have elapsed from the settlement of the underwriting with the issuer
d. Are an allowable asset if less than 30 days have elapsed from the settlement of the underwriting with the issuer

C- A good faith deposit represents the cash deposit made by a broker-dealer that is bidding for an underwriting. Once the underwriting is completed, the issuer that is holding the good-faith deposit will return it to the broker-dealers. If the deposit has not been returned within 11 days of the settlement of the underwriting, the full amount of the deposit must be deducted from capital.

21

Pembridge Brokerage has a fail to deliver on its books. The fail is three days old. The contract value is $45,000, and the market value is $40,000. The security is heavily traded on the Nasdaq system. The haircut on this fail to deliver is:
a. $6,750
b. $0
c. $11,000
d. $1,000

B- Since this fail to deliver contract for a Nasdaq security is three days old, there is no haircut required. A fail to deliver for an equity security is considered to be aged when it becomes five days old. At that point the haircut is applied to the market value of the contract ($40,000) with an adjustment for any differential between market value and contract value. In this case, there is an unrealized loss of $5,000, which would be added to the initial haircut, which is $6,000, for a total haircut of $11,000.

22

A broker-dealer has the following long and short positions in municipal securities.

Long
$900 000New Jersey 7% of 2025 $600,000 Florida 6% of 2020

Short
$100,000 California 6% of 2025
$200,000 Texas 7% of 2020


The haircut that must be applied is:
a. $90,000
b. $105,000
c. $67,500
d. $60,000

B- The haircut on municipal bonds is applied to the greater of the long or short position in each maturity category. In this question, the long position of $1,500,000 is greater than the short position of $300,000, and both are in the same maturity category. Therefore, the 7% haircut would be applied to $1,500,000 and would total $105,000.

23

Pembridge Brokerage has a fail to deliver on its books. The fail is three days old. The contract value is $45,000, and the market value is $40,000. The security is heavily traded on the Nasdaq system. The haircut on this fail to deliver is:
a. $6,750
b. $0
c. $11,000
d. $1,000

B- Since this fail to deliver contract for a Nasdaq security is three days old, there is no haircut required. A fail to deliver for an equity security is considered to be aged when it becomes five days old. At that point the haircut is applied to the market value of the contract ($40,000) with an adjustment for any differential between market value and contract value. In this case, there is an unrealized loss of $5,000, which would be added to the initial haircut, which is $6,000, for a total haircut of $11,000.

24


Which of the following statements is TRUE regarding aged fail to deliver haircuts?
a. Only customer positions are considered.
b. Market values are ignored.
c. They are offset by aged fails to receive.
d. They begin on the fifth business day after settlement.

D- A fail to deliver becomes aged and is subject to a charge on the fifth business day after settlement. Both firm and customer fails are subject to the charge.

25

On Tuesday, April 9, Bridgewater Securities conducts a securities count. Bridgewater is missing 1,000 shares of Rigamarole Corp. valued at $50 per share. The impact on its financial statements at the end of April would be a:
a. $50,000 charge to capital
b. $25,000 charge to capital
c. $50,000 credit item in the reserve formula
d. $50,000 debit item in the reserve formula

B- Bridgewater must deduct $25,000 from its capital to recognize the short difference. After 14 business days from the time it occurred, the charge is 50% of the market value of the securities. April 30 is 15 business days after April 9. The short securities difference does not affect the reserve formula until more than 30 calendar days have passed.

26

A broker-dealer has a short contractual commitment for $6,000 in ABC common stock, a non-exchange-listed OTC security. The current market value is $7,000. The haircut would be:
a. $3,100
b. $2,800
c. $2,100
d. $1,800

A- The haircut is 30%, since ABC is not a Nasdaq or NYSE listed security. There is also a loss of $1,000. The broker-dealer will receive $6,000 when it delivers the stock, which currently has a market value of $7,000. Therefore, the net haircut is $3,100 (30% of $7,000, plus the $1,000 unrealized loss).

27

When the securities subject to a fail to deliver haircut are finally delivered:
a. Net capital increases
b. Cash falls
c. Inventory decreases
d. All of the above

A- Because the firm is no longer taking haircuts on the fail, net capital would increase. Cash would increase upon the delivery of securities.

28

With regard to the haircuts on U.S. government securities and municipal securities, which TWO of the following statements are TRUE?
I. The haircut on governments applies only to the net position.
II. Longer maturities will have smaller haircuts than shorter maturities.
III. Municipal securities haircuts are only on the greater of the long or short position.
IV. Governments are subject to a maximum haircut of 15%.
a. I and II
b. I and III
c. II and III
d. III and IV

B- Haircuts on government securities are applied to the net position only. The haircuts range from 0% for maturities of less than 3 months to 6.0% for maturities of more than 25 years. Municipal securities are subject to a haircut on either the long or short position, whichever is greater. There is no deduction for the other side, even if it is more than 25% of the position that is subject to the haircut.

29

Which of the following percentages is not a published haircut value for equity securities according to SEC Rule 15c3-1?
a. 15%
b. 30%
c. 40%
d. 50%

D- According to SEC Rule 15c3-1, the haircut for an equity security with a ready market is 15%. If a limited market is deemed to exist for the security, the haircut is 40%. Where there is no ready market for the security, the haircut is 100%. In the case of equity securities being pledged as collateral on a secured demand note, the applicable haircut on those securities is 30%.

30

In regard to common stock, fails to deliver are considered to be aged if they are:
a. 4 days or more old
b. 5 days or more old
c. 15 days or more old
d. 21 days or more old

B- Fails to deliver for common stock are considered to be aged, and therefore subject to a deduction in the computation of net capital, if they are 5 days or more old.