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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.