Unit 1- Uniform Net Capital Rules Flashcards Preview

Series 27 Questions > Unit 1- Uniform Net Capital Rules > Flashcards

Flashcards in Unit 1- Uniform Net Capital Rules Deck (169):
1

A broker/dealer that carries customer accounts and makes a market in 8 stocks selling for less than $5 a share must maintain minimum net capital of:

A) $100,000.
B) $1 million.
C) $250,000.
D) $25,000.

The requirement for market makers is $1,000 for each stock selling for $5 or less; $2,500 for each stock selling at more than $5; a minimum requirement of $100,000; and a maximum requirement of $1 million. In this case, 8 stocks × $1,000 = $8,000, which is less than $100,000. Therefore, the minimum net capital required as a market maker is $100,000. However, because the broker/dealer is a carrying firm, its minimum net capital requirement is $250,000.

2

A broker/dealer making a market in 50 stocks selling for more than $5 a share must maintain minimum net capital of:

A) $125,000.
B) $50,000.
C) $250,000.
D) $1 million.

Click for Answer and Explanation

Answer: A

The requirement for market makers is: $1,000 for each stock selling for $5 or less; $2,500 for each stock selling at more than $5; a minimum requirement of $100,000; and a maximum requirement of $1 million. In this case, 50 stocks times $2,500 equals $125,000.

3

Under the SEC net capital rules, an introducing broker/dealer that receives customer securities may participate in underwritings provided that:

I participation is on an all-or-none or a best efforts basis.
II it maintains net capital of at least $50,000.
III all customer drafts and checks are forwarded to an escrow agent.
IV all customer drafts and checks are made payable to an escrow agent.
A) I, II, III and IV.
B) I and II.
C) I, II and III.
D) II and III.

Answer: A

A broker/dealer that does not maintain $250,000 of net capital cannot participate as a syndicate member in a firm commitment underwriting. The firm described can participate in best efforts commitments. In addition, the firm must forward all funds promptly to an escrow agent and must make all checks payable to the escrow agent.

4

A introducing member firm, acting solely as a market maker, makes a market in 20 stocks under $5 bid and 20 stocks over $5 bid. Under SEC rules, this firm has a minimum net capital requirement of:

A) $50,000.
B) $70,000.
C) $250,000.
D) $100,000.

Click for Answer and Explanation

Answer: D

The minimum net capital requirement for market makers is based on the number of markets made. For stocks that have a bid price of $5 or less, a firm needs $1,000 in capital per security. For stocks that have a bid price of more than $5, a firm needs $2,500 in capital per security. The minimum requirement is $100,000 with a maximum of $1 million. The computation is:

20 × $1,000 = $20,000
20 × $2,500 = $50,000
Total= $70,000

If the computation shows less than $100,000, the minimum is $100,000.

5

An established introducing firm that receives customer securities for prompt forwarding to its clearing agent has a minimum net capital requirement of:

A) $5,000 or 1/15 of AI, whichever is greater.
B) $50,000 or 1/15 of AI, whichever is greater.
C) $5,000 or 1/8 of AI, whichever is greater.
D) $50,000 or 1/8 of AI, whichever is greater.

Answer: B

An introducing firm that receives (but does not hold) customer securities has a minimum capital requirement of $50,000. As the firm in this question is established, it cannot let its AI-to-NC ratio exceed 15:1. Therefore, its minimum net capital requirement is $50,000 or 1/15 of AI, whichever is greater.

6

A member firm that deals exclusively in investment company securities on both a subscription and wire order basis has a minimum net capital requirement of:

A) $5,000.
B) $30,000.
C) $50,000.
D) $25,000.

Click for Answer and Explanation

Answer: D

The minimum net capital requirement for firms dealing exclusively in investment company securities is either $5,000 (subscription orders only) or $25,000 (wire orders). If a firm does both, its minimum is the higher of the two.

7

An introducing firm subject to a $50,000 minimum capital requirement is permitted to:

I participate in a firm commitment underwriting as a selling group member.
II make an occasional trade for its own account.
III participate in a firm commitment underwriting as a syndicate member.
IV manage a best efforts underwriting.
A) I and III.
B) III and IV.
C) II and IV.
D) I, II and IV.

Click for Answer and Explanation

Answer: D

Introducing firms (both $5,000 and $50,000) are permitted to make occasional trades for their own accounts and manage best efforts underwritings. Neither is permitted to participate in a firm commitment underwriting as a syndicate member. A $50,000 introducing firm — unlike its $5,000 counterpart — is permitted to participate in a firm commitment underwriting as a member of the selling group.

8

An introducing member that executes more than 10 transactions per year in its investment account has a minimum net capital requirement of:

A) $5,000
B) $50,000
C) $250,000
D) $100,000

Click for Answer and Explanation

Answer: D

If an introducing member or a firm engaged solely in the sale of investment company products executes more than 10 trades per year in its investment account, it is considered a dealer for net capital purposes. The minimum net capital requirement for a dealer is $100,000.

9

A $5,000 introducing member firm is prohibited from all of the following EXCEPT:

A) participating in a firm commitment underwriting as a selling group member.
B) purchasing as principal prior to executing the customer’s buy order the same number of shares necessary to complete the order, which is cleared through another broker/dealer.
C) holding customer securities and later forwarding them to its carrying firm.
D) receiving customer checks in the member's name for prompt forwarding to the carrying firm.

Answer: B

$5,000 introducing firms may, prior to executing a customer's buy order, purchase as principal the same number of shares or purchase shares to accumulate the number of shares necessary to complete the customer's order. The order must be cleared through another registered broker/dealer.

10

A $50,000 introducing member firm is permitted to do all of the following EXCEPT:

A) receive customer checks in the member's name for prompt forwarding to its clearing firm.
B) receive customer securities for prompt forwarding to its clearing firm.
C) receive customer checks in the clearing firm's name for prompt forwarding to the clearing firm.
D) participate in a firm commitment underwriting as a selling group member.

Answer: A

Both $5,000 and $50,000 introducing firms may accept checks made out to the clearing firm for prompt forwarding, but neither may accept checks made out in their name. Both may make occasional trades in their investment accounts and manage a best efforts offering, but neither may be in a syndicate engaged in a firm commitment underwriting. There are 2 actions that can be taken by $50,000 firms that are prohibited to $5,000 firms: $50,000 firms may accept customer securities in-house for prompt forwarding and can participate in a firm commitment underwriting as a selling group member.

11

A member firm, acting solely as a market maker, makes a market in 30 stocks under $5 bid and 30 stocks over $5 bid. Under SEC rules, the minimum net capital requirement for this firm is:

A) $150,000.
B) $250,000.
C) $105,000.
D) $100,000.

Answer: C

The minimum net capital requirement for a market maker is a function of the number of markets made. The minimum is $100,000 and the maximum is $1 million.

30 stocks under $5 bid 30 × $1,000 = $30,000
30 stocks over $5 bid 30 × $2,500 = $75,000
= $105,000

12

A fully-disclosed broker/dealer receiving customer securities for prompt forwarding to its clearing firm must maintain minimum net capital of:

A) $75,000.
B) $100,000.
C) $50,000.
D) $5,000.

Answer: C

An introducing broker/dealer receiving customer securities, even if promptly forwarded to the clearing firm, must maintain minimum net capital of $50,000.

13

Net Capital
Question ID: 48691
A first-year clearing firm makes a market in 80 stocks above $5 bid and has AI of $2,800,000. Its minimum net capital requirement is:

A) $350,000.
B) $175,000.
C) $200,000.
D) $250,000.

Answer: A

This clearing firm has a minimum net capital requirement of at least $250,000. As a market maker, the firm must maintain $2,500 of net capital for each security of more than $5 bid; this amounts to $200,000, which is superseded by the $250,000. The other test that must be performed is the AI-to-NC ratio. Since this firm is less than 12 months old, the ratio cannot exceed 8:1. $2,800,000/8 is $350,000, which is the minimum net capital requirement.

Reference: 1.1.2.6 in the License Exam Manual.

14

A broker/dealer using the alternative method must maintain minimum net capital of at least:

A) $100,000.
B) $175,000.
C) $200,000.
D) $250,000.

Answer: D

Broker/dealers that use the alternative net capital calculation method must maintain a minimum of $250,000 or 2% of aggregate debit balances (as shown in the reserve computation), whichever is greater.

15

A broker/dealer endorsing unlisted options or effecting more than 10 transactions per year in its investment account must maintain minimum net capital of at least:

A) $150,000.
B) $250,000.
C) $100,000.
D) $75,000.

Answer: C

By effecting more than 10 transactions per year in its investment account or by endorsing unlisted options, a broker/dealer is classified as a "dealer" required to have minimum net capital of at least $100,000.

16

Net Capital
Question ID: 48751
A broker/dealer engaged exclusively in the sale of mutual funds on a wire order basis must maintain minimum net capital of at least:

A) $100,000.
B) $25,000.
C) $5,000.
D) $50,000.

Answer: B

Mutual fund broker/dealers require net capital of $25,000 if wire order sales are made. If business is done by formal application only, the minimum net capital requirement is $5,000.

Reference: 1.1.2.4 in the License Exam Manual.

17

A fully-disclosed broker/dealer that does not receive or hold customer funds or securities makes a market in three stocks over $5 bid. Its minimum net capital requirement is:

A) $75,000.
B) $100,000.
C) $5,000.
D) $50,000.

Answer: B

Market making firms that are not carrying firms are subject to a net capital minimum of $100,000 unless the calculation of net capital per stock is greater. In this situation, the three issues of over $5 bid each would require total net capital of $7,500 ($2,500 each), which is less than the $100,000 market maker minimum.

18

Question ID: 48791
Under net capital rules, a municipal broker's broker must maintain minimum net capital of:

A) $150,000.
B) $50,000.
C) $100,000.
D) $250,000.

Answer: A

All broker's brokers must have net capital of no less than $150,000.

Reference: 1.1.2 in the License Exam Manual.

19

An established general securities broker/dealer makes a market in 400 stocks over $5 bid and 300 stocks under $5 bid. Its minimum net capital requirement is:

A) $50,000.
B) $100,000.
C) $1,300,000.
D) $1,000,000.

Answer: D

The ceiling on capital requirements for market makers is $1 million.

Reference: 1.1.2.6 in the License Exam Manual.

20

To participate in firm commitment underwritings as a selling group member, a fully-disclosed broker/dealer would be subject to a minimum net capital requirement of:

A) $25,000.
B) $100,000.
C) $50,000.
D) $5,000.

Answer: C

Fully-disclosed broker/dealers may not participate as syndicate members in firm commitment underwritings, but may participate as selling group members-provided they are subject to a $50,000 minimum requirement.

Reference: 1.1.2.2 in the License Exam Manual.

21

A brokerage firm's net capital may not be less than what percentage of aggregate debits?

A) 10%.
B) 2%.
C) 5%.
D) 17%.

Answer: B

Under the alternative method, the firm must maintain at least 2% of aggregate debits or $250,000, whichever is greater.

Reference: 1.1.2.7 in the License Exam Manual.

22

Question ID: 48903
Broker/dealers computing net capital under the alternative method are required to maintain the greater of:

A) $25,000 or 2% of aggregate debits computed under the reserve requirement of SEC Rule 15c3-3.
B) $25,000 or 1,500% of their aggregate indebtedness.
C) $250,000 or 1,500% of their aggregate indebtedness.
D) $250,000 or 2% of aggregate debits computed under the reserve requirement of SEC Rule 15c3-3.

Answer: D

The alternative minimum capital requirement is 2% of aggregate debits in the reserve formula or $250,000, whichever is greater.

Reference: 1.1.2.7 in the License Exam Manual.

23

Question ID: 48933
A market maker that carries customer accounts and makes markets in 8 stocks selling under $4 a share has a minimum net capital requirement of:

A) $250,000.
B) $8,000.
C) $20,000.
D) $100,000.

Answer: A

The net capital requirement is $1,000 for each stock selling at or under $5 so the total for eight such stocks would be $8,000. However, the minimum net capital requirement for carrying firms is $250,000.

Reference: 1.1.2.1 in the License Exam Manual.

24

Question ID: 48938
A broker/dealer that sells stocks and bonds, underwrites offerings, sells mutual funds by wire order, and carries customer accounts must maintain a minimum net capital of:

A) $50,000.
B) $100,000.
C) $125,000.
D) $250,000.

Answer: D

A broker/dealer that carries customer accounts must maintain a minimum net capital of $250,000.

Reference: 1.1.2 in the License Exam Manual.

25

Question ID: 48939
A newly-organized carrying broker/dealer makes a market in 50 stocks selling for more than $5 and has aggregate indebtedness of $1 million. According to SEC Rule 15c3-1, what is the minimum net capital requirement?

A) $250,000.
B) $50,000.
C) $100,000.
D) $125,000.

Answer: A

Based on the number of markets made in securities valued at more than $5, the required net capital is 50 stocks times $2,500, which equals $125,000. The minimum net capital required (based on the number of markets made) is $100,000, so the requirement is $125,000. The broker/dealer is newly formed, so AI cannot exceed eight times net capital. AI equals $1 million; $1 million divided by 8 equals $125,000. The minimum requirement for carrying broker/dealers is $250,000, so this is the minimum net capital requirement.

Reference: 1.1.2.1 in the License Exam Manual.

26

Question ID: 48941
A fully-disclosed broker/dealer that makes a market in four stocks selling at less than $5 a share and receives and promptly transmits customer funds and securities must maintain minimum net capital of:

A) $5,000.
B) $10,000.
C) $50,000.
D) $100,000.

Answer: D

A fully-disclosed broker/dealer that receives but promptly transmits customer funds and securities must maintain minimum net capital of $50,000. A broker/dealer that is a market maker must maintain minimum net capital of $100,000. The firm must maintain the greater of these two minimums.

Reference: 1.1.2.6 in the License Exam Manual.

27

Question ID: 48942
A broker/dealer making a market in 50 stocks selling for more than $5 a share must maintain minimum net capital of:

A) $50,000.
B) $250,000.
C) $1 million.
D) $125,000.

Answer: D

$2,500 is required for each of the 50 stocks priced over $5 bid.

Reference: 1.1.2.6 in the License Exam Manual.

28

Question ID: 49064
A fully disclosed securities firm that writes and endorses nonstandardized OTC put and call options must maintain a minimum net capital of:

A) $25,000.
B) $50,000.
C) $125,000.
D) $100,000.

Answer: D

A broker/dealer writing nonstandardized option contracts must maintain a minimum net capital of $100,000.

Reference: 1.1.2.5 in the License Exam Manual.

29

Question ID: 49116
A broker/dealer, subject to a $25,000 minimum net capital requirement, is engaged solely in the sale of investment company securities. Under which of the following circumstances could this firm accept and execute a customer order to sell shares of ABC, an NYSE-listed company?

A) Without restriction.
B) As long as the proceeds are immediately invested in CDs insured by the FDIC.
C) Under no circumstances.
D) As long as the proceeds are immediately invested in redeemable investment company securities.

Answer: D

A $25,000 investment company broker/dealer is permitted to handle the sale of securities for the account of a customer to obtain funds for the immediate reinvestment in redeemable investment company securities. This rule presumes the firm has the capability to clear such a transaction.

Reference: 1.1.2.4 in the License Exam Manual.

30

Question ID: 49117
A broker/dealer, engaged solely in the sale of direct participation programs, does not receive or hold funds or securities nor does it owe funds or securities to customers. Under 15c3-1, this firm has a minimum net capital requirement of:

A) $25,000.
B) $50,000.
C) $100,000.
D) $5,000.

Answer: D

Firms engaged solely in merger and acquisition work or in the sale of direct participation programs have a minimum net capital requirement of $5,000. Those selling DPPs are acting as agents for program sponsors. Customer payments for interests in DPPs are made directly to the program sponsors.

Reference: 1.1.2.8 in the License Exam Manual.

31

Question ID: 49126
Which of the following broker/dealers are subject to a minimum net capital requirement of $5,000?

A firm engaged solely in merger and acquisition work.
A firm engaged solely in the sale of investment company securities on a subscription basis only.
A fully disclosed firm which does not receive customer funds or securities.
A firm acting as a prime broker.
A) II and IV.
B) III and IV.
C) I, II and III.
D) I and III.

Answer: C

Selling investment company securities on a subscription basis only requires capital of $5,000. This is also true for an introducing firm which does not receive customer funds or securities. Firms engaged solely in M&A work fall into the category of other brokers or dealers under the net capital rule. The requirement for these firms is $5,000. A prime broker carries customer accounts and is therefore subject to a capital requirement of at least $250,000.

Reference: 1.1.2.8 in the License Exam Manual.

32

Question ID: 49148
A $25,000 broker/dealer subject to a K(1) exemption under SEC Rule 15c3-3 is permitted to:

A) sell stock for a customer as long as the proceeds are immediately reinvested in CDs insured by the FDIC.
B) sell stock for a customer as long as the proceeds are immediately reinvested in redeemable investment company securities.
C) hold customer funds and securities.
D) act as syndicate manager in a firm commitment underwriting.

Answer: B

The K(1) exemption applies to firms doing business in investment company securities, variable annuities, etc. If subject to a $25,000 minimum net capital requirement, the firm could handle the sale of stock for a customer - as long as the proceeds are immediately reinvested in redeemable investment company securities.

Reference: 1.1.2.4 in the License Exam Manual.

33

Net Capital
Question ID: 49165
Which statement is TRUE regarding the net capital treatment of sole proprietorships?

A) The excess of nonbusiness liabilities over nonbusiness assets must be deducted from net worth in computing net capital.
B) The excess of nonbusiness liabilities over nonbusiness assets must be added to net worth in computing net capital.
C) The excess of nonbusiness assets over nonbusiness liabilities must be deducted from net worth in computing net capital.
D) The excess of nonbusiness assets over nonbusiness liabilities must be added to net worth in computing net capital.

Answer: A

In doing a net capital computation, a sole proprietor excludes any nonbusiness assets and liabilities. However, if those nonbusiness assets and liabilities, when combined, show a negative net worth, this amount (the excess of liabilities over assets) must be deducted from net worth.

Reference: 1.1.2.8 in the License Exam Manual.

34

Net Capital Computations
Question ID: 48647
For net capital purposes, all of the following are nonallowable assets EXCEPT:

A) goodwill.
B) aged fails-to-deliver.
C) exchange memberships.
D) equity in real estate.

Answer: B

Exchange memberships, equity in real estate, and goodwill are all examples of nonallowable (illiquid) assets. A fail-to-deliver occurs when a customer sells and fails to deliver the securities by settlement date. This is like a receivable, and it is an allowable asset. However, if it is still outstanding on the 5th business day past settlement date, it must be aged (a value reduction for net capital purposes). Though reduced in value, it is still an allowable asset. After 10 business days from settlement, it must be bought in.

Reference: 1.2.3 in the License Exam Manual.

35

Net Capital Computations
Question ID: 48665
Under the net capital rule, which of the following are considered allowable capital?

I. Common stock.
II. Accounts payable.
III. Subordinated loans.
IV. Long-term debt.

A) II and III.
B) II and IV.
C) I and III.
D) I and IV.

Answer: C

Allowable capital includes net worth (common stock plus retained earnings) and subordinated loans (including secured demand notes).

Reference: 1.2.3 in the License Exam Manual.

36

Net Capital Computations
Question ID: 48776
A fail to deliver that is aged will:

A) decrease AI.
B) decrease the reserve requirement.
C) decrease net capital.
D) increase AI.

Answer: C

Fails are aged on the fifth business day after settlement date which means the positions are marked to the market and a haircut is taken on the market value of the securities not yet delivered. This will result in a charge to net capital unless the mark to the market is positive and exceeds the haircut amount. In this case there is no charge to net-capital.

Reference: 1.2.3.1 in the License Exam Manual.

37

Net Capital Computations
Question ID: 48777
A customer has a margin account with a debit balance of $100,000 and common stock with a market value of $80,000. A maintenance margin call for $40,000 has been outstanding for three business days. The charge to the broker/dealer's capital is:

A) $32,000.
B) $0.
C) $12,000.
D) $20,000.

Answer: B

There is no charge to the broker/dealer's net capital until the position is on its second maintenance call. When on the second maintenance call, the position is marked to the market and a haircut is taken on the market value.

38

Net Capital Computations
Question ID: 48907
A customer has a debit balance of $50,000 and securities with a market value of $40,000. A margin call for $20,000 was sent 6 business days ago. The second call was sent 1 business day ago. What is the charge to net capital?

A) $16,000.
B) $0.
C) $12,000.
D) $50,000.

Answer: A

Because the customer account has been issued a second margin call, the unsecured portion of the debit balance is nonallowable and the underlying security position must be haircut.

Reference: 1.2.3.1 in the License Exam Manual.

39

Net Capital Computations
Question ID: 48908
A customer has a debit balance of $75,000 and securities with a market value of $60,000. A margin call for $30,000 is outstanding for three days. How much is the charge to the broker's net capital?

A) $33,000.
B) $0.
C) $15,000.
D) $24,000.

Answer: B

No charge is applied to net capital until the second Regulation T extension. Each extension is given a maximum 5-business-day period. Thus, a charge will be taken on the sixth business day. On the sixth day, if the margin call is not met, the charge would be:
$75,000 Debit
− 60,000 Securities
15,000 Unsecured
9,000 15% Haircut on 60,000
$24,000 Total Deduction

Reference: 1.2.3.1 in the License Exam Manual.

40

Net Capital Computations
Question ID: 48909
A firm has a fail to deliver that is 17 days old. The contract value is $12,000 and the market value is $10,000. The firm must take a deduction to net capital of:

A) $3,500.
B) $1,000.
C) $3,000.
D) $5,000.

Answer: A

The position must be marked to the market and given a 15% haircut because the fail to deliver is older than four business days.

Reference: 1.2.3.1 in the License Exam Manual.

41

Net Capital Computations
Question ID: 48912
For net capital purposes, fails to deliver must be:

A) added to aggregate indebtedness after the fourth day.
B) marked to the market and haircut after the fourth day.
C) marked to the market after the fourth day.
D) marked to the market after the seventh day.

Answer: B

Fails to deliver must be marked to the market and appropriately haircut after the fourth business day, meaning the fifth business day after settlement.

Reference: 1.2.3.1 in the License Exam Manual.

42


Net Capital Computations
Question ID: 48914
Aged fails to deliver result in a(n):

A) reduction in aggregate indebtedness by the appropriate amount.
B) increase in net capital by the appropriate amount.
C) increase in aggregate indebtedness by the appropriate amount.
D) reduction in net capital by the appropriate amount.

Answer: D

Aged fails to deliver must be marked to the market and receive a 15% haircut, resulting in a reduction of net capital.

Reference: 1.2.3.1 in the License Exam Manual.

43

Net Capital Computations
Question ID: 48920
If a broker/dealer has an aged fail to deliver for common stock at a contract value of $20,000, how must this item be treated for net capital computation purposes?

A) 100% nonallowable asset.
B) Marked to the market plus 15% haircut.
C) Marked to the market.
D) 15% haircut.

Answer: B

Aged fail to deliver contracts are given normal haircuts. Aged fail to deliver items must also be marked to the market.

Reference: 1.2.3.1 in the License Exam Manual.

44

Net Capital Computations
Question ID: 48925
An undue concentration haircut in a security underwritten by the firm applies when the position has been open:

A) more than 11 business days.
B) less than 7 business days.
C) more than 7 business days.
D) more than 14 business days.

Answer: A

Undue concentration (and concentration haircuts) apply to positions in securities underwritten by the firm when the positions are open for more than 11 business days.

Reference: 1.2.3.1 in the License Exam Manual.

45

Net Capital Computations
Question ID: 48931
Fails to deliver for common stock are subject to a haircut if they are at least how many days old?

A) 15 days.
B) 30 days.
C) 5 days.
D) 10 days.

Answer: C

A fail to deliver contract that is five business days old (or older) is subject to a haircut in addition to being marked to the market.

Reference: 1.2.3.1 in the License Exam Manual.

46


Net Capital Computations
Question ID: 48934
For net capital computation purposes, which of the following statements regarding customer debit balances is TRUE?

A) Debit balances in cash accounts are 100% nonallowable.
B) Provided they are fully secured, they are 100% allowable assets.
C) Debit balances are liabilities and are added to aggregate indebtedness.
D) Only customer debit balances in margin accounts are allowable assets.

Answer: B

Customer debit balances in both cash and margin accounts represent money due a broker/dealer. As such, they are receivables in accounting terms (assets). Provided these assets are fully secured (by securities with ample market value to cover the debit), they are 100% allowable for net capital computation purposes.

Reference: 1.2.3.1 in the License Exam Manual.

47

Net Capital Computations
Question ID: 48936
Which of the following may NOT be considered part of a firm's net capital?

Equity in real estate.
Office furniture.
Rent paid in advance.
A) I and II.
B) II and III.
C) I, II and III.
D) I only.

Answer: C

Fixed assets and prepaid items may not be counted as part of a firm's net capital because they are not liquid. Real estate and office furniture are considered fixed assets. Rent paid in advance is a prepaid item.

Reference: 1.2.3 in the License Exam Manual.

48


Net Capital Computations
Question ID: 48937
All of the following are counted as part of the equity of a broker/dealer EXCEPT:

A) common stock, par account.
B) paid-in surplus.
C) commissions payable.
D) retained earnings.

Answer: C

Commissions payable are a liability of the firm.

Reference: 1.2.1 in the License Exam Manual.

49

Net Capital Computations
Question ID: 49065
An aged fail to deliver results in:

A) reduced net capital and increased aggregate indebtedness.
B) reduced net capital.
C) increased aggregate indebtedness.
D) reduced net capital and like reduction in aggregate indebtedness

Answer: B

Aged fails to deliver must be marked to the market and given a 15% haircut (assuming common stock). This results in a charge against net capital.

Reference: 1.2.3.1 in the License Exam Manual.

50

Net Capital Computations
Question ID: 49129
Which of the following balance sheet entries are NOT allowable for net capital purposes?

Pre-paid insurance.
Rent deposit.
Automobile.
Exchange memberships.
A) I and IV.
B) II and III.
C) II and IV.
D) I, II, III and IV.

Answer: D

Pre-paid expenses are never allowable assets for net capital purposes, nor are automobiles or aircraft. Similarly, exchange memberships, while a valuable asset, are nonallowable.

Reference: 1.2.3.1.1 in the License Exam Manual.

51

Net Capital Computations
Question ID: 49166
Which of the following receivables, all less than 30 days old, is nonallowable for capital computation purposes?

A) Floor brokerage earned but not collected.
B) Dividends earned but not collected.
C) Interest earned but not collected.
D) Commissions receivable from a thrift institution.

Answer: D

Under an SEC interpretation, commissions receivable from an S&L or other thrift institutions must be treated as nonallowable assets. Generally, receivables are allowable if 30 calendar days old or less.

Reference: 1.2.3.1.1 in the License Exam Manual.

52

Net Capital Computations
Question ID: 49168
The following selected entries are taken from the trial balance of a carrying firm:
DR CR
Cash—bank $200,000
Reserve account$180,000
Cust. control $450,000 $190,000
Rent deposit $100,000
F-D—cust. $120,000
S-B—cust. $150,000
Trading inventory$700,000 $175,000
Exchange
membership$375,000
Revenue $85,000
Telecom equip. $285,000
Sub loan $350,000
Expenses $60,000 Net worth $900,000

What is this firm's tentative net capital?

A) $490,000.
B) $615,000.
C) $515,000.
D) $410,000.

Answer: C

Start with net worth, add profit or loss to date (a profit of $25,000) and add subordinated debt to arrive at total available capital which is $1,275,000. Next, back out all nonallowable assets which total $760,000. These items are prepaid rent, exchange membership, and equipment. The result is tentative net capital (TNC) of $515,000. TNC is capital before the application of haircuts.

Reference: 1.2.1 in the License Exam Manual.

53


Net Capital Computations
Question ID: 49171
On its May 31, 2006, trial balance, a firm has a customer fail to deliver with a contract value of $20,000 and a current market value of $18,000. The trade settled on May 28. Under SEC rules, the charge to net capital is:

A) $0.
B) $2,000.
C) $2,700.
D) $4,700.

Answer: A

Customer fails in common stock are not aged until the 5th business day after the settlement date.

Reference: 1.2.3.1 in the License Exam Manual.

54

Net Capital Computations
Question ID: 49185
Your firm owns its office building. The original cost was $500,000, and so far, $100,000 has been taken in depreciation. The current mortgage on the property is $325,000. Which of the following best describes the treatment of these items when computing net capital?

A) $75,000 is allowable.
B) $175,000 is allowable.
C) $225,000 is allowable.
D) $325,000 is allowable.

Answer: D

The real estate is being carried at $400,000, which is the original cost less depreciation. It is the equity in real estate that is nonallowable. The equity is $75,000, which is depreciated cost less the current mortgage. Put another way, the amount represented by the mortgage is allowable. Also note that the mortgage, which is a secured liability, is not AI.

Reference: 1.2.3.1 in the License Exam Manual.

55

Net Capital Computations
Question ID: 49187
An introducing firm is advised by its clearing firm that there are unsecured debits in several introduced accounts. Under SEC rules, the introducing firm must charge its capital:

A) on the day after it becomes a charge to the carrying firm.
B) on the day it becomes a charge to the carrying firm.
C) as of month's end.
D) as of its next Focus IIA report.

Answer: A

If there are unsecured debits in introduced accounts, both the carrying firm and the introducing firm must charge capital. The introducing firm must deduct the charge on the day after it becomes a charge to the carrying firm. Furthermore, the carrying firm must advise the introducing firm, in writing, on a daily basis of all such deficits to be charged.

Reference: 1.2.3.1 in the License Exam Manual.

56

Net Capital Computations
Question ID: 49189
On its year-end trial balance, a broker/dealer has a company automobile with a carrying value of $18,000 and a loan balance against it of $6,000.Under SEC rules, which of the following statements are TRUE?

The automobile is an allowable asset.
The automobile is a nonallowable asset.
The loan balance is AI.
The loan balance is not AI.
A) I and III.
B) I and IV.
C) II and IV.
D) II and III.

Answer: D

Automobiles are never allowable for capital purposes, and any loans against them are always AI.

Reference: 1.2.3.1.1 in the License Exam Manual.

57

Haircuts
Question ID: 48533
If a broker/dealer has tentative net capital of $1 million and a stock position of $100,000, the haircut on the stock will be:

A) $15,000.
B) $10,000.
C) $30,000.
D) $36,000.

Answer: A

A haircut of 15% is applied to the $100,000 position, equaling $15,000. There is no undue concentration. Therefore, no additional haircut need be taken.

Reference: 1.3.1 in the License Exam Manual

58

Haircuts
Question ID: 48634
Under net capital rules, the sale of a long securities difference:

A) increases net capital.
B) increases AI.
C) decreases AI.
D) decreases net capital.

Answer: D

The sale of a long securities difference (which is permitted) will result in a decrease in net worth and net capital. SEC rules require members to charge net worth by the amount of the proceeds of the sale. According to the SEC, the member will sooner or later find out who the owner is and have to buy them back. The prudent move would be to promptly resolve the long securities difference.

Reference: 1.3.1.1 in the License Exam Manual.

59

Haircuts
Question ID: 48663
A member firm has computed a tentative net capital of $850,000. Which of the following inventory positions would be subject to an undue concentration haircut?

A) $100,000 of U.S. T-bills.
B) $95,000 of ABC common stock.
C) $50,000 of ARTXX, a bulletin board stock.
D) $80,000 of LRKK common stock.

Answer: B

Excluding an ETF, if any single nonexempt security in inventory (long or short) exceeds 10% of tentative net capital, an additional haircut at the same rate (15%) must be taken on the amount the position exceeds the 10% threshold. This rule does not apply to exempt securities.

Reference: 1.3.1.1 in the License Exam Manual.

60

Haircuts
Question ID: 48688
All of the following securities could be subject to an undue concentration haircut EXCEPT:

A) insured municipal bonds.
B) common stock underlying a secured demand note.
C) U.S. Treasury bonds.
D) AAA-rated preferred bonds.

Answer: C

U.S. government securities are never subject to an undue concentration haircut.

61

Haircuts
Question ID: 48692
A broker/dealer is short 100 shares of ABC common stock at $50 per share and is long 1 ABC Apr 45 call. The haircut on these positions is:

A) $2,500.
B) $0.
C) $1,500.
D) $2,000.

Answer: B

The firm is fully protected because it has the right to buy back its short position at a $5 per share profit.

Reference: 1.3.2 in the License Exam Manual.

62

Haircuts
Question ID: 48701
The sale of a long securities difference is:

A) added to AI.
B) deducted from net capital.
C) added to net capital.
D) deducted from AI.

Answer: B

A long securities difference occurs when a broker/dealer's count of securities exceeds the total shown on the stock record. If the difference is not sold, there is no effect on the firm's financial statement (the difference is not on the firm's books). If the difference is sold (not a good choice but permissible), the proceeds of the sale must be charged to net worth and, thus, to net capital.

Reference: 1.3.1.1 in the License Exam Manual.

63

Haircuts
Question ID: 48722
The basic haircut on a money market fund is:

A) two percent.
B) one percent.
C) three percent.
D) four percent.

Answer: A

Money market funds are subject to a haircut of two percent.

Reference: 1.3.1 in the License Exam Manual.

64

Haircuts
Question ID: 48741
Acme Broker/Dealer has a net short open contractual commitment on its books for $55,000 worth of ABC stock (NYSE-listed) on a when-issued basis. The market value of the position is $50,000. What is the effect on the broker/dealer's net capital?

A) $2,500 increase.
B) $5,000 increase.
C) $5,000 decrease.
D) $2,500 decrease.

Answer: D

This open contractual commitment is subject to a mark-to-the-market and a haircut. The mark-to-the-market is a positive $5,000 because this is a short position. The haircut on the market value of $50,000 is $7,500 (15% of $50,000). The total adjustment is a $2,500 decrease to net capital.

Reference: 1.3.1.1 in the License Exam Manual.

65

Haircuts
Question ID: 48770
A broker/dealer has proprietary positions in various common stocks with an aggregate long market value of $50,000 and an aggregate short market value of $200,000. The haircut on these positions is:

A) $15,000.
B) $22,500.
C) $30,000.
D) $7,500.

Answer: C

The haircut on the proprietary securities of the broker/dealer is based on the greater of the long and short positions. In this case, the short position of $200,000 is subject to a 15% haircut ($30,000). An additional haircut of 15% would apply to any excess of the smaller position over the threshold, which is 25% of the larger position (25% × $200,000 = $50,000). No additional haircut is required since there is no excess over the threshold.

Reference: 1.3.1 in the License Exam Manual.

66

Haircuts
Question ID: 48775
A broker/dealer has computed tentative net capital of $1,750,000. Which of the positions listed are subject to an undue concentration haircut?

I $200,000 ABC common stock held in syndicate accounts for eight business days.
II $250,000 XYZ common stock held for eight business days.
III $300,000 U.S. Treasury bonds held for 21 business days.

A) I, II and III.
B) II only.
C) I and II.
D) III only.

Answer: B

An undue concentration haircut is necessary if the equity position exceeds 10% of the tentative net capital of the broker/dealer, regardless of how long the stock has been held. The exception to this rule is common stock in a syndicate account, which is subject to undue concentration only after 11 business days. Government securities are not subject to undue concentration haircuts.

Reference: 1.3.1.1 in the License Exam Manual.

67

Haircuts
Question ID: 48780
Which of the following statements regarding short securities differences are TRUE?

I. Any unresolved difference must be recorded no later than 7 business days after discovery.
II. Any unresolved difference must be set up as a liability on the broker/dealer's books after 30 days from discovery.
III. Any unresolved difference over 30 days old is an AI item.
IV. Any unresolved difference over 45 days old must be bought in.
A) II, III and IV.
B) I, II, III and IV.
C) I, III and IV.
D) II and III.

Answer: B

All of the statements correctly describe requirements regarding short securities differences.

Reference: 1.3.1.1 in the License Exam Manual.

68

Haircuts
Question ID: 48792
A broker/dealer with a short securities difference must begin to charge net capital if the difference is not resolved within:

A) 7 business days.
B) 3 business days.
C) 10 business days.
D) 11 business days.

Answer: A

The first charge against net capital for an unresolved short securities difference must be made after seven business days. The required charge is 25%.
First 7 business days - 0%.
After 7 business days - 25%.
After 14 business days - 50%.
After 21 business days - 75%
After 28 business days - 100%

Reference: 1.3.1.1 in the License Exam Manual.

69

Haircuts
Question ID: 48812
Which of the following statements regarding haircuts on open contractual commitments are TRUE?

If the security is listed or designated Nasdaq Global or Global Select, the haircut is 15%.
If the security is not listed or designated Nasdaq Global or Global Select, the haircut is 30%.
The haircut on initial public offerings of common stock is 30%.
If a broker/dealer maintains more than $250,000 in net capital, the first $150,000 of the haircut need not be deducted.
A) II and III.
B) I, II, III and IV.
C) I, III and IV.
D) I and IV.

Answer: B

If broker/dealers maintain net capital of $250,000, the first $150,000 of an open contractual commitment haircut need not be deducted. IPOs are subject to 30% haircuts; listed and Global securities are subject to 15% haircuts; and Nasdaq small cap and non-Nasdaq securities are subject to 30% haircuts.

Reference: 1.3.1.1 in the License Exam Manual.

70

Haircuts
Question ID: 48905
A broker/dealer with an unresolved short securities difference of 500 shares that have a market value of $100 per share which is open 5 days must charge its net capital:

A) $50,000.
B) $0.
C) $15,000.
D) $35,000.

Answer: B

No charge is taken on a short securities difference until the difference is unresolved for seven business days after discovery.

Reference: 1.3.1.1 in the License Exam Manual.

71

Haircuts
Question ID: 48906
A broker/dealer that has a short securities difference open 24 business days must charge its net capital by:

A) 75% of the difference.
B) 15% of the difference.
C) 50% of the difference.
D) immediately in full.

Answer: A

21 business days after discovery, the firm must have charged its capital by 75% of the market value of the difference.

Reference: 1.3.1.1 in the License Exam Manual.

72

Haircuts
Question ID: 48910
A broker/dealer with a short securities difference must begin to charge its net capital if the difference is not resolved:

A) within ten business days.
B) within seven business days.
C) immediately.
D) within five business days.

Answer: B

Unresolved short securities differences must be taken as a reduction to net capital beginning seven business days after discovery.

Reference: 1.3.1.1 in the License Exam Manual.

73

Haircuts
Question ID: 48918
A broker/dealer's inventory of common stock consists of a long position of 10,000 ACM shares and a short position of 7,500 ACM shares. ACM is currently trading at $80 per share. The haircut for the proprietary account is:

A) $120,000.
B) $180,000.
C) $30,000.
D) $10,000.

Answer: C

The basic haircut on common stock is 15% of the market value of the greater of the long or short position. When the firm has long and short positions in the same stock, the haircut is based on the net position. The net position is 2,500 long shares (10,000 long shares minus 7,500 short shares); 2,500 times $80 per share equals $200,000 net market value. The 15% haircut applies to the net market value; $200,000 times 15% equals $30,000.

Reference: 1.3.1 in the License Exam Manual.

74

Haircuts
Question ID: 48919
A broker/dealer registers proprietary securities in the name of one of its partners as nominee. If the partner dies, the securities are subject to a haircut of:

A) 30%.
B) 40%.
C) 100%.
D) 15%.

Answer: C

Securities registered in the name of a deceased person are not negotiable (they are illiquid). Until they are transferred into the name of the partnership or one of the surviving partners, the securities are nonallowable for purposes of computing the firm's net capital.

Reference: 1.3.1 in the License Exam Manual.

75

Haircuts
Question ID: 48922
A broker/dealer's inventory includes a position in a convertible bond that is trading at 120. This position receives a haircut based on:

A) 15% of par value.
B) 30% of market value.
C) 15% of market value.
D) 10% of par value.

Answer: C

Convertible bonds that are trading at or above par are subject to an equity haircut.

Reference: 1.3.1 in the License Exam Manual.

76


Haircuts
Question ID: 48924
If no last sale information is available, which of the following is the correct valuation for a long position of 200 shares with a Nasdaq bid 10-ask 10.50?

A) $2,000.
B) $1,400.
C) $2,050.
D) $2,100.

Answer: A

This is its liquidation value because the stock can be sold to another market maker at the bid. The ask price is the price at which another market maker is willing to sell and is the price at which the stock can be purchased; 10 bid times 200 shares equals a $2,000 value.

Reference: 1.3.1 in the License Exam Manual.

77

Haircuts
Question ID: 48926
A broker/dealer's net capital must be reduced by a percentage of the short securities difference if the difference is not resolved:

A) immediately.
B) within three business days.
C) within five business days.
D) within seven business days.

Answer: D

A broker/dealer that finds a short securities difference has seven business days to resolve the difference before a reduction of net capital is required.

Reference: 1.3.1.1 in the License Exam Manual.

78

Haircuts
Question ID: 48927
A broker/dealer has a short contractual commitment for a small cap stock in the amount of $6,000. The market value is now $5,000. According to SEC Rule 15c3-1, what is the deduction from net capital?

A) $3,000.
B) $5,000.
C) $500.
D) $1,000.

Answer: C

The contractual commitment must be marked to the market for a profit of $1,000. This increases net worth by $1,000. This stock is not listed or quoted on the Nasdaq Global or Global Select, so the haircut is 30% of $5,000, which equals $1,500, making a net deduction from net capital of $500.

Reference: 1.3.1.1 in the License Exam Manual.

79

Haircuts
Question ID: 48928
A broker/dealer is short 100 shares of IBM which is listed on the NYSE. What is the required haircut?

A) 15% of the market value.
B) 0%.
C) 30% of the market value.
D) 50% of the market value.

Answer: A

The haircut on equity securities is 15% of the market value.

Reference: 1.3.1 in the License Exam Manual.

80

Haircuts
Question ID: 48929
A broker/dealer has proprietary positions in common stocks with a long market value of $75,000 and a short market value of $140,000. Haircuts required by the uniform net capital rule will result in a charge to net capital of:

A) $64,500.
B) $27,000.
C) $19,500.
D) $21,000.

Answer: B

The haircut on equity securities is 15% of the greater side; 15% of $140,000 is $21,000. In addition, the test must be performed to see whether an extra 15% haircut must be taken. The test figure is 25% of the greater side; 25% of $140,000 is $35,000. The smaller side (long position of $75,000) is larger than this, so the extra haircut must be taken on the excess portion. The excess portion is $40,000; 15% of $40,000 is $6,000. The total haircut is $21,000 plus $6,000, which is $27,000.

Reference: 1.3.1 in the License Exam Manual.

81

Haircuts
Question ID: 48930
An over-the-counter stock in which there are only two market makers in addition to the broker/dealer making the computation will receive a haircut of what percentage of its market value?

A) 40%.
B) 60%.
C) 70%.
D) 100%.

Answer: A

Securities with a limited market (one or two market makers) receive a 40% haircut.

Reference: 1.3.1 in the License Exam Manual.

82

Haircuts
Question ID: 48932
A broker/dealer has a common stock position totaling $50,000. If there are only two market makers aside from that firm in the security, the broker/dealer must give the position a haircut of:

A) $25,000.
B) $50,000.
C) $20,000.
D) $15,000.

Answer: C

Stock with a limited trading market—meaning one or two market makers aside from your firm—receives a 40% haircut; 40% × $50,000 = $20,000 haircut.

Reference: 1.3.1 in the License Exam Manual.

83

Haircuts
Question ID: 49067
A broker/dealer must buy-in unresolved short securities differences within how many days after the discovery date?

A) 7 business days.
B) 45 business days.
C) 45 calendar days.
D) 7 calendar days.

Answer: C

Short securities differences, if unresolved, must be bought-in within 45 calendar days of discovery.

Reference: 1.3.1.1 in the License Exam Manual.

84

Haircuts
Question ID: 49105
Which of the following statements regarding short securities differences may be TRUE?

A) They are marked on the market.
B) They are subject to a haircut.
C) They must be set up as a subsidiary record after 7 business days from discovery.
D) All of these.

Answer: D

Short differences are marked to the market and subject to a capital charge (haircut) according to the following schedule: after 7 business days, 25%; after 14 business days, 50%; after 21 business days, 75%; and after 28 business days from discovery, 100%. In addition, the firm must set up a subsidiary record for these breaks in the stock record 7 business days from discovery.

Reference: 1.3.1.1 in the License Exam Manual.

85

Haircuts
Question ID: 49106
A broker/dealer is long 100 shares of XYZ currently trading at $35 and is long 1 XYZ Jan 30 put. Under SEC rules, the haircut on these positions is 15% of the market value of the:

A) long position not to exceed the amount the market value of the long position exceeds the exercise value of the put.
B) long position.
C) long position not to exceed $250.
D) long position not to exceed the amount the exercise value of the put exceeds the market value of the long position.

Answer: A

The haircut is 15% of the market value of 100 shares of XYZ not to exceed the out-of-the-money amount. In this case, the put is out-of-the-money by 5 points, or $500 per contract. In a worst-case scenario, no matter how far the price of XYZ falls, the firm can always sell its position by exercising the put and selling XYZ stock at $30. Therefore, the maximum loss to the firm would be $500 which puts a ceiling on the amount of the haircut.

Reference: 1.3.2 in the License Exam Manual.

86

Haircuts
Question ID: 49121
For common stock positions, an undue concentration haircut is applied only on the market value:

in excess of $10,000.
in excess of $25,000.
of 500 shares.
of 1,000 shares.
A) II or III, whichever is greater.
B) II or IV, whichever is greater.
C) I or III, whichever is greater.
D) I or IV, whichever is greater.

Answer: C

The concentration amount, which is the value of the position exceeding 10% of tentative net capital, can be reduced by $10,000 or the value of 500 shares, whichever is greater, before applying the concentration haircut.

Reference: 1.3.1.1 in the License Exam Manual.

87

Haircuts
Question ID: 49146
The haircut on a convertible corporate bond trading below par is most similar to that taken on:

A) common stock.
B) U.S. Treasury bonds.
C) municipal bonds.
D) nonconvertible corporate bonds.

Answer: D

If a convertible bond is trading at par or above, making conversion into common stock more likely, the haircut is 15%. If it is trading below par, the haircut is a function of maturity; identical to that for nonconvertible debt.

Reference: 1.3.1 in the License Exam Manual.

88

Haircuts
Question ID: 49147
The haircut on a mortgage-backed security backed by Ginnie Mae collateral could be:

A) 7%.
B) 40%.
C) 100%.
D) 4%.

Answer: D

The underlying security is a direct obligation of the U.S. government, so the haircut is identical to that applicable to U.S. government securities. The haircuts on governments are a function of maturity with the highest haircut being 6%. Therefore, the only possible answer is 4%.

Reference: 1.3.1 in the License Exam Manual.

89

Haircuts
Question ID: 49154
The haircut on a long option contract listed on the CBOE is:

A) 50% of the market value of the contract.
B) 15% of the market value of the contract.
C) 15% of the market value of the underlying security.
D) 50% of the market value of the underlying security.

Answer: A

For long positions in listed options, the haircut is 50% of the market value of the contract; that is, 50% of the current premium.

Reference: 1.3.2 in the License Exam Manual.

90

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Question ID: 49155
The haircut on a long unlisted OTC option contract is:

A) 15% of the market value of the contract.
B) 50% of the market value of the contract.
C) 50% of the market value of the underlying security.
D) 15% of the market value of the underlying security.

Answer: D

As unlisted options have a limited trading market, and often premiums are not readily available electronically, the haircut is 15% of the market value of the underlying security.

Reference: 1.3.2 in the License Exam Manual.

91

Haircuts
Question ID: 49157
The haircut on exchange-traded funds which are based on high capitalization broad-based indexes is:

A) 10%.
B) 2%.
C) 5%.
D) 15%.

Answer: A

Haircuts on high capitalization broad-based indexes such as SPDRs are 10%. The haircut on exchange-traded funds based on non-high capitalization indexes (either broad or narrow based) is 15%.

Reference: 1.3.1 in the License Exam Manual.

92

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Question ID: 49162
The following is taken from the trial balance of a carrying firm and shows its trading inventory:

DR CR
$300,000 XYZ common $200,000 ABC common
$400,000 DEF common $100,000 LRK common
$100,000 PAK common

Under SEC rules, the firm's haircut on its trading inventory is:"

A) $75,000.
B) $120,000.
C) $165,000.
D) $135,000.

Answer: D

A haircut of 15% is taken on the greater of the long or short position. In this case, 15% × $800,000 = $120,000. Next, a test figure of 25% of the greater is computed, which equals $200,000 (25% × $800,000). This test figure is then compared with the smaller of the two, which is the short position of $300,000. If the smaller of the two exceeds the test figure, an additional haircut of 15% is taken on the amount by which the short position exceeds the test figure of $200,000. In this case, an additional haircut of 15% is taken on $100,000, which amounts to $15,000. Therefore, the total haircut is $135,000.

Reference: 1.3.1 in the License Exam Manual.

93

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Question ID: 49163
The trial balance of a carrying firm shows the following securities positions:

DR CR


Inventory-listed
common stock $400,000 $100,000
Inventory-SPDRs $50,000
Investment account $250,000

The investment account consists entirely of unregistered warrants. Under SEC rule 15c3-1, the charge to net worth in the computation of net capital would be:

A) $300,000.
B) $317,500.
C) $315,000.
D) $105,000.

Answer: C

The haircut on common stock is taken on the greater of the long or short position. In this case, 15% × $400,000 = $60,000. The test figure of 25% of the larger ($100,000), when compared to the smaller, indicates that no additional haircut need be taken. The haircut on high capitalization broad-based indexes such as SPDRs is 10%. Therefore, the haircut on this position is $5,000. Unregistered warrants are considered securities for which there is no ready market and are therefore nonallowable assets. Thus, the total charge to net worth is $60,000 + $5,000 + $250,000.

Reference: 1.3.1 in the License Exam Manual.

94

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Question ID: 49167
Broker/dealers are expected to be able to demonstrate compliance with SEC Rule 15c3-1:

A) moment to moment.
B) day to day.
C) week to week.
D) month to month.

Answer: A

Broker/dealers must maintain sufficient net capital at all times prior to, during, and after purchasing or selling proprietary securities. Firms must, at all times, have sufficient capital to meet the haircut requirements of Rule 15c3-1 before taking on any new proprietary positions, even if the intent of the firm is to liquidate or cover the positions before the end of the same day. Firms must be able to demonstrate moment to moment compliance.

Reference: 1.3 in the License Exam Manual.

95

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Question ID: 49170
Under SEC 15c3-1, haircuts on proprietary positions must be charged on:

A) S.
B) T.
C) T+1.
D) T+2.

Answer: B

Under the SEC's moment-to-moment compliance interpretation, haircuts must be charged to net capital on the trade date.

Reference: 1.3.1 in the License Exam Manual.

96

Haircuts
Question ID: 49176
Your firm is short 10 XYZ January 45 calls and has no position in the underlying common stock. The current market price of XYZ is $42. The haircut on this short uncovered position would be:

A) $3,750.
B) $6,300.
C) $6,750.
D) $3,300.

Answer: D

The haircut on short uncovered options is 15% times the market value of the underlying stock less the out-of-the-money amount, if any. 15% × $42,000 = $6,300. The call is out-of-the-money by three points which, on ten contracts, is $3,000. Therefore, the haircut is $3,300.

Reference: 1.3.2 in the License Exam Manual.

97

Haircuts
Question ID: 49178
A broker/dealer is computing its net capital 10 business days after the discovery of a short securities difference. The market value of the difference is $160,000. Under SEC rules, the charge to net capital is:

A) $40,000.
B) $80,000.
C) $120,000.
D) $160,000.

Answer: A

Seven business days after discovery, the firm must charge its net capital by 25% of the market value of the difference. Fourteen business days after discovery, 50% of the then-current market value must be charged.

Reference: 1.3.1.1 in the License Exam Manual.

98

Haircuts
Question ID: 49186
When calculating a haircut on an open contractual commitment, a firm with computed net capital of $250,000 or more can add back which of the following amounts to net worth?

A) $150,000.
B) $100,000.
C) $200,000.
D) $250,000.

Answer: A

The first $150,000 of any open contractual commitment haircut is eliminated if the firm has computed net capital of $250,000 or more.

Reference: 1.3.1.1 in the License Exam Manual.

99

Aggregate Indebtedness
Question ID: 48592
In its first year of operation, a member firm cannot let its AI exceed its net capital by more than:

A) 8:1.
B) 10:1.
C) 12:1.
D) 15:1.

Answer: A

In its first year, the ratio of AI-to-NC cannot exceed 8:1. For established firms, the limit is 15:1.

Reference: 1.5.2 in the License Exam Manual.

100

Aggregate Indebtedness
Question ID: 48594
An established member firm cannot let its AI exceed its net capital by more than:

A) 10:1.
B) 12:1.
C) 15:1.
D) 8:1.

Answer: C

An established firm cannot let its AI-to-NC ratio exceed 15:1. Otherwise, it is in violation of the net capital rule.

Reference: 1.5.2 in the License Exam Manual.

101

Aggregate Indebtedness
Question ID: 48624
Under SEC Rule 15c3-1, the minimum net capital requirement for an established carrying firm is:

$100,000.
$250,000.
1/8 of AI.
1/15 of AI.
A) I or III, whichever is less.
B) I or IV, whichever is greater.
C) II or III, whichever is less.
D) II or IV, whichever is greater.

Answer: D

The minimum net capital requirement for an established carrying firm is $250,000 or 1/15 of AI, whichever is greater.

Reference: 1.5.2 in the License Exam Manual.

102

Aggregate Indebtedness
Question ID: 48700
A broker/dealer has $200,000 on deposit in the special reserve account and has computed, on Friday, a reserve requirement of $250,000. Its AI is $600,000. For ratio purposes, the proper AI amount is:

A) $600,000.
B) $400,000.
C) $150,000.
D) $350,000.

Answer: B

For computation of the aggregate indebtedness ratio, the AI amount is reduced by the lesser of the reserve requirement calculation or the amount currently on deposit ($600,000 − $200,000 = $400,000 of AI).

Reference: 1.5.2 in the License Exam Manual.

103

Aggregate Indebtedness
Question ID: 48736
ABC Broker/dealer, an established market maker in 50 stocks over $5 bid, has AI of $5,700,000 and $300,000 on deposit in its special reserve account. Its minimum net capital requirement is:

A) $360,000.
B) $100,000.
C) $125,000.
D) $250,000.

Answer: A

The computation of net capital for this market maker is based on $2,500 per each security over $5 bid (50 × $2,500 = 125,000). However, the AI cannot exceed more than 15 times the net capital. The AI for ratio purposes can be reduced by the special reserve account amount ($5,700,000 − $300,000 = $5,400,000). In calculating net capital as required by the AI ratio, divide $5,400,000 by 15. The total of $360,000 is the minimum net capital requirement.

Reference: 1.5.2 in the License Exam Manual.

104

Aggregate Indebtedness
Question ID: 48745
In its first year, a carrying firm makes markets in 50 stocks over $5 bid. Its level of AI is $960,000. Its minimum net capital requirement is:

A) $250,000.
B) $100,000.
C) $120,000.
D) $125,000.

Answer: A

As a carrying firm, this market maker must have at least $250,000 of net capital. This exceeds the amount required for market making activity as calculated by the number of issues (50) multiplied by $2,500 (capital required per issue if over $5 bid). The AI of $960,000 cannot exceed the net capital by more than eight times.

Reference: 1.5.2 in the License Exam Manual.

105

Aggregate Indebtedness
Question ID: 48749
A first-year introducing broker/dealer with aggregate indebtedness of $320,000 regularly receives customer securities for prompt forwarding to its clearing firm. Its minimum net capital requirement is:

A) $5,000.
B) $25,000.
C) $40,000.
D) $50,000.

Answer: D

Introducing firms that receive customer securities must have minimum net capital of $50,000. The AI amount would not increase the net capital requirement (no more than 8:1) because $320,000 ÷ 8 is $40,000.

Reference: 1.5.2 in the License Exam Manual.

106

Aggregate Indebtedness
Question ID: 48815
An established general securities broker/dealer, with AI of $6,000,000, makes markets in 60 stocks over $5 bid. Its minimum net capital requirement is:

A) $150,000.
B) $250,000.
C) $400,000.
D) $100,000.

Answer: C

This general securities broker/dealer must maintain capital of no less than $250,000 and AI-to-NC ratio of no more than 15:1; $6,000,000/15 mandates a requirement of $400,000.

Reference: 1.5.2 in the License Exam Manual.

107

Aggregate Indebtedness
Question ID: 48819
A first-year introducing broker/dealer that does not receive customer securities has aggregate indebtedness of $320,000. Its minimum net capital requirement is:

A) $25,000.
B) $50,000.
C) $40,000.
D) $5,000.

Answer: C

First-year introducing broker/dealers that do not receive customer securities in-house are subject to minimum net capital of $5,000 or AI to NC of no more than 8:1. The AI-to-NC ratio requires minimum net capital of $40,000.

Reference: 1.5.2 in the License Exam Manual.

108

Aggregate Indebtedness
Question ID: 48898
A general securities broker/dealer has aggregate indebtedness of $8,500,000, a reserve requirement of $1,000,000, and a special reserve bank account balance of $1,200,000. When computing the AI-to-NC ratio, what amount would the firm use for AI?

A) $8,500,000.
B) $7,500,000.
C) $6,300,000.
D) $7,300,000.

Answer: B

When computing the ratio, the deduction from AI is the lesser of the required balance or the actual balance in the reserve account.

Reference: 1.5.3 in the License Exam Manual.

109

Aggregate Indebtedness
Question ID: 48899
All of the following are included in aggregate indebtedness EXCEPT:

A) commissions payable.
B) fail to receive in a customer account.
C) retained earnings.
D) income tax payable.

Answer: C

Retained earnings is part of the equity of the firm.

Reference: 1.5.1 in the License Exam Manual.

110

Aggregate Indebtedness
Question ID: 48901
Which of the following would be included in a firm's aggregate indebtedness?

Money borrowed.
Securities owed.
Customers' free credit balances.
A) I, II and III.
B) I only.
C) I and II.
D) II only.

Answer: A

A firm's aggregate indebtedness is its total amount of unsecured and customer-related debt. Free credit balances are included because they represent customer-related liabilities.

Reference: 1.5.1 in the License Exam Manual.

111

Aggregate Indebtedness
Question ID: 48902
A new broker/dealer with $50,000 of net capital can support total aggregate indebtedness of:

A) $400,000.
B) $250,000.
C) $500,000.
D) $750,000.

Answer: A

Rule 15c3-1 usually allows a maximum AI-to-NC ratio of 15:1, but broker/dealers in their first year of operation must maintain a maximum ratio of no more than 8:1. Aggregate indebtedness can equal 8 times $50,000, or $400,000.

Reference: 1.5.2 in the License Exam Manual.

112

Aggregate Indebtedness
Question ID: 48904
A broker/dealer has a special reserve bank account requirement amounting to $150,000. The broker/dealer has on deposit in the special reserve account $100,000. What amount may be deducted from aggregate indebtedness?

A) $50,000.
B) $140,000.
C) $150,000.
D) $100,000.

Answer: D

The lesser of the amount required to be on reserve or the amount that is deposited may be deducted from aggregate indebtedness. In this case, the broker/dealer has $150,000 required and $100,000 on deposit. The deduction amount is $100,000. If the firm had $150,000 required and $200,000 on deposit, the deduction amount would be $150,000.

Reference: 1.5.3 in the License Exam Manual.

113

Aggregate Indebtedness
Question ID: 48911
A fail to receive for a firm's account that has not been sold:

A) is added to aggregate indebtedness.
B) has no effect on net capital or on aggregate indebtedness.
C) is deducted from net capital.
D) is deducted from aggregate indebtedness.

Answer: B

Unsold firm fails to receive represent secured liabilities of the firm. Therefore, they have no effect on net capital or on aggregate indebtedness.

Reference: 1.5.1 in the License Exam Manual.

114

Aggregate Indebtedness
Question ID: 48913
Which of the following results from the sale of a fail to receive for the firm's account?

A) Increase in aggregate indebtedness.
B) Decrease in net capital.
C) Decrease in aggregate indebtedness.
D) Increase in net capital.

Answer: A

A fail to receive represents securities that must be paid for when they are delivered. Thus, it is a secured debt (credit item) of the firm. If the firm sells these securities, the firm no longer owns the collateral. Therefore, the credit item becomes unsecured and it is part of aggregate indebtedness.

Reference: 1.5.1 in the License Exam Manual.

115

Aggregate Indebtedness
Question ID: 48915
Which of the following broker/dealers may be in violation of the net capital requirements?

I. Fully-disclosed broker/dealer in its first year of operation that does not receive customer funds or securities, has aggregate indebtedness of $80,000, and has net capital of $8,000.
II. Clearing broker/dealer in its first year of operation, also doing best efforts underwritings, that has aggregate indebtedness of $1,000,000 and net capital of $120,000.
III. Wire-order broker/dealer that handles only mutual funds and variable annuities and an occasional trade for its own account, with no aggregate indebtedness and net capital of $28,000.
A) I, II and III.
B) I and II.
C) II only.
D) III only.

Answer: B

Broker I is at a 10:1 ratio in its first year, when the allowable maximum is 8:1. Broker II does not meet the $250,000 minimum for clearing brokers. Broker III meets the $25,000 minimum for a wire-order investment company firm.

Reference: 1.5.2 in the License Exam Manual.

116

Aggregate Indebtedness
Question ID: 48916
Which of the following broker/dealers is NOT in violation of SEC Rule 15c3-1?

Fully-disclosed broker/dealer that does not receive customer funds or securities, has aggregate indebtedness of $16,000, and has net capital of $4,000.
First-year carrying broker/dealer with aggregate indebtedness of $500,000 and net capital of $340,000.
Fully-disclosed broker/dealer that receives customer funds and securities and that has aggregate indebtedness of $90,000 and net capital of $45,000.
Clearing broker/dealer with aggregate indebtedness of $2,800,000 and net capital of $200,000.
A) I only.
B) III only.
C) IV only.
D) II only.

Answer: D

The broker/dealer in Choice I must maintain minimum net capital of $5,000. The broker/dealer in Choice III must maintain minimum net capital of $50,000. The broker/dealer in Choice IV must maintain minimum net capital of $250,000. Only the broker/dealer in Choice II satisfies the minimum net capital requirement ($250,000) and is below an 8:1 ratio (first year).

Reference: 1.5.2 in the License Exam Manual.

117

Aggregate Indebtedness
Question ID: 48917
An established carrying firm with aggregate indebtedness of $6,000,000 and maintaining a required deposit of $1,500,000 in its reserve bank account must maintain minimum net capital of:

A) $250,000.
B) $400,000.
C) $500,000.
D) $300,000.

Answer: D

The reserve deposit is allowed as a reduction of aggregate indebtedness. Therefore, adjusted AI is $6,000,000 less $1,500,000, or $4,500,000. To maintain a 15:1 AI-to-NC ratio, $4,500,000 is divided by 15; $300,000 of net capital is required.

Reference: 1.5.2 in the License Exam Manual.

118

Aggregate Indebtedness
Question ID: 48935
An established carrying firm with aggregate indebtedness of $1,200,000 which is maintaining a required deposit of $300,000 in its special reserve bank account must maintain minimum net capital of:

A) $80,000.
B) $250,000.
C) $50,000.
D) $60,000.

Answer: B

As a carrying broker/dealer, the firm is required to meet the $250,000 minimum net capital requirement. The aggregate indebtedness and reserve deposit numbers do not affect the firm's required minimum net capital. The AI for ratio purposes is $900,000 which divided by 15 equals $60,000.

Reference: 1.5.2 in the License Exam Manual.

119

Aggregate Indebtedness
Question ID: 48940
After its first year of operation, a broker/dealer that conducts a wire order business exclusively in investment company shares and that receives and promptly transmits all customer securities and funds must maintain minimum net capital of:

A) $50,000 or AI not exceeding 1,200% of net capital, whichever is greater.
B) $25,000 or AI not exceeding 1,500% of net capital, whichever is greater.
C) $5,000 or AI not exceeding 800% of net capital, whichever is greater.
D) $5,000 or AI not exceeding 1,500% of net capital, whichever is greater.

Answer: B

After its first year of operation, a broker/dealer selling only investment company shares but that receives customer funds or securities must have at least $25,000 of net capital and cannot let its AI-to-NC ratio exceed 15:1 (1,500%).

Reference: 1.5.2 in the License Exam Manual.

120

Aggregate Indebtedness
Question ID: 49066
Credit balances in customer accounts are:

A) excluded from aggregate indebtedness.
B) an allowable asset for net capital purposes.
C) a nonallowable asset for net capital purposes.
D) included in aggregate indebtedness.

Answer: D

Credit balances in customer accounts represent sale proceeds and other balances payable. Customer credit balances are liabilities (unsecured by firm assets) and must be reported as aggregate indebtedness.

Reference: 1.5.1 in the License Exam Manual.

121

Aggregate Indebtedness
Question ID: 49068
If they are not approved by an appropriate examining authority, a broker/dealer's subordination loans:

are added to equity capital when computing net capital.
must not be included in the firm's capital base when computing net capital.
are included in the firm's aggregate indebtedness.
are excluded from the firm's aggregate indebtedness.
A) II and III.
B) I only.
C) I and IV.
D) III only.

Answer: A

Only subordinated loans that are approved by an examining authority are included as part of a broker/dealer's capital for purposes of Rule 15c3-1 and are not included in aggregate indebtedness. If a subordinated loan is unapproved, the reverse is true.

Reference: 1.5.1 in the License Exam Manual.

122

Aggregate Indebtedness
Question ID: 49151
Which of the following statements are TRUE regarding AI?

Current tax liabilities are AI.
Current tax liabilities are not AI.
Deferred tax liabilities are AI.
Deferred tax liabilities are not AI.
A) II and III.
B) II and IV.
C) I and IV.
D) I and III.

Answer: C

Current tax liabilities are unsecured liabilities of a firm and are therefore AI. Deferred tax liabilities, however, roll forward accounting period to accounting period. Accordingly, they don't become payable until they become current and, as such, are excluded from the definition of AI.

Reference: 1.5.1 in the License Exam Manual.

123

Aggregate Indebtedness
Question ID: 49152
Which of the following credit items are considered AI?

Fail to receive-firm (sold).
Mortgage.
Short securities difference reserve.
Stock loan-firm.
A) I and IV.
B) II and III.
C) II and IV.
D) I and III.

Answer: D

A fail to receive for the firm's account where there is no offsetting long position (the position has been sold) is AI. The fail is no longer secured. A short securities difference reserve is clearly a customer-related liability and is also AI. A stock loan where firm securities are collateralizing the loan is not AI. It is secured. If the lender does not return the stock, the firm will keep the proceeds. In other words, the loan is secured. A mortgage is not AI, as it is secured by real estate.

Reference: 1.5.1 in the License Exam Manual.

124

Aggregate Indebtedness
Question ID: 49156
For purposes of the Aggregate Indebtedness Standard, a new broker/dealer is deemed to have begun doing business on the date it:

A) becomes a member of SIPC.
B) executes its first customer trade.
C) becomes effectively registered with the SEC.
D) becomes a member of any SRO.

Answer: C

For purposes of applying the 8:1 standard for first-year firms, the clock begins to run on the date a firm becomes effectively registered with the SEC.

Reference: 1.5.2 in the License Exam Manual.

125

Aggregate Indebtedness
Question ID: 49160
The following credit items appear on the trial balance of a carrying firm:

Credit balances in customer accounts - $240,000.
Short sales to customers - $175,000.
Fail to receive-firm (unsold) - $50,000.
Subordinated loan - $300,000.
Deferred income taxes - $75,000.
Stock loan-customer - $60,000.
Prior to the reduction for the lesser of the amount currently in the special reserve account or the reserve requirement, the proper AI amount is:
A) $525,000.
B) $300,000.
C) $375,000.
D) $475,000.

Answer: B

The only two items of AI are credit balances in customer accounts and stock loans where customer securities are collateralizing the loans. Short sales to customers are short positions in the firm's inventory. They are subject to a haircut and are therefore not AI. Fails to receive for the firm's account where there is an offsetting long position are secured; therefore, they are not AI. Subordinated debt and deferred income taxes are also excluded from AI.

Reference: 1.5.3 in the License Exam Manual.

126

Aggregate Indebtedness
Question ID: 49190
Your firm takes some of the securities it holds in its proprietary trading account and pledges them to a bank as collateral for a loan. Which of the following statements are CORRECT?

Net worth increases.
Net worth is unaffected.
Aggregate indebtedness increases.
Aggregate indebtedness is unaffected.
A) II and IV.
B) I and III.
C) I and IV.
D) II and III.

Answer: A

When a firm pledges securities for a loan, the liability is offset by the proceeds of the loan; therefore, there is no change in net worth. Furthermore, the loan is secured and not AI.

Reference: 1.5.3 in the License Exam Manual.

127

Aggregate Indebtedness
Question ID: 49191
Which of the following are excluded from aggregate indebtedness?

Open contractual commitments.
An adverse award in an arbitration proceeding.
Deferred income taxes.
Loans secured by company automobiles.
A) I and IV.
B) II and III.
C) II and IV.
D) I and III.

Answer: D

With the exception of short securities differences, any item subject to a haircut is not AI. Therefore, open contractual commitments are excluded from AI. Deferred income taxes are also excluded. An adverse award in an arbitration proceeding is AI as the award cannot be appealed. Auto loans are always AI.

Reference: 1.5.1 in the License Exam Manual.

128

Subordinated Loans
Question ID: 48506
A subordinated loan agreement CANNOT be prepaid for a period of:

A) Three years.
B) no minimum time.
C) one year.
D) six months.

Answer: C

Subordination agreements (other than temporary subordinations) must have a minimum term of one year.

Reference: 1.6.5.5 in the License Exam Manual.

129


Subordinated Loans
Question ID: 48507
A subordinated loan agreement must be filed with:

A) neither the SEC nor the broker/dealer's examining authority.
B) both the SEC and the broker/dealer's examining authority.
C) the SEC.
D) the broker/dealer's examining authority.

Answer: B

Subordination agreements must be filed with both the SEC and the designated SRO.

Reference: 1.6.5.10 in the License Exam Manual.

130

Subordinated Loans
Question ID: 48508
Prepayment of a subordination agreement is prohibited if it would cause aggregate indebtedness to exceed net capital by:

A) 1,000% or cause the dollar amount of net capital to fall below 120% of the minimum requirement.
B) 1,000% or cause the dollar amount of net capital to fall below 100% of the minimum requirement.
C) 1,200% or cause the dollar amount of net capital to fall below 100% of the minimum requirement.
D) 1,200% or cause the dollar amount of net capital to fall below 120% of the minimum requirement.

Answer: A

Prepayment of a subordinated loan is not allowed if it would cause the firm's AI-to-NC ratio to exceed 10:1 or net capital to fall below 120% of the minimum requirement.

Reference: 1.6.5.5 in the License Exam Manual.

131

Subordinated Loans
Question ID: 48509
A temporary subordinated loan can be taken out:

A) if a regular subordinated loan has become deficient.
B) to reduce the AI-to-NC ratio to below 12:1.
C) to increase net capital to 120% of the minimum requirement.
D) for an equity underwriting.

Answer: D

Temporary subordinated loans are used for unusual circumstances, such as an underwriting. A broker/dealer may not take out a temporary subordinated loan if its capital is under 120% of the minimum requirement, or if its AI-to-NC ratio is over 10:1. A temporary loan cannot be used to cure a capital deficiency.

Reference: 1.6.5.9 in the License Exam Manual.

132

Subordinated Loans
Question ID: 48591
Subordinated loan agreements must have a minimum term of:

A) 45 days.
B) 6 months.
C) 3 years.
D) 1 year.

Answer: D

All subordinated loan agreements must be in writing, be for a specific amount, and have a minimum term of 1 year.

Reference: 1.6.5.4 in the License Exam Manual.

133


Subordinated Loans
Question ID: 48606
Copies of subordinated loan agreements must be filed with FINRA how many days prior to the effective date?

A) 10 days.
B) 15 days.
C) 20 days.
D) 30 days.

Answer: D

All subordinated loan agreements, including secured demand notes, must be filed with FINRA at least 30 days prior to the effective date of such loans. Written approval from FINRA is required before a member can include these loans as part of its capital.

Reference: 1.6.5.3 in the License Exam Manual.

134

Subordinated Loans
Question ID: 48636
Temporary subordinated loan agreements have a maximum duration of:

A) 45 days.
B) 30 days.
C) 90 days.
D) 1 year.

Answer: A

Temporary subordinated loans have a maximum duration of 45 days. Members can take out no more than 3 per year.

Reference: 1.6.5.4 in the License Exam Manual.

135


Subordinated Loans
Question ID: 48653
A member firm wishes to upstream capital to its parent holding company. The amount of the withdrawal will exceed 30% of the firm's excess net capital. Under SEC Rule 15c3-1, the member must advise the SEC:

A) on or before the next FOCUS reporting date.
B) two business days prior to the withdrawal.
C) on or before the withdrawal.
D) within two business days of the withdrawal.

Answer: B

Under SEC rules, if a member wishes to withdraw capital in any 30-day period that exceeds 30% of its excess net capital, the member must notify the SEC at least two business days before the withdrawal.

Reference: 1.6.5.8 in the License Exam Manual.

136

Subordinated Loans
Question ID: 48703
Which of the following statements regarding temporary subordinated loans are TRUE?

The maximum duration is 45 days.
The maximum number per 12 months is 3.
They may be used to offset early warning.
A) I and III.
B) II only.
C) I and II.
D) I, II and III.

Answer: C

Temporary subordinated loans are used for open contractual commitments. The rules state that a broker/dealer cannot have more than 3 per year; the maximum duration is 45 days; cannot be used while the broker/dealer is in early warning; and are subject to approval by FINRA and the SEC.

Reference: 1.6.5.4 in the License Exam Manual.

137

Subordinated Loans
Question ID: 48706
Prepayment of a subordinated loan is permitted:

anytime after inception.
after one year has elapsed following inception.
if the broker/dealer's AI to NC will not exceed 12:1 after prepayment.
if the broker/dealer's AI to NC will not exceed 10:1 after prepayment.
A) II and IV.
B) I and III.
C) I and IV.
D) II and III.

Answer: A

Prepayment of subordinated loans cannot take place before 1 year has elapsed and cannot subject a firm to AI-to-NC of more than 10:1 as a result of the prepayment.

Reference: 1.6.5.5 in the License Exam Manual.

138

Subordinated Loans
Question ID: 48708
Repayment of a subordinated loan is permitted if, after repayment:

net capital will be at least 100% of minimum.
net capital will be at least 120% of minimum.
AI to NC will not exceed 10:1.
AI to NC will not exceed 12:1.
A) II and III.
B) II and IV.
C) I and III.
D) I and IV.

Answer: B

The requirements for repayment are less stringent than for prepayment. Repayment cannot occur before 12 months have elapsed and it cannot cause the firm's net capital to fall below 120% of minimum. Additionally, after repayment, the firm's AI/NC ratio cannot exceed 12:1.

Reference: 1.6.5.5 in the License Exam Manual.

139

Subordinated Loans
Question ID: 48727
A broker/dealer discovers that it has deficient collateral under a secured demand note agreement. Under SEC 15c3-1:

the broker/dealer must immediately demand additional collateral from the lender.
demands for additional collateral must be met by noon of the following business day.
the note amount can be reduced by up to 15% provided AI to NC does not exceed 10:1 or capital does not fall below 120% of minimum.
the broker/dealer can sell out securities to eliminate the deficiency with the written consent of the lender.
A) I, II and IV.
B) I, III and IV.
C) I, II, III and IV.
D) I, II and III.

Answer: D

The broker/dealer can sell out securities to eliminate the deficiency without the written consent of the lender.

Reference: 1.6.5.4 in the License Exam Manual.

140

Subordinated Loans
Question ID: 48743
A broker/dealer takes on subordinated debt in the form of a secured demand note collateralized by common stock listed on the NYSE. The haircut on the collateral is:

A) 0%.
B) 15%.
C) 40%.
D) 30%.

Answer: D

The haircut on securities collateralizing secured demand notes is 30%.

Reference: 1.6.5.2 in the License Exam Manual.

141

Subordinated Loans
Question ID: 48747
At maturity, a broker/dealer is prohibited from repaying a subordinated loan pursuant to Appendix D of Rule 15c3-1. As a result, the subordinated loan:

continues to be excluded from AI.
is now considered AI.
continues to be allowable capital.
is excluded in the computation of capital.
A) I and III.
B) I and IV.
C) II and III.
D) II and IV.

Answer: A

If a subordinated loan is not paid at maturity because repayment will put the firm in early warning, the treatment on the broker/dealer's books does not change. It is excluded from AI, and included as allowable capital.

Reference: 1.6.5.5 in the License Exam Manual.

142

Subordinated Loans
Question ID: 48750
A broker/dealer, a wholly owned subsidiary of a commercial bank, takes down a subordinated loan (equity) from its parent company. Which of the following statements are TRUE?

I. The firm is permitted to maintain a checking account with its parent bank.
II. The firm is not permitted to maintain a checking account with its parent bank.
III. The firm is permitted to purchase a CD from its parent with the proceeds of the loan.
IV. The firm is not permitted to purchase a CD from its parent with the proceeds of the loan.
A) I and III.
B) II and III.
C) II and IV.
D) I and IV.

Answer: D

Although it would be permissible to continue to maintain a checking account with the bank under these circumstances, it would be a conflict to invest the money in a CD of that bank. The SEC states that buying a CD from a parent bank with part of the proceeds of an equity subordination is a form of prepayment, which is not permitted for at least one year.

Reference: 1.6.5.1 in the License Exam Manual.

143

Subordinated Loans
Question ID: 48752
Which of the following statements regarding secured demand notes are TRUE?

Copies must be filed with FINRA 10 days before effective date.
Copies must be filed with FINRA 30 days before effective date.
Copies must be filed with the SEC 10 days before effective date.
Copies must be filed with the SEC 30 days before effective date.
A) I and III.
B) I and IV.
C) II and IV.
D) II and III.

Answer: D

Copies of subordinated loan agreements must be filed with the SEC 10 days before the effective date and with FINRA 30 days before the effective date.

Reference: 1.6.5.2 in the License Exam Manual.

144

Subordinated Loans
Question ID: 48757
Which of the following statements regarding temporary subordinated loans are TRUE?

Agreements must be filed with the SEC 10 days before effective date.
Agreements must be filed with FINRA 30 days before effective date.
Minimum duration is 45 days.
Maximum duration is 45 days.
A) I, II and III.
B) I, II and IV.
C) II and IV.
D) I and IV.

Answer: D

Temporary subordinated loans are used for firm commitment underwritings. A firm may have no more than 3 in one year, and they must be approved 10 days before the effective date by the SEC and FINRA. Their maximum duration is 45 days.

Reference: 1.6.5.4 in the License Exam Manual.

145

Subordinated Loans
Question ID: 48761
Which of the following statements regarding temporary subordinated loans are TRUE?

They may be used to restore capital reduced from haircuts on contractual commitments.
They cannot be used if the broker/dealer has AI to NC in excess of 10:1.
They cannot be used if the broker/dealer has given notice under SEC Rule 17a-11 within the preceding 30 calendar days.
They cannot be used if the broker/dealer has a debt-equity ratio exceeding 70%.
A) I and IV.
B) I, II, III and IV.
C) I, II and III.
D) I and III.

Answer: C

Temporary subordinated loans are used for restoring capital depleted by open contractual commitments (firm commitment underwritings). They are not allowed to be used if firms are approaching net capital difficulties.

Reference: 1.6.5.4 in the License Exam Manual.

146

Subordinated Loans
Question ID: 48790
Which of the following statements regarding secured demand notes are TRUE?

The securities pledged must be in bearer form, in street name, or the name of the broker/dealer.
The lender has the right to substitute the collateral.
The securities pledged are subject to a haircut, including undue concentration, if applicable.
The securities pledged must be fully paid.
A) I, II, III and IV.
B) I, II and IV.
C) I, III and IV.
D) I and IV.

Answer: A

All statements accurately describe secured demand notes. The haircut applied to the underlying securities is 30%.

Reference: 1.6.5.2 in the License Exam Manual.

147

Subordinated Loans
Question ID: 48820
The trial balance of an established firm shows the following:

Common stock-$500,000.
Retained earnings-$800,000.
Profit to date-$200,000.
Subordinated loan-$300,000.

The loan qualifies as an equity subordination. For financial reporting purposes, the firm's debt/equity ratio is:

A) 17%.
B) 20%.
C) 30%.
D) 0%.

Answer: D

A subordinated loan, if qualified as an equity subordination, is not included as debt in the computation of the firm's debt/equity ratio. A numerator of 0 creates a debt/equity ratio of 0%. If the subordinated loan had not met the requirements for an equity subordination, this firm's debt/equity ratio would be 17% ($300,000 divided by $1.8 million).

Reference: 1.6.5.6 in the License Exam Manual.

148

Subordinated Loans
Question ID: 48885
A partner who is retiring from a carrying firm wants to withdraw equity. The firm's net capital is $400,000. The maximum withdrawal allowed is:

A) $150,000.
B) $200,000.
C) $400,000.
D) $100,000.

Answer: D

A withdrawal of equity capital is not permitted if it would result in net capital falling below 120% of the minimum requirement or AI to NC exceeding 10:1. A general securities broker/dealer is required to have minimum net capital of $250,000, so a withdrawal cannot cause net capital to fall below 120% of $250,000, which equals $300,000. $400,000 minus $300,000 equals $100,000, which is the maximum withdrawal of equity capital allowed.

Reference: 1.6.5.7 in the License Exam Manual.

149

Subordinated Loans
Question ID: 48886
Which of the following provisions must a subordinated loan agreement contain?

Statement that the lender agrees to subordinate its claim to the claims of other creditors.
Statement that the proceeds will be used as capital by the broker/dealer and will be subject to the risks of the business.
Statement that the broker/dealer will repay the loan immediately if net capital exceeds aggregate indebtedness by more than 1,500%.
Statement that the broker/dealer will repay the loan immediately on demand.
A) II, III and IV.
B) I, II, III and IV.
C) I and II.
D) I only.

Answer: C

Only choices I and II are correct. Subordinated loans must be in writing, the loans are at risk in the business, and all claims are subordinate to all other creditors' claims.

Reference: 1.6.5.1 in the License Exam Manual.

150

Subordinated Loans
Question ID: 48887
Subordinated loan agreements must:

indicate a specific dollar amount for the loan.
set an upper limit that the loan cannot exceed.
indicate securities valued at a specific amount.
set an upper limit for the loaned securities.
A) II and III.
B) II and IV.
C) I and III.
D) I and IV.

Answer: C

A subordination agreement must be for a specific dollar amount. If it is a subordination of securities, the collateral value of the securities (market value less haircut) must be equal to or greater than the dollar amount of the agreement. If the collateral value of the securities falls below the amount of the agreement, the lender must put up additional securities.

Reference: 1.6.5.1 in the License Exam Manual.

151


Subordinated Loans
Question ID: 48888
Temporary subordination agreements are available to:

A) broker/dealers whose ratio of AI-to-NC does not exceed 1,000% and whose dollar amount of net capital is 120% or more of the minimum requirement.
B) all broker/dealers without restriction.
C) broker/dealers whose net capital is $100,000 or higher.
D) broker/dealers that are bona fide market makers in securities.

Answer: A

To enter into a temporary subordination agreement, a firm's AI-to-NC ratio cannot exceed 10:1 and its capital cannot be less than 120% of the minimum.

Reference: 1.6.5.9 in the License Exam Manual.

152

Subordinated Loans
Question ID: 48889
Securities pledged as collateral on a secured demand note agreement may be held in:

bearer form.
the name of the broker/dealer.
the name of the lender.
the name of the nominee or trustee of the broker/dealer.
A) II and IV.
B) III only.
C) I, II, III and IV.
D) I, II and IV.

Answer: D

Secured demand note collateral may only be in bearer form, in the name of the broker/dealer, or held in the name of a trustee for the broker/dealer. This is required to allow the broker/dealer to use these securities as collateral to obtain a loan. The securities may not be in the lender's name because they would not be acceptable as collateral to a bank. Remember, the bank will want the ability to sell the securities held as collateral if the loan is not repaid, and it can do so with bearer securities, securities in broker/dealer name that are assigned to the bank, and securities put into the bank's name (trustee name). To sell out securities in the lender's name would require the endorsement of the lender.

Reference: 1.6.5.2 in the License Exam Manual.

153

Subordinated Loans
Question ID: 48890
In a satisfactory subordination agreement, the lender must agree that the broker/dealer has the right to:

deposit the cash proceeds of the subordinated loan into its account at the bank.
hypothecate all securities pledged as collateral on the secured demand note agreement.
lend all securities pledged as collateral on the secured demand note agreement.
include the cash resulting from the subordinated loan in total capital.
A) II and III.
B) IV only.
C) I, II, III and IV.
D) I and IV.

Answer: C

Under a subordinated loan, any cash received by the broker/dealer can be used for any purpose. If the loan is a secured demand note, the lender is pledging marketable securities to the broker/dealer. The only way the broker/dealer can obtain cash from these securities is to rehypothecate them to a bank. Therefore, secured demand note agreements must allow the broker/dealer to cash in on the loaned securities.

Reference: 1.6.5.2 in the License Exam Manual.

154

Subordinated Loans
Question ID: 48891
Under the uniform net capital rule, which of the following requirements must be met for broker/dealer capital contributed under a subordinated loan agreement to be treated as if it were equity under the debt/equity relationship?

I. The agreement must be entered into by a partner, stockholder, or parent company.
II. The initial term of the agreement must be 3 years or more.
III. The agreement must have a remaining term of at least 12 months.
IV. The agreement must contain no provisions for accelerated maturity.
A) I, III and IV.
B) II and III.
C) IV only.
D) I, II, III and IV.

Answer: D

For a secured demand note to be treated as if it were equity capital for purposes of the debt/equity relationship, the loan must be made by a partner; must have an initial term of at least three years; must have a remaining life of at least one year; and must not allow for accelerated maturity.

Reference: 1.6.5.6 in the License Exam Manual.

155

Subordinated Loans
Question ID: 48892
Within any 12-month period, what is the maximum number of temporary subordination agreements that may be entered into by a broker/dealer?

A) Four temporary subordination agreements.
B) Three temporary subordination agreements.
C) One temporary subordination agreement.
D) Two temporary subordination agreements.

Click for Answer and Explanation

Answer: B

A broker/dealer may enter into no more than 3 temporary subordination agreements per year. Each agreement can be no more than 45 days in duration.

Reference: 1.6.5.9 in the License Exam Manual.

156

Subordinated Loans
Question ID: 48893
Prepayment of a subordination agreement may be made after:

A) the second year.
B) the third year.
C) the first year.
D) six months.

Answer: C

Because subordinated loans (other than temporary subordinations, as defined) must have a minimum term of one year, no prepayments are allowed for the first year.

Reference: 1.6.5.5 in the License Exam Manual.

157

Subordinated Loans
Question ID: 48894
A secured demand note secured by stock with a market value of $100,000 allows a broker/dealer to increase its net capital by no more than:

A) $60,000.
B) $85,000.
C) $100,000.
D) $70,000.

Answer: D

Secured demand note agreements must be set at no more than the collateral value of the securities. Common stock backing a secured demand note receives a 30% haircut. Therefore, the firm can increase its net capital by $70,000.

Reference: 1.6.5.2 in the License Exam Manual.

158

Subordinated Loans
Question ID: 48895
A subordinated loan agreement may consist of:

A) all of these.
B) secured demand note secured by debt securities.
C) secured demand note secured by equity securities.
D) subordinated loan of cash.

Answer: A

Subordinated loans may be straight subordination agreements for cash or secured demand note agreements collateralized by securities.

Reference: 1.6.5.2 in the License Exam Manual.

159

Subordinated Loans
Question ID: 48896
A broker/dealer with equity of $300,000 and a subordinated loan of $700,000 obtains an additional subordinated loan of $1,000,000. If the broker/dealer does not want to increase its funding beyond $2,000,000, it must increase the equity and simultaneously pay down the subordinated loan amount by:

A) $250,000 immediately.
B) $300,000 immediately.
C) $250,000 within 90 days.
D) $300,000 within 90 days.

Answer: D

Given that the firm now has $2,000,000 of funding (and wishes to limit it to that amount), 30% ($600,000) must be equity. The firm has $300,000 of equity. Therefore, an additional $300,000 is required. SEC Rule 15c3-1 allows equity to be less than 30% of total funding for 90 days before the firm is considered to be in violation.

Reference: 1.6.5.6 in the License Exam Manual.

160

Subordinated Loans
Question ID: 48897
A broker/dealer's equity cannot be less than what percentage of the debt/equity total?

A) 20%.
B) 25%.
C) 50%.
D) 30%.

Answer: D

SEC Rule 15c3-1 states that subordinated loans from outsiders cannot exceed 70% of total funding. Equity financing and subordinated loans from insiders constitute the balance.

Reference: 1.6.5.6 in the License Exam Manual.

161

Subordinated Loans
Question ID: 49069
If a broker/dealer with equity capital of $60,000 and debt capital (subordinated loan) of $140,000 increases its debt capital by $200,000 via an additional subordinated loan, how much additional equity capital must be raised to avoid violating the minimum debt/equity ratio requirement?

A) $60,000 raised within 90 days.
B) $86,000 raised within 90 days.
C) $60,000 raised immediately.
D) $86,000 raised immediately.

Answer: B

The debt side of the equation has grown from $140,000 to $340,000, and total capital is now $400,000 ($340,000 in debt and $60,000 in equity). The debt side of the ratio must not exceed 70% of total capital, so the first step is to determine how much total capital is needed to support $340,000 in debt. The answer is approximately $486,000 ($340,000 ÷ 70%). In turn this means that the firm's equity capital must be $146,000 ($486,000 − $340,000), which means that $86,000 more is needed to bring the equity capital up to $146,000 (30% × $486,000).

Reference: 1.6.5.6 in the License Exam Manual.

162

Subordinated Loans
Question ID: 49085
A retiring partner would be permitted to withdraw equity from a firm using the:

A) alternative method whose capital is at 4% of aggregate debits.
B) standard method whose AI-to-NC is 1,500% of capital.
C) standard method whose AI-to-NC is 8:1.
D) standard method whose AI-to-NC ratio is 11:1.

Answer: C

For firms using the standard method, equity may be withdrawn provided it does not cause capital to fall below 120% of minimum or AI-to-NC to exceed 10:1. For firms using the alternative method, equity may be withdrawn provided it does not cause capital to fall below 120% of minimum or fall below 5% of aggregate debits in the reserve computation.

Reference: 1.6.5.7 in the License Exam Manual.

163

Subordinated Loans
Question ID: 49107
Under the SEC Rule 15c3-1, a broker/dealer would be prohibited from taking on temporary subordinated debt if it has given notice under SEC Rule 17a-11 within the preceding:

A) 180 calendar days.
B) 30 calendar days.
C) 60 calendar days.
D) 90 calendar days.

Answer: B

If a firm has given notice under 17a-11 (e.g., early warning notification) within the 30 calendar days preceding the time it wishes to take on temporary subordinated debt, it will be prohibited from doing so.

Reference: 1.6.5.9 in the License Exam Manual.

164

Subordinated Loans
Question ID: 49122
Which of the following statements regarding subordinated loans are TRUE?

Cash provided by subordinated lenders is covered by SIPC.
Cash provided by subordinated lenders is not covered by SIPC.
Securities provided by subordinated lenders are covered by SIPC.
Securities provided by subordinated lenders are not covered by SIPC.
A) I and III.
B) I and IV.
C) II and III.
D) II and IV.

Answer: D

Cash and/or securities subject to a subordination agreement are not protected by SIPC.

Reference: 1.6.5.11 in the License Exam Manual.

165

Subordinated Loans
Question ID: 49123
Under SEC rules, a broker/dealer may take down no more than:

3 temporary subordinated loans.
5 temporary subordinated loans.
in any calendar year.
in any 12-month period.
A) I and IV.
B) I and III.
C) II and III.
D) II and IV.

Answer: A

Firms are allowed no more than three temporary subordinated loans in any 12-month period.

Reference: 1.6.5.9 in the License Exam Manual.

166

Subordinated Loans
Question ID: 49124
Your firm uses the standard method and is considering the possibility of pre-paying a subordinated loan. Your firm will be able to do so if:

the loan has been outstanding for at least 1 year.
it receives prior approval from its DEA .
after pre-payment, its AI-to-NC ratio will not exceed 10:1.
after pre-payment, its AI-to-NC ratio will not exceed 12:1.
A) I and III.
B) II and IV.
C) I, II and III.
D) I, II and IV.

Answer: C

A subordinated loan can not be pre-paid until it has been outstanding for at least 1 year. Further, pre-payment requires the written consent of the DEA. For firms using the standard method, pre-payment is prohibited if it would cause capital to fall below 120% of minimum or AI-to-NC to exceed 10:1.

Reference: 1.6.5.5 in the License Exam Manual.

167

Subordinated Loans
Question ID: 49134
Under SEC Rule 15c3-1, a broker/dealer is prohibited from prepaying a subordinated loan without the prior written approval of:

A) the SIC.
B) its designated examining authority.
C) the SEC.
D) both the SEC and its designated examining authority.

Answer: B

A permissive prepayment can only occur if it does not cause the firm's AI-to-NC ratio to exceed 10-1 or its capital to fall below 120% of minimum. Furthermore, it can only occur if the loan has been outstanding for at least 1 year. Nonetheless, a firm needs prior written approval from its DEA (e.g., FINRA) before prepayment can occur.

Reference: 1.6.5.5 in the License Exam Manual.

168

Subordinated Loans
Question ID: 49172
Securities pledged as collateral for a secured demand note may be held in all of the following ways EXCEPT:

A) the name of the borrowing firm.
B) bearer form.
C) the name of the lender.
D) street name.

Answer: C

If the securities pledged are in the name of the lender, they cannot be used by the broker/dealer.

Reference: 1.6.5.2 in the License Exam Manual.

169

Subordinated Loans
Question ID: 49184
The repayment of a subordinated loan at maturity will be suspended if, after repayment, the firm's AI-to-NC ratio exceeds:

A) 15:1.
B) 12:1.
C) 8:1.
D) 10:1.

Answer: B

Prepayment will not be permitted if it will cause the AI-to-NC ratio to exceed 10:1, whereas repayment at maturity will be suspended if it will cause the AI-to-NC ratio to exceed 12:1.

Reference: 1.6.5.5 in the License Exam Manual.