Unit 4 - Customer Protection Flashcards Preview

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Flashcards in Unit 4 - Customer Protection Deck (103):
1

Pledging Customer Securities
Question ID: 48652
Which of the following statements regarding customer securities are TRUE?

I. They may be commingled with securities of other customers.
II. They may not be commingled with securities of other customers.
III. They may be commingled with proprietary securities.
IV. They may not be commingled with proprietary securities.
A) I and IV.
B) I and III.
C) II and III.
D) II and IV.

Answer: A

Customer securities may be commingled with securities of other customers. This happens in margin accounts where securities of different customers are all at a bank collateralizing customer debits. However, customer securities may never be commingled with proprietary securities.

Reference: 4.1.9.1 in the License Exam Manual.

2

Pledging Customer Securities
Question ID: 48995
Which of the following practices is (are) not allowed under SEC Rule 15c2-1?

I. Commingling the securities of a customer with those of another customer without first obtaining the permission of each customer.
II. Commingling the securities of a customer with those of another person who is not a bona fide customer.
III. Pledging securities owned by customers to borrow an amount that exceeds the total indebtedness of the customers.

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

Answer: D

A broker/dealer may only commingle a customer's securities with those of another customer if written permission from both customers is obtained first. A broker/dealer may never commingle customer securities with firm securities or those of a noncustomer. Further, a firm may never borrow more than it reloans to customers.

Reference: 4.1.9.1 in the License Exam Manual.

3

Rule 15c3-3
Question ID: 48501
A broker/dealer that computes its reserve requirement monthly must maintain in the special reserve account what percentage of the excess of total credits over total debits?

A) 95%.
B) 100%.
C) 110%.
D) 105%.

Answer: D

When computing its reserve requirement monthly, a broker/dealer must have on deposit 105% of the calculated amount (the excess of credits over debits in the formula).

Reference: 4.3.2.3 in the License Exam Manual.

4

Rule 15c3-3
Question ID: 48502
Under the customer protection rule, SEC Rule 15c3-3, securities due from customers to complete sell orders must be bought in promptly how many business days after the settlement date?

A) 10 days.
B) 5 days.
C) 7 days.
D) 15 days.

Answer: A

Securities due from customers to complete sell orders must be bought in promptly after 10 business days from settlement.

Reference: 4.3.3.1 in the License Exam Manual.

5


Rule 15c3-3
Question ID: 48503
Provided that proper regulatory approval has been granted, securities are considered to be under the control of a broker/dealer if they are in the custody of:

A) a foreign depository.
B) a foreign clearing agency.
C) a foreign custodian bank.
D) any of these.

Answer: D

A broker/dealer may apply to the SEC to designate any of these locations as acceptable for the safekeeping of securities.

Reference: 4.3.1.1 in the License Exam Manual.

6

Rule 15c3-3
Question ID: 48561
Which of the following phrases describe SEC Rule 15c3-3?

I. Minimum net capital requirements.
II. Customer protection rule.
III. Reserves and custody of securities.
IV. Supplemental financial and operational reports.
A) I and IV.
B) II and IV.
C) II and III.
D) I and III.

Answer: C

SEC Rule 15c3-3 is often referred to as the customer protection rule. It is concerned primarily with the reserves a member has available and regulations governing the care and safekeeping of customer securities.

Reference: 4.3 in the License Exam Manual.

7

Rule 15c3-3
Question ID: 48600
Unless otherwise directed by the SEC, carrying firms must perform a reserve computation:

A) weekly.
B) daily.
C) biweekly.
D) monthly.

Answer: A

Reserve computations must be made weekly, after the close of business on Friday.

Reference: 4.3.2 in the License Exam Manual.

8

Rule 15c3-3
Question ID: 48622
Under the customer protection rule, unresolved short securities differences must be bought in how many days after discovery?

A) 15 days.
B) 20 days.
C) 30 days.
D) 45 days.

Answer: D

Short differences arise when a securities count shows the firm has under its possession or control fewer shares of a particular stock than indicated on the stock record. If unresolved for 45 days from discovery, the difference must be bought in.

Reference: 4.3.3 in the License Exam Manual.

9

Rule 15c3-3
Question ID: 48628
Under SEC rules, a carrying firm must determine if there is any excess or deficit in customer segregation accounts:

A) daily.
B) weekly.
C) monthly.
D) quarterly

Answer: A

Carrying firms have the daily requirement to reduce to possession or control all fully paid-for customer securities and all excess margin securities. In SEC Rule 15c3-3, the wording is daily requirement to determine if there is any excess or deficit in customer segregation accounts. Each day, from the prior day's settlement records, carrying firms must make certain that stock resulting from customer purchases has come into the firm (or into an account it controls), and that excess margin securities have been placed in safekeeping.

Reference: 4.3.1.2 in the License Exam Manual.

10

Rule 15c3-3
Question ID: 48630
A member firm wishes to change its fiscal year-end date. Under SEC 17a-5, the request must be directed to the:

A) member's designated examining authority.
B) SEC (Washington, D.C.).
C) SEC (District office).
D) SIA.

Answer: A

Any request to change a member's fiscal year-end date must be directed to the member's designated examining authority (e.g., FINRA). Requests for extensions of time to file required reports are also directed to the firm's DEA.

Reference: 4.3.4.3 in the License Exam Manual.

11

Rule 15c3-3
Question ID: 48655
Under the customer protection rule, if credits exceed debits in the reserve computation, the difference must be on deposit in the special reserve account within one hour of the bank opening on the:

A) third business day following computation.
B) fourth business day following computation.
C) second business day following computation.
D) business day following computation.

Answer: C

If a member has a reserve requirement, the deposit must be made within one hour of the bank opening on the second business day following computation.

Reference: 4.3.2 in the License Exam Manual.

12

Rule 15c3-3
Question ID: 48658
Under the customer protection rule, all of the following must be reduced to possession or control EXCEPT:

A) fully paid-for municipal bonds.
B) excess margin securities.
C) margin securities.
D) fully paid-for common stock.

Answer: C

A carrying firm has the daily requirement to reduce to possession or control all fully paid-for customer securities and all excess margin securities. Margin securities are not subject to possession or control requirements because they are at a bank collateralizing customer debit balances.

Reference: 4.3.1 in the License Exam Manual.

13

Rule 15c3-3
Question ID: 48682
Which of the following statements regarding a broker/dealer depositing qualified securities into the special reserve account are TRUE?

I. Securities are haircut for deposit valuation.
II. Securities are not haircut for deposit valuation.
III. Securities are haircut for net capital.
IV. Securities are not haircut for net capital.
A) II and IV.
B) II and III.
C) I and III.
D) I and IV.

Answer: B

Broker/dealers are required to deposit cash or qualified securities into the special reserve account when customer credit balances exceed customer debit balances, as determined by the weekly calculation. Qualified securities are those that are guaranteed by the U.S. government, and need not be haircut when calculating the deposit amount. However, they must be haircut for the net capital computation.

Reference: 4.3.2 in the License Exam Manual.

14

Rule 15c3-3
Question ID: 48695
Which of the following may be debit items in the reserve formula?

I. Fail to deliver-firm.
II. Stock borrowed-customer.
III. Stock loaned-customer.
IV. Fail to receive-customer.
A) II only.
B) I and III.
C) I and IV.
D) II, III and IV.

Answer: A

The debit items used in the calculation of the reserve formula are customer related. Customers borrowing stock from the firm create a customer-related debit item. Although a firm fail to deliver is a debit, it is not included in this calculation. "Stock loaned-customer" and "Fail to receive-customer" are both credit items that would be included in the credit side of the calculation.

Reference: 4.3.2.1 in the License Exam Manual.

15

Rule 15c3-3
Question ID: 48696
To be able to compute the reserve requirement monthly, a broker/dealer must have:

I. AI to NC of 10:1 or less.
II. AI to NC of 8:1 or less.
III. customer credits of $1 million or less.
IV. minimum net capital of $1 million.

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

Answer: C

Monthly calculators must have AI to NC of 8:1 or less and customer credits of less than $1 million. When a deposit to the reserve account is required, it must be 105% of the excess of credits over debits.

Reference: 4.3.2.3 in the License Exam Manual.

16

Rule 15c3-3
Question ID: 48697
Short securities differences are:

I. debit items in the reserve formula.
II. credit items in the reserve formula.
III. included in the reserve formula after 30 days.
IV. included in the reserve formula after 45 days.

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

Answer: C

Short securities differences are credit items in the reserve calculation after 30 days. They must be bought in after 45 days.

Reference: 4.3.2.1 in the License Exam Manual.

17

Rule 15c3-3
Question ID: 48698
Under SEC Rule 15c3-3, all of the following are considered under the control of a broker/dealer EXCEPT:

A) securities in transfer for 30 days.
B) customer fails to receive 10 days old.
C) securities in transit for 10 business days.
D) customer fails to deliver 5 business days old.

Answer: C

The following shows the time horizon applicable to possession or control requirements:
Under Control.
Customer Fail to Deliver-10 business days after S.D.
Customer Fail to Receive-30 calendar days after S.D.
Short Securities Differences-45 calendar days from discovery.
Stock Splits, Dividends-45 calendar days from payable date.
Securities in Transfer-40 calendar days.
Securities in Transit-5 business days.

Reference: 4.3.1.1 in the License Exam Manual.

18

Rule 15c3-3
Question ID: 48699
A broker/dealer is required to reduce which of the following to possession or control?

I. Securities in transfer for 31 days.
II. Fully-paid customer securities.
III. Margin securities.
IV. Excess margin securities.

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

Answer: C

Broker/dealers must determine daily if they have possession or control of fully-paid customer securities and excess margin securities.

Reference: 4.3.1.2 in the License Exam Manual.

19

Rule 15c3-3
Question ID: 48724
Which of the following requests must be directed to the broker/dealer's Designated Examining Authority (DEA)?

I. Requests for an extension of time to file FOCUS Reports.
II. Requests for an extension of time to file audited annual FOCUS Reports.
III. Requests to change fiscal year-end date.

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

Answer: D

Requests involving extensions on financial reports and changes to the reporting year should be directed to the broker/dealer's Designated Examining Authority.

Reference: 4.3.4.3 in the License Exam Manual.

20

Rule 15c3-3
Question ID: 48729
Borrowing securities to obtain possession or control is acceptable for:

I. customer fails to deliver over 10 business days old.
II. fails to receive over 30 days old.
III. securities at a bank collateralizing customer indebtedness.
IV. securities not received due to a stock split over 45 days old.

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

Answer: B

Borrowing for possession and control is not allowed for fails to deliver over 10 business days old, for fails to receive over 30 days old, and for short differences over 45 days old. A buy-in is required in these instances.

Reference: 4.3.1.3 in the License Exam Manual.

21

Rule 15c3-3
Question ID: 48738
Under SEC 15c3-3, which of the following are considered under the possession or control of a broker/dealer?

I. Securities in transit between offices of a broker/dealer for four business days.
II. Securities in transfer for 31 days.
III. Short securities differences 41 days old.
IV. Stock receivable from a stock dividend 41 days old.

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

Answer: C

Securities are considered to be in the control of the broker/dealer if in transit for no more than 5 business days, and if in transfer for no more than 40 calendar days. A short securities difference and shares from a stock dividend are in control until after 45 days from discovery or payable date respectively.

Reference: 4.3.1 in the License Exam Manual.

22


Rule 15c3-3
Question ID: 48744
A broker/dealer, using the alternative method, has debits in the Reserve Formula of $4,200,000. Reporting under 17a-11 will begin if the broker/dealer's capital falls below:

A) $150,000.
B) $200,000.
C) $210,000.
D) $300,000.

Answer: D

Broker/dealers calculating under the alternative method must begin early warning reporting under 17a-11 if net capital falls below the greater of 120% of required minimum net capital or 5% of reserve formula debit balances. In this example, $300,000 (120% × $250,000) of net capital exceeds 5% of the reserve formula debit balances.

Reference: 4.3.6.1 in the License Exam Manual.

23

Rule 15c3-3
Question ID: 48746
A broker/dealer, using the Alternative Method, has debits of $15 million in the reserve formula. Its minimum net capital requirement is:

A) $150,000.
B) $200,000.
C) $250,000.
D) $300,000.

Answer: D

A broker/dealer calculating under the alternative method must have minimum net capital of $250,000 or 2% of reserve formula debit balances, whichever is greater (2% of debits of $15 million is $300,000).

Reference: 4.3.6.1 in the License Exam Manual.

24

Rule 15c3-3
Question ID: 48753
Which of the following would be deemed to be satisfactory control locations under SEC Rule 15c3-3?

I. Custodian bank.
II. DTC.
III. Foreign broker/dealer.
IV. Omnibus account.

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

Answer: A

The customer protection rule, 15c3-3, identifies that securities are in control of broker/dealers if held in certain satisfactory control locations like the Depository Trust Corporation (DTC). Custodian banks and omnibus clearing accounts, which hold and clear securities through one master account, are also satisfactory. Foreign depositories, foreign clearing agencies, and foreign custodian banks are also acceptable if approved by the SEC. Foreign broker-dealers are not acceptable.

Reference: 4.3.1.1 in the License Exam Manual.

25

Rule 15c3-3
Question ID: 48774
In a best efforts all-or-none underwriting, funds collected by the underwriter must be made payable to:

A) the underwriter.
B) the syndicate member who collects the funds.
C) an independent escrow agent.
D) the issuer.

Answer: C

In a best efforts all-or-none underwriting, the funds collected must be made payable to an unaffiliated escrow agent because no order will be final until the entire offering has been sold.

Reference: 4.3.6 in the License Exam Manual.

26

Rule 15c3-3
Question ID: 48778
All of the following statements regarding a special reserve bank account are true EXCEPT:

A) a balance must be maintained if customer credits exceed customer debits.
B) a broker/dealer may use the funds to finance an underwriting.
C) the reserve requirement is normally computed weekly.
D) withdrawals are permitted midweek if supported by a computation.

Answer: B

The special reserve deposit requirement is typically a weekly computation. A deposit is required to the account if customer credits exceed customer debits. If there is more on deposit than the calculation requires, the excess may be withdrawn as long the withdrawal is supported by a computation.

Reference: 4.3.2 in the License Exam Manual.

27

Rule 15c3-3
Question ID: 48782
The securities collateralizing customer margin debit balances for Acme Securities, Inc., consist of:
ABC Common-$100,000.
DEF Common-$350,000.
XYZ Common-$200,000.
PDQ Preferred-$150,000.
U.S. T-bonds-$600,000.

Under 15c3-3, the concentration threshold for determining concentrated collateral is:

A) $350,000.
B) $210,000.
C) $140,000.
D) $280,000.

Answer: B

Concentration of collateral in margin accounts occurs if a nonexempt issue of securities is worth more than 15% of the value of all securities collateralizing the account. To determine whether concentration exists, the threshold must be computed. Add all of the collateral together and multiply by 15% ($1,400,000 × 15% = $210,000). Note that the government securities, which are exempt securities, are included in the threshold calculation. However, they are never subject to a concentration deduction.

Reference: 4.3.2.2 in the License Exam Manual.

28

Rule 15c3-3
Question ID: 48783
Which of the following items are credits in the reserve formula under SEC 15c3-3?

I. Monies borrowed collateralized by customer securities.
II. Monies payable against customer securities loaned.
III. Securities borrowed by customers to effect short sales.
IV. Customer securities failed to receive.

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

Answer: B

Customer-related credit items are credits in the reserve computations. Stock borrowed by a customer is a debit.

Reference: 4.3.2.1 in the License Exam Manual.

29

Rule 15c3-3
Question ID: 48784
For reserve computation purposes, debit balances in customer accounts include:

I. debits in margin accounts.
II. debits in cash accounts.
III. unsecured debits.
IV. concentrated debits.

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

Answer: D

Customer-related debit items are included in the reserve computation. Debits in both cash and margin account balances are included. The amount of unsecured customer debit balances and concentrated debits in margin accounts are deducted to arrive at a net customer debit balance.

Reference: 4.3.2.2 in the License Exam Manual.

30

Rule 15c3-3
Question ID: 48785
Which of the following items are credits in the reserve formula under SEC 15c3-3?

I. Free credit balances in customer accounts.
II. Credits in customer accounts arising from short sales.
III. Subordinated debt (approved).
IV. Subordinated debt (unapproved).

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

Answer: D

Reserve formula credits are related to customers. Subordinated loans are for the benefit of the firm. Note that customer credits from any source, including short sales, are part of the reserve computation.

Reference: 4.3.2.1 in the License Exam Manual.

31

Rule 15c3-3
Question ID: 48786
Which of the following are considered to be under the control of a broker/dealer under SEC 15c3-3?

I. Securities in transit between offices for 6 business days.
II. Securities in transfer for 45 days.
III. Securities on deposit with DTC.
IV. Securities on deposit with a custodian bank.

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

Answer: A

Securities on deposit with SEC registered depositories, such as DTC, are considered to be in control of the broker/dealer. Securities in transfer for more than 40 days or in transit for more than 5 business days are not under the control of the computing broker/dealer.

Reference: 4.3.1.1 in the License Exam Manual.

32

Rule 15c3-3
Question ID: 48787
A customer has a cash account debit balance of $100,000 and a margin account debit balance of $500,000. What amount would be included as net customer debit balances, under the reserve formula, assuming no unsecured or concentrated debits?

A) $495,000.
B) $500,000.
C) $600,000.
D) $594,000.

Answer: D

The total of the cash and margin account debit balances are added and then reduced by 1% in the calculation of net customer debit balances for reserve computation purposes.

Reference: 4.3.2.2 in the License Exam Manual.

33

Rule 15c3-3
Question ID: 48788
Which of the following are acceptable deposits into the special reserve account?

I. Cash.
II. Insured municipal bonds.
III. Repurchase agreements.
IV. U.S. government securities.

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

Answer: D

Besides cash, only qualified securities are allowed to be deposited into the special reserve bank account. Qualified securities are those that are backed in full by the U.S. government.

Reference: 4.3.2.1 in the License Exam Manual.

34

Rule 15c3-3
Question ID: 48794
Withdrawals from the special reserve account:

I. may be made on any business day.
II. must be made on the second business day of the week.
III. must be supported by a computation.
IV. such computations must be retained in compliance with 17a-4.

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

Answer: B

Special reserve account withdrawals may be made on any day of the week as long as the withdrawal is supported by a computation. Records of reserve computations and withdrawals must be maintained for three years.

Reference: 4.3.2.3 in the License Exam Manual

35

Rule 15c3-3
Question ID: 48795
An exemption from the reserve requirement may be granted under K(2)i if a broker/dealer meets which of the following criteria?

I. Customer funds and securities are promptly transmitted to a clearing firm.
II. Financial transactions between customers and the broker/dealer are effected through a bank account maintained for the exclusive benefit of customers.
III. Credit balances in customer accounts are $1 million or less.
IV. The broker/dealer carries no margin accounts.

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

Answer: B

Firms clearing their business on an omnibus basis are exempt from the reserve computation under K(2)i; firms clearing this way can carry no margin accounts, must promptly transmit all customer securities to a clearing firm, and must effect all financial transactions with customers through a special bank account.

Reference: 4.3.4.1 in the License Exam Manual.

36

Rule 15c3-3
Question ID: 48798
A broker/dealer has tentative net capital of $380,000. Which of the following margin account debit balances would be subject to a concentration deduction when computing the reserve requirement?

1. Customer 1 − $100,000.
2. Customer 2 − $60,000.
3. Customer 3 − $90,000.
4. Customer 4 − $75,000.
"
A) I, III and IV.
B) I, II, III and IV.
C) I only.
D) I and III.

Answer: C

Concentration in customer debit balances occurs when a single customer's debit balance exceeds 25% of the firm's tentative net capital. The threshold for determining concentration is $95,000. Only Customer 1's balance requires a concentration deduction.

Reference: 4.3.2.2 in the License Exam Manual.

37

Rule 15c3-3
Question ID: 48801
Securities borrowed from one broker/dealer by another broker/dealer may be:

I. used to eliminate a short securities difference over 45 days old.
II. used to take possession or control of stock dividends over 45 days old.
III. used to take possession or control of securities in transfer for over 40 days.
IV. rehypothecated to a bank for a loan.

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

Answer: C

Short securities differences must be bought-in when over 45 days old. Borrowing does not suffice. Securities that have been borrowed from another broker/dealer are not allowed to be rehypothecated. Securities may be borrowed to meet possession and control rules for stock dividends over 45 days old and securities in transfer for over 40 days.

Reference: 4.3.1.3 in the License Exam Manual.

38

Rule 15c3-3
Question ID: 48802
Under 15c3-3, a broker/dealer may obtain possession or control over a given security by:

I. recalling customer securities collateralizing loans.
II. borrowing the security.
III. buying in the security.
IV. revising the selection of securities in margin accounts representing collateral for customer loans.

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

Answer: B

All options listed are available to the broker/dealer for obtaining possession and control under 15c3-3.

Reference: 4.3.1.3 in the License Exam Manual.

39

Rule 15c3-3
Question ID: 48816
A broker/dealer using the alternative method has aggregate debits of $7 million in the reserve formula. In addition, the broker/dealer makes markets in 60 stocks over $5 bid. Its minimum net capital requirement is:

A) $200,000.
B) $250,000.
C) $140,000.
D) $150,000.

Answer: B

This general securities broker/dealer must maintain net capital of $250,000 or 2% of aggregate debit balances as an alternative method calculator. The greater of the 2 amounts ($250,000) is the minimum net capital requirement.

Reference: 4.3.6.1 in the License Exam Manual.

40

Rule 15c3-3
Question ID: 48857
Debit balances in customer cash and margin accounts included in the reserve formula of a general securities broker/dealer are reduced by what percentage of their aggregate value?

A) 15%.
B) 1%.
C) 3%.
D) 5%.

Answer: B

A 1% reduction in the value of customer debit balances is required by SEC Rule 15c3-3 to cover potential bad debts.

Reference: 4.3.2.2 in the License Exam Manual.

41

Rule 15c3-3
Question ID: 48858
In computing a broker/dealer's reserve account requirement under SEC Rule 15c3-3, which of the following statements regarding the calculation of net customer debit balances may be TRUE?

I. Unsecured customer debit balances are not included in this calculation.
II. Only margin account debit balances are included in this calculation.
III. Adjustments may have to be made if there is an undue concentration in margin accounts.
IV. A 1% deduction must be made only if total customer debits exceed $1.5 million.

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

Answer: A

Aggregate debit balances in customers' cash and margin accounts, as reported for purposes of computing a broker/dealer's reserve account requirements, do not include balances that are not secured. In addition, deduction may be necessary if there is undue concentration (individual margin accounts having collateral value in excess of 15% of all margin accounts). Only margin account debit balances are counted; cash account debits also are counted. The 1% automatic deduction applies in all instances, without regard to dollar amount limitations.

Reference: 4.3.2.2 in the License Exam Manual.

42

Rule 15c3-3
Question ID: 48859
A broker/dealer may borrow securities to obtain possession or control in all of the following situations EXCEPT:

A) when securities have been loaned to another broker/dealer.
B) when securities have not been received as a result of a stock dividend more than 45 days ago.
C) when securities failed to receive over 30 days old.
D) when securities are on deposit as collateral for a loan at a bank.

Answer: C

To obtain possession or control, a broker/dealer is permitted to borrow stock to bring the following into control: bank loan collateral, securities loaned and securities receivable on a stock split, and dividends older than 45 days. Stock may not be borrowed to obtain control over fails to receive older than 30 calendar days, and customer fails to deliver over 10 business days; these must be bought in.

Reference: 4.3.1.3 in the License Exam Manual.

43


Rule 15c3-3
Question ID: 48860
A broker/dealer carries customer margin accounts with $500,000 in debits that are fully secured by security positions shown in the table below:
$210,000 ALF
$140,000 IBS
$70,000 U.S. government bonds
$80,000 MTN
$25,000 TCB
$175,000 TIP
---------- ----------
$700,000 Total

When computing the reserve formula under SEC Rule 15c3-3, the broker/dealer must calculate a concentration deduction on any nonexempt securities collateralizing the position in excess of what market value?

A) $105,000.
B) $70,000.
C) $175,000.
D) $250,000.

Answer: A

Any nonexempt security position that exceeds 15% of the market value of the total securities that are available as collateral for customer debits is considered concentrated. The concentration threshold in this example is 15% of $700,000, or $105,000.

Reference: 4.3.2.2 in the License Exam Manual.

44

Rule 15c3-3
Question ID: 48861
In calculating the reserve formula under SEC Rule 15c3-3, all of the following are credit items EXCEPT:

A) customers' securities that are failed to receive.
B) securities borrowed to effect short sales by customers.
C) monies borrowed that are collateralized by customers' securities.
D) monies payable against customers' securities loaned.

Answer: B

Stock borrowed for customers is a debit item in the reserve computation. Loans obtained using customer collateral, customers' stock loaned, and customers' securities failed to receive are all credit items.

Reference: 4.3.2.1 in the License Exam Manual.

45

Rule 15c3-3
Question ID: 48862
When performing the reserve account computation as required under SEC Rule 15c3-3, which of the following items are included as credits?

I. Free credit balances in customer accounts.
II. Credit balances in customer accounts arising from short sales.
III. Fails to deliver for customer accounts not older than 30 calendar days.
IV. Short securities differences 7 business days old.

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

Answer: A

All credit balances in customer accounts are included as credit items in the reserve formula. Fails to deliver for customer accounts are included as debits. Short securities differences are included as credits only when they are older than 30 calendar days.

Reference: 4.3.2.1 in the License Exam Manual.

46


Rule 15c3-3
Question ID: 48863
When calculating the reserve requirement under SEC Rule 15c3-3, which of the following items would appear on the debit side of the reserve formula?

A) Fail to deliver-firm.
B) Fail to receive-customer.
C) Stock loaned-customer.
D) Stock borrowed-customer.

Answer: D

In the reserve formula, the most important debit and credit items are:

Debits:
Customer debit balances
Customer fails to deliver
Customer stock borrowed

Credits:
Customer credit balances
Customer fails to receive
Customer stock loaned
Principal short sales to customers
Firm loans using customer collateral
Short securities differences over 30 days

Reference: 4.3.2.1 in the License Exam Manual.

47

Rule 15c3-3
Question ID: 48864
A broker/dealer that computes its reserve requirement weekly must maintain what percentage of the excess of total credits over total debits in the special reserve account?

A) 110%.
B) 100%.
C) 95%.
D) 105%

Answer: B

When computing its reserve requirement weekly, a broker/dealer must have on deposit 100% of the calculated amount, meaning the excess of credits over debits in the formula.

Reference: 4.3.2.1 in the License Exam Manual.

48

Rule 15c3-3
Question ID: 48865
Unresolved short securities differences must be bought-in:

A) immediately upon discovery.
B) within 5 business days of discovery.
C) within 30 calendar days of discovery.
D) within 45 calendar days of discovery

Answer: D

Under the rule, short securities differences must be bought-in within 45 days of the date of discovery.

Reference: 4.3.3 in the License Exam Manual.

49

Rule 15c3-3
Question ID: 48866
Short securities differences become:

A) credit items in the reserve formula if not resolved within 45 calendar days.
B) credit items in the reserve formula if not resolved within 30 calendar days.
C) debit items in the reserve formula if not resolved within 30 calendar days.
D) debit items in the reserve formula if not resolved within 45 calendar days.

Answer: B

Any short securities difference more than 30 days old becomes a credit item in the reserve formula. Short securities differences must be bought-in within 45 days of the date of discovery.

Reference: 4.3.2.1 in the License Exam Manual.

50

Rule 15c3-3
Question ID: 48867
A broker/dealer with an aggregate indebtedness of less than 800% of net capital and that has less than $1 million of customer credits may compute the reserve requirement no less frequently than:

A) monthly.
B) daily.
C) weekly.
D) quarterly.

Answer: A

A monthly reserve computation may be performed only if a broker/dealer's AI-to-NC ratio does not exceed 8:1 and if customer credit balances do not exceed $1 million. Otherwise, the computation must be performed weekly.

Reference: 4.3.2.1 in the License Exam Manual.

51

Rule 15c3-3
Question ID: 48868
A broker/dealer whose AI to NC ratio exceeds 800% must compute the reserve requirement at least:

A) quarterly.
B) weekly.
C) daily.
D) monthly.

Answer: B

A monthly reserve computation may be performed only if a broker/dealer's AI-to-NC ratio does not exceed 8:1, and if customer credit balances do not exceed $1 million. Otherwise, the computation must be performed weekly.

Reference: 4.3.2.1 in the License Exam Manual.

52

Rule 15c3-3
Question ID: 48869
Which of the following may be eligible for deposit into a special reserve account under SEC Rule 15c3-3?

I. Cash.
II. Securities guaranteed by the U.S. government.
III. Corporate bonds rated AA or higher.
IV. Municipal securities on which the interest is paid from the general taxing power of the municipality.

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

Answer: B

The only items acceptable for deposit into a special reserve account are cash and qualified securities. A qualified security is one with guaranteed principal and interest by the U.S. government.

Reference: 4.3.2.1 in the License Exam Manual.

53

Rule 15c3-3
Question ID: 48870
If there is a concentration of securities in customer margin accounts, a deduction to customer debit balances must be made based on the market value of the securities. If the securities collateralizing margin accounts are as shown below, what is the concentration amount?

ACM common stock: $100,000.
AMN common stock: $100,000.
LMN common stock: $100,000.
DEF common stock: $125,000.
SSS common stock: $175,000.
U.S. T-bills: $300,000.
Total: $900,000.
A) $135,000.
B) $40,000.
C) $90,000.
D) $100,000.

Answer: B

A concentration exists if any one nonexempt position exceeds 15% of all securities that collateralize customer margin accounts. In this case, 15% of $900,000 is $135,000. The only nonexempt position listed that exceeds this is the SSS common stock of $175,000. The excess is $40,000 and this market value is used as a basis for computing the deduction to customer debits ($40,000 ÷ 140%).

Reference: 4.3.2.2 in the License Exam Manual.

54

Rule 15c3-3
Question ID: 48921
Assume that a broker/dealer's tentative net capital, as computed in accordance with SEC Rule 15c3-1, is $500,000. Which of the following margin account debit balances would be subject to concentration and deduction from total debit balances when computing the firm's reserve requirement?

I. $100,000.
II. $120,000.
III. $140,000.
IV. $160,000.

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

Answer: A

Any margin account debit balance in excess of 25% of the carrying broker/dealer's tentative net capital is subject to concentration and reduction of all such excess debit amounts from total customer debits. In this case, 25% of the broker/dealer's tentative net capital of $500,000 is $125,000. Thus, the $140,000 and $160,000 debit balances are over the concentration threshold by $15,000 and $35,000, respectively. A total of $50,000 would therefore be deducted from customer debits when computing the reserve requirement.

Reference: 4.3.2.2 in the License Exam Manual.

55

Rule 15c3-3
Question ID: 48994
SEC Rule 15c3-2 regarding notices to customers of their free credit balances states all of the following EXCEPT that the:

A) notice must be sent monthly if the account is active.
B) notice must state that the funds are segregated and may not be used by the broker/dealer.
C) customer must be sent a written notice of the amount due at least quarterly.
D) notice must state that the funds are payable on demand from the customer.

Answer: B

SEC Rule 15c3-2 requires that customers be given quarterly notice of free credit balances. The notice must show the amount of the balances, state that the funds are payable on demand, and state that the broker/dealer may use the funds in its business because they are not segregated.

Reference: 4.3.5 in the License Exam Manual.

56

Rule 15c3-3
Question ID: 48997
Customers for whom a broker/dealer is holding free credit balances must be advised of this fact:

A) monthly.
B) annually.
C) before each transaction.
D) quarterly.

Answer: D

SEC Rule 15c3-2 requires that customers with free credit balances be sent a statement at least quarterly. This statement must alert customers to the fact that the funds may be withdrawn on request, but the money may be used by the firm as business working capital.

Reference: 4.3.5 in the License Exam Manual.

57

Rule 15c3-3
Question ID: 49011
Customer statements must be sent out at least:

A) monthly.
B) quarterly.
C) daily.
D) weekly.

Answer: B

FINRA requires member firms to send out customer account statements at least once per calendar quarter.

Reference: 4.3.5 in the License Exam Manual.

58

Rule 15c3-3
Question ID: 49058
In computing reserve account requirements under SEC Rule 15c3-3, customer net debit balances must automatically be adjusted downward by:

A) 10%.
B) 12%.
C) 15%.
D) 1%.

Answer: D

Debit balances in customers' cash and margin accounts must be reduced in the reserve calculation by an amount equal to 1% of their aggregate value.

Reference: 4.3.2.2 in the License Exam Manual.

59

Rule 15c3-3
Question ID: 49059
Under the provisions of SEC Rule 15c3-3, broker/dealers are required to determine the amount of excess margin securities in inactive margin accounts not less than:

A) quarterly.
B) weekly.
C) daily.
D) monthly.

Answer: B

Although the rule requires a daily computation of securities under a broker/dealer's possession or control, it allows inactive margin accounts to be computed weekly instead of daily.

Reference: 4.3.1.5 in the License Exam Manual.

60

Rule 15c3-3
Question ID: 49060
Which of the following offsite locations for customers' fully paid or excess margin securities do not require the broker/dealer to take immediate action to secure such securities?

A) Securities failed to receive for 33 calendar days.
B) Securities in transfer for 22 calendar days.
C) Securities loaned to another broker/dealer.
D) Securities subject to a lien securing monies borrowed by the broker/dealer.

Answer: B

Securities are deemed to be in control if they are in transfer for no more than 40 calendar days. Securities failed to receive older than 30 calendar days are not in control and must be bought in promptly. Securities subject to a lien securing monies borrowed by the broker/dealer must be released from the lien on the next business day and physical possession or control obtained in another two business days. Securities loaned to another broker/dealer must be returned within 5 business days of issuing instructions.

Reference: 4.3.1.1 in the License Exam Manual.

61

Rule 15c3-3
Question ID: 49108
Which of the following statements regarding the reserve computation for firms operating under the alternative method is TRUE?

A) There is a 3% deduction against adjusted customer debits.
B) There is no automatic deduction against adjusted customer debits.
C) There is a 1% deduction against adjusted customer debits.
D) There is a 2% deduction against adjusted customer debits.

Answer: A

The automatic deduction is 3% for firms using the alternative method. For firms using the standard method, the charge is 1%.

Reference: 4.3.6.1 in the License Exam Manual.

62

Rule 15c3-3
Question ID: 49115
A broker/dealer wishes to change its exempt status under SEC 15c3-3 from K(2)ii to K(2)i. The request for the change must be directed to:

I. the SEC.
II. the DEA.

A) Both I and II.
B) Neither I nor II.
C) II only.
D) I only.

Answer: C

Any request to change exempt status must be directed to the firm's DEA. A firm cannot operate under a different, exempt provision until it receives written approval from its DEA.

Reference: 4.3.4 in the License Exam Manual.

63

Rule 15c3-3
Question ID: 49118
A broker/dealer, using the alternative method, has an unresolved short securities difference. Under SEC rules, the firm must include the market value of the difference as a credit in its reserve computation after:

A) 14 business days from discovery.
B) 21 business days from discovery.
C) 30 calendar days from discovery.
D) 7 business days from discovery.

Answer: D

Under the alternative method, short differences must be set up as a liability seven business days from discovery. For firms using the standard method, the time frame is 30 calendar days from discovery. All firms must create a subsidiary ledger for breaks in the stock record seven business days from discovery.

Reference: 4.3.6.1 in the License Exam Manual.

64

Rule 15c3-3
Question ID: 49132
If a firm fails to make a required deposit into the special reserve account, it must notify the SEC and its SRO:

A) by email, followed promptly by facsimile notice.
B) by facsimile notice, followed promptly by email.
C) electronically, followed promptly by written notice.
D) by telephone, followed promptly by written notice.

Answer: C

Immediate electronic notification must be followed by prompt written notice.

Reference: 4.3.2.3 in the License Exam Manual.

65

Rule 15c3-3
Question ID: 49133
If an all-or-none offering is not completed by the date outlined in the prospectus, which of the following statements is TRUE?

A) The offering converts to a mini-max underwriting.
B) The syndicate manager will lower the offering price.
C) Customer checks are released from escrow.
D) The shares sold are allocated pro rata to subscribers.

Answer: C

In contingent offerings such as all-or-none, customer checks are placed in escrow pending the results of the underwriting. If all of the shares are not sold, the offering is cancelled and the checks in escrow are returned to those customers.

Reference: 4.3.6 in the License Exam Manual.

66

Rule 15c3-3
Question ID: 49150
Under SEC rules, customer checks deposited into an escrow account in connection with a contingent offering may be invested in all of the following EXCEPT:

A) a money market fund.
B) securities guaranteed by the U.S. government.
C) a negotiable CD.
D) a deposit obligation of a bank.

Answer: C

Deposited proceeds may be held in cash, invested in a money market fund, or invested in any security with guaranteed principal and interest by the U.S. government.

Reference: 4.3.6 in the License Exam Manual.

67

Rule 15c3-3
Question ID: 49153
A broker/dealer is securing customer debit balances with registered securities. The securities are not endorsed, and the firm does not have signed stock powers. Which of the following statements are TRUE?

I. Customer debits are allowable in the computation of net capital.
II. Customer debits are nonallowable in the computation of net capital.
III. Customer debits are included in the reserve computation.
IV. Customer debits are excluded in the reserve computation.

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

Answer: D

In the event a customer does not meet a margin call, the firm cannot sell the securities. Therefore, the firm is unprotected. These unsecured debits are nonallowable for capital purposes and are excluded in the reserve computation.

Reference: 4.3.2.2 in the License Exam Manual.

68

Rule 15c3-3
Question ID: 49158
A broker/dealer has computed tentative net capital of $900,000. A concentration charge must be made, when performing the reserve computation, for any customer margin debit balance exceeding:

A) $90,000.
B) $135,000.
C) $180,000.
D) $225,000.

Answer: D

If any single margin customer's debit balance exceeds 25% of tentative net capital, the excess amount must be deducted from the customer's debit balance amount when performing the reserve computation.

Reference: 4.3.2.2 in the License Exam Manual.

69

Rule 15c3-3
Question ID: 49164
The following entries are taken from the trial balance of a firm which computes its net capital requirement using the AI method:
; ; ; ;

DR CR
Cust. control -
cash accounts $200,000 $1,200,000
Cust. control -
margin accounts $1,400,000
Fail to deliver -
cust. $150,000
Stock borrowed - cust. $400,000
Short sales to cus $300,000
Fail to recieve - cust. $400,000
Stock loan - cust. $500,000
Cash - sp. reserved
account $210,000

What is this firm's reserve deposit requirement?""

A) $88,000.
B) $56,000.
C) $0.
D) $40,000.

Answer: B

The first thing to do is to determine the reserve requirement. Debit balances in both cash and margin accounts must be added and then reduced by 1%. Therefore, $1,600,000 − 1% = $1,584,000. Customer fails to deliver as well as stock borrowed by customers are monies owed by customers to the firm. When added to net customer debit balances, debits in the reserve computation total $2,134,000. Credit balances in customer accounts, short sales to customers, fails to receive for customer accounts, and customer stock loaned out all represent monies the firm owes customers and are therefore credit items in the computation. Credits total $2,400,000 and exceed debits by $266,000, which represents the reserve requirement. As the firm already has $210,000 in its reserve account, the deposit amount is $56,000.

Reference: 4.3.2.1 in the License Exam Manual.

70

Rule 15c3-3
Question ID: 49179
A firm using the Alternative Method has aggregate debits of $10 million. The firm's last computed net capital was $475,000. How much equity could a retiring partner withdraw?

A) $225,000.
B) $275,000.
C) $0.
D) $175,000.

Answer: C

Under the Alternative Method, equity cannot be withdrawn if it would bring capital below 120% of minimum or below 5% of aggregate debits. This firm's capital is already below 5% of aggregate debits, which means the firm is in early warning.

Reference: 4.3.6.1 in the License Exam Manual.

71

Rule 15c3-3
Question ID: 49180
Unless an extension of time is granted by your SRO, a customer fail to deliver must be bought in:

A) ten business days after S.
B) five business days after T.
C) five business days after S.
D) ten business days after T.

Answer: A

For capital purposes, customer fails are aged on the 5th business day after settlement. Ten business days after settlement, they must be bought in.

Reference: 4.3.1.1 in the License Exam Manual.

72

Rule 15c3-3
Question ID: 49182
When computing your reserve requirement, you note that, among the securities collateralizing $2 million in customer debit balances is $700,000 of XYZ stock. This would require you to take a concentration charge against customer debits of:

A) $300,000.
B) $400,000.
C) $200,000.
D) $100,000.

Answer: C

Using the 140% rule, there are securities worth $2.8 million collateralizing margin account debit balances of $2 million. The concentration threshold is 15% of $2.8 million, or $420,000. Therefore, the concentration amount is $280,000 ($700,000 − $420,000). To determine the concentration deduction, divide the concentration amount by 140%. $280,000 ÷ 1.4 = $200,000.

Reference: 4.3.2.2 in the License Exam Manual.

73

SIPC
Question ID: 48489
The trustee for a bankrupt broker/dealer must:

I. notify customers of the bankruptcy.
II. handle the broker/dealer's liquidation.
III. distribute all property specifically identified as belonging to customers.
IV. review the firm's books and records.

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

Answer: D

Upon being appointed by a court, a trustee must inform all customers of the broker/dealer's condition, conduct a rapid and orderly liquidation of the broker/dealer's business, and distribute all identifiable assets. The trustee reviews the broker/dealer's books and records as part of this process.

Reference: 4.4.6.1 in the License Exam Manual.

74

SIPC
Question ID: 48490
Securities distributed by a trustee operating under Securities Investor Protection Corporation (SIPC) authorization will be valued for coverage based on the:

A) current purchase price.
B) market value of the securities on the day on which the court is petitioned to appoint a trustee.
C) average daily value of the securities between the date of the bankruptcy and the distribution date.
D) value of the securities as of the distribution date.

Answer: B

The value of a customer account under SIPC is set as of the date that SIPC applies to the courts to appoint a bankruptcy trustee.

Reference: 4.4.6.2 in the License Exam Manual.

75

SIPC
Question ID: 48491
Which of the following statements regarding clients not covered by SIPC in a broker/dealer bankruptcy is TRUE?

A) They become general creditors.
B) They become secured creditors.
C) They become preferred creditors.
D) They lose their investment.

Answer: A

Any customer claims that SIPC does not cover will result in the customer becoming a general (unsecured) creditor of the company.

Reference: 4.4.6.3 in the License Exam Manual.

76

SIPC
Question ID: 48492
In the event that a broker/dealer goes bankrupt, the Securities Investor Protection Corporation covers:

A) $100,000 per account.
B) $500,000 per account.
C) $500,000 per separate customer.
D) $100,000 per separate customer.

Answer: C

Coverage under SIPC amounts to $500,000 per separate customer. No more than $250,000 of that amount covers unrecovered cash.

Reference: 4.4.6.3.1 in the License Exam Manual.

77

SIPC
Question ID: 48493
Which of the following best describes a fidelity bond?

A) Corporate debt issue backed by the faith and credit of the issuer.
B) Insurance bond that protects broker/dealers from losses due to theft or embezzlement by employees.
C) Bond that protects customer accounts against loss of value.
D) Truth-in-lending statement that must be furnished to customers before they open accounts.

Answer: B

A broker/dealer must maintain fidelity bond coverage to protect the firm's assets from loss due to theft or embezzlement by officers or employees.

Reference: 4.4.6.6 in the License Exam Manual.

78

SIPC
Question ID: 48541
If a customer has $350,000 in securities and $150,000 cash in a brokerage firm for which a SIPC trustee has been appointed, how much will SIPC return to him?

A) $200,000.
B) $250,000.
C) $350,000.
D) $500,000.

Answer: D

SIPC coverage is $500,000, which includes a maximum of $250,000 in cash.

Reference: 4.4.6.3 in the License Exam Manual.

79

SIPC
Question ID: 48601
For which of the following investments does SIPC provide coverage to customers?

I. Commodity futures contracts.
II. Unregistered stock.
III. Currencies.
IV. Municipal bonds.

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

Answer: D

SIPC coverage only applies to cash and securities. Commodity futures contracts and foreign currencies are not considered securities.

Reference: 4.4.6.1 in the License Exam Manual.

80

SIPC
Question ID: 48613
FINRA rules require member firms to review their surety bond coverage:

A) quarterly.
B) semiannually.
C) annually.
D) monthly.

Answer: C

Fidelity bonding policies are renewable annually, and members are required to review the adequacy of their coverage each year.

Reference: 4.4.6.6 in the License Exam Manual.

81

SIPC
Question ID: 48616
Coverage under SIPC is:

A) per each taxpayer ID number.
B) unlimited.
C) per separate customer.
D) per separate account.

Answer: C

Coverage under SIPC is per separate customer, not per separate account. Different accounts held by the same customer would be combined for coverage purposes.

Reference: 4.4.6.3.1 in the License Exam Manual.

82

SIPC
Question ID: 48631
All of the following customer positions would be covered in an SIPC liquidation EXCEPT:

A) direct participation programs.
B) S&P index futures.
C) municipal bonds.
D) U.S. T-bills.

Answer: B

SIPC covers securities only. Futures are not covered under SIPC.

Reference: 4.4.6.1 in the License Exam Manual.

83

SIPC
Question ID: 48662
Under SEC rules, all of the following persons are prohibited from supervising a quarterly securities count EXCEPT:

A) a person responsible for the preservation of records relating to the count.
B) a person responsible for preparing and filing the firm's SIPC Assessment Report.
C) a person responsible for the custody of securities.
D) a person responsible for the preparation of records relating to the count.

Answer: B

Carrying firms are required to count all securities being held by the firm at least quarterly. The count cannot be performed by persons whose responsibilities include the care and custody of securities. The count must be made or supervised by persons whose regular duties do not require them to have direct responsibility for the care and custody of securities, or the making or preservation of records relating to the count.

Reference: 4.4.2 in the License Exam Manual.

84


SIPC
Question ID: 48681
A customer has a margin account with $300,000 of securities and a $100,000 debit. The customer also has a cash account with no securities positions and a $150,000 free credit balance. The customer's coverage under SIPC is:

A) $400,000.
B) $350,000.
C) $200,000.
D) $450,000.

Answer: B

SIPC covers a maximum of $500,000 per customer, with a limit of $250,000 of coverage for cash. The coverage applies to fully-paid customer securities, which, in this example, total $200,000 due to the $100,000 debit.

Reference: 4.4.6.3 in the License Exam Manual.

85

SIPC
Question ID: 48702
The SIPC logo must appear on a broker/dealer's:

I. advertising.
II. stationery.
III. business cards.

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

Answer: D

The SIPC logo is required on all broker/dealer advertising if the broker/dealer is a SIPC member.

Reference: 4.4.6.4 in the License Exam Manual.

86

SIPC
Question ID: 48719
Broker/dealers are required to maintain indemnification insurance based upon the firm's:

A) net capital requirement.
B) total number of employees.
C) total number of registered employees.
D) SIPC assessment rate.

Answer: A

Indemnification insurance or a fidelity bond is required to protect the firm from loss or theft by employees. The coverage amount must be 120% of the net capital required, subject to a minimum of $100,000. The amount must be reviewed annually to assure compliance. Note that the 120% rule is applied against the firm's highest net capital requirement over the 12 months preceding the computation.

Reference: 4.4.6.6 in the License Exam Manual.

87

SIPC
Question ID: 48739
Under 17a-13, which of the following statements regarding quarterly securities counts are TRUE?

I. Personnel doing the count must not be involved in the care or custody of securities.
II. Fully disclosed broker/dealers are exempt.
III. A cyclical count, where only a portion of the securities are counted at any one time, is permitted.
IV. All securities must be counted within a given quarter.
A) I and IV.
B) I, II, III and IV.
C) I, II and IV.
D) I, III and IV.

Answer: B

Quarterly counts are required for firms that hold customer securities and must be performed by persons not responsible for the safekeeping of the securities.

Reference: 4.4.2 in the License Exam Manual.

88

SIPC
Question ID: 48740
Which market value is used by SIPC in determining coverage for investors who have lost securities as the result of insolvency of a broker/dealer?

A) The closing bid price on the date the broker/dealer declares bankruptcy.
B) The closing bid price on the date SIPC claims are paid.
C) The average closing bid price between the date of bankruptcy and SIPC payment date.
D) The closing bid price on the date the Federal court is petitioned to appoint a trustee.

Answer: D

The market valuation of securities, for SIPC purposes, is the closing bid price on the day that the court is petitioned to appoint a trustee.

Reference: 4.4.6.2 in the License Exam Manual.

89

SIPC
Question ID: 48748
For purposes of the Securities Investors Protection Act, customers of introducing firms are considered customers of:

A) SIPC.
B) none of these.
C) the clearing firm.
D) the introducing firm.

Answer: C

The clearing firm holds the customer securities, so for SIPC purposes, customers of introducing broker/dealers are customers of the clearing firm.

Reference: 4.4.6.1 in the License Exam Manual.

90

SIPC
Question ID: 48771
Under SEC Rule 17a-13, broker/dealers using a cyclical count procedure must count all security positions:

A) on any basis that is fair and reasonable.
B) not less than three months or more than six months from the previous count.
C) not less than two months or more than 4 months from the previous count.
D) on exact date three months following the previous count.

Answer: C

A cyclical count procedure is allowable provided all securities are counted at least once per quarter, and the same position is counted no sooner than two months, nor later than four months, from the previous count.

Reference: 4.4.2 in the License Exam Manual.

91

SIPC
Question ID: 48779
Which of the following statements regarding coverage under SIPC are TRUE?

I. Accounts of officers and partners are not covered.
II. Futures accounts are not covered.
III. Subordinated lenders are not covered.
IV. For any claims in excess of SIPC limits, the customer becomes a general creditor.
A) I and III.
B) II and IV.
C) I, II, III and IV.
D) I, II and III.

Answer: C

SIPC covers the accounts of customers of the firm only, which does not include officers, partners, and subordinated lenders. Only securities are covered, so commodities do not have coverage. Customers who have claims in excess of SIPC limits are treated as general creditors.

Reference: 4.4.6.3 in the License Exam Manual.

92

SIPC
Question ID: 48793
Which of the following are considered customers of a broker/dealer under SEC rules?

I. A person whose funds or securities are held by the broker/dealer.
II. An officer of the broker/dealer whose funds or securities are held by the broker/dealer.
III. Another broker/dealer who maintains a trading account with the broker/dealer.
IV. Another broker/dealer who maintains an omnibus account with the broker/dealer.
A) II, III and IV.
B) I and IV.
C) I and II.
D) I, II and III.

Answer: B

Public persons and broker/dealers who have omnibus account relationships with a broker/dealer are considered customers under SEC rules. Officers and trading accounts maintained by other broker/dealers are not considered customers.

Reference: 4.4.6.2.1 in the License Exam Manual.

93

SIPC
Question ID: 48830
SEC Rule 17a-13 requires a quarterly count of physical securities by a(n):

A) employee whose regular duties do not involve direct responsibility for safekeeping securities.
B) head cashier or branch manager.
C) independent public accountant.
D) partner, officer, or other registered principal.

Answer: A

Rule 17a-13 covering quarterly securities counts states that the count cannot be handled by individuals who normally safeguard securities and/or keep records.

Reference: 4.4.2 in the License Exam Manual.

94

SIPC
Question ID: 48831
Under SEC Rule 17a-13, firms performing the required securities count and using a cyclical count procedure must count all security positions:

A) not less than three months or more than six months from the previous count.
B) on the same date exactly three months following the previous count for that position.
C) on any basis that is fair and reasonable.
D) not less than two months or more than four months from the previous count.

Answer: D

Firms can count all securities quarterly on a set date, or use a rotating cyclical procedure that counts selected positions only, and that over the course of three months counts all positions. Under a cyclical method, securities may not be counted more frequently than two months from the last count, nor may the securities be counted more than four months from the last count.

Reference: 4.4.2 in the License Exam Manual.

95

SIPC
Question ID: 48993
Confirmations sent to customers must include:

A) the amount of any commissions charged.
B) all of these.
C) the markup or markdown if the member acted as a principal or in a riskless principal capacity in a Nasdaq security.
D) whether the member acted as agent or principal.

Answer: B

Customer confirmations must include the amount of markup for riskless transactions in Nasdaq securities, disclose whether the member acted in an agency or dealer capacity, and indicate the amount of commission when acting as an agent.

Reference: 4.4.1 in the License Exam Manual.

96

SIPC
Question ID: 49061
A customer of a broker/dealer has $150,000 in cash and $375,000 in securities in street name when the broker/dealer becomes insolvent. Under SIPC rules, the customer will be protected for what total amount?

A) $375,000.
B) $525,000.
C) $500,000.
D) $100,000.

Answer: C

$250,000 worth of securities are covered, while up to $250,000 of the cash is covered, for total coverage of $500,000.

Reference: 4.4.6.3 in the License Exam Manual.

97

SIPC
Question ID: 49062
Which of the following would not be considered separate customers with each entitled to SIPC coverage?

A) Bob Adams' cash account; Bob Adams' margin account.
B) Bob Adams' cash account; Jane Adams' cash account.
C) Bob Adams' cash account; Bob and Jane Adams' joint cash account.
D) Bob Adams' cash account; Bob Adams' custodian for Bob Adams, Jr., under the Uniform Gifts to Minors Act.

Answer: A

Both the cash account and the margin account are in the same name, so they are considered one customer for SIPC coverage limits. The other accounts have different names and are considered separate customers under SIPC.

Reference: 4.4.6.3.1 in the License Exam Manual.

98

SIPC
Question ID: 49063
How would a SIPC trustee allocate street name securities when they are less than the actual amounts of physical securities owed to customers?

A) On a first-come, first-serve basis.
B) By giving priority to customers with the oldest cost basis dates.
C) By giving priority to customers with the newest cost basis dates.
D) On a pro rata basis

Answer: D

In a SIPC liquidation, street name securities are divided among customers on a pro rata basis.

Reference: 4.4.6.2 in the License Exam Manual.

99

SIPC
Question ID: 49130
A member firm must compute its fidelity bonding insurance requirement based on its:

A) lowest required net capital over the preceding 12 months.
B) average net capital over the preceding 12 months.
C) highest required net capital over the preceding 12 months.
D) most recently computed net capital requirement.

Answer: C

To determine its fidelity bonding requirement, a firm must use its highest required net capital over the preceding 12 months.

Reference: 4.4.6.6 in the License Exam Manual.

100

SIPC
Question ID: 49143
A member firm decides to reduce its excess SIPC coverage. Under FINRA rules, the firm must notify its customers of the reduction:

A) at or before the next trade confirmation sent to customers.
B) at least 15 days before the reduction.
C) at least 30 days before the reduction.
D) at or before the next statement sent to customers.

Answer: C

Excess SIPC coverage is acquired through private insurance companies and provides protection in excess of the $500,000 covered by SIPC. Customers must be advised at least 30 days in advance of the change if a member reduces or eliminates any excess coverage.

Reference: 4.4.6.5 in the License Exam Manual.

101

SIPC
Question ID: 49149
A member firm has a net capital requirement of $350,000. Under FINRA rules, it must maintain a fidelity bond of not less than:

A) $350,000.
B) $525,000.
C) $420,000.
D) $250,000.

Answer: C

A member must maintain minimum coverage of no less than 120% of its net capital requirement.

Reference: 4.4.6.6 in the License Exam Manual.

102

SIPC
Question ID: 49169
Under SEC rules, a box count must be performed:

A) quarterly.
B) daily.
C) weekly.
D) monthly.

Answer: A

A box count is another name for a securities count. Under SEC Rule 17a- 13, box counts must be performed at least quarterly.

Reference: 4.4.2 in the License Exam Manual.

103

SIPC
Question ID: 49174
In the event of a broker/dealer bankruptcy, the date used to value customer securities for coverage purposes is the date:

A) customer accounts are transferred to another firm.
B) SIPC applies to a court for the appointment of a trustee.
C) the broker/dealer files for bankruptcy protection.
D) a trustee is appointed to oversee the liquidation.

Answer: B

Claims are valued as of the filing date (i.e., the date a court is asked to appoint a trustee).

Reference: 4.4.6.2.1 in the License Exam Manual.