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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.