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Series 27
Finra Operations Principal Exam
| Term | Definition |
|---|---|
| S27 Q1: 1. In order to control mailing costs, a FINRA member could: Ask clients to pick up statements at the office Make RRs responsible for delivering statements to their clients Direct clients to a web site where information can be accessed Wait until y | Answer: C. Traditionally, broker-dealers mailed customer statements, balance sheets, confirmations and other regulatory notices. However, there is greater acceptance of electronic communications because of easy access and retention capability. Clients mus |
| S27 Q2: 2. An OTC derivatives dealer requires net capital of: Ten times the general securities dealer minimum 10 times the aggregate debit items 5 % of the notional value of the amount at risk $20 million | Answer: D. OTC derivatives are financial management tools employed by corporations, financial institutions, government entities and other end users. Participants use OTC derivatives to effectively manage risks associated with their business activities. Th |
| S27 Q3: 3. A U4 has disclosures that include: An applicant’s felony history How many times he was married Employment record for last ten years Income earned I and II I and III II and III II and IV | Answer: B. A U4 requires an industry applicant to answer questions about their felony history in the Criminal Disclosure Section, particularly if they have EVER been convicted or pled guilty to a felony. Ten year employment history is found in Section 12 |
| S27 Q4: 4. A firm acting in the capacity of a municipal broker’s broker: Is unregulated because they are trading exempt securities Cannot hold proprietary positions Cannot participate in more than three underwritings per year Does not require a principal | Answer: B. A municipal broker’s broker is a specialized entity that brokers trades for other municipal firms. They are referenced in the net capital rule. See below. The term municipal securities brokers' broker shall mean a municipal securities broker or |
| S27 Q5: 5. A broker dealer performs a box count on March 31 and again on June 30. They should perform another box count: Every three months If there are no short differences on June 30, wait till year end At their fiscal year end Within the next four mont | Answer: D. Although the regulation appears to call for a quarterly verification of positions, there is some flexibility in the schedule. No security shall be examined, counted, verified, or compared for the purpose of this rule less than 2 months or more |
| S27 Q6: 6. Which of the following would not decrease SMA? Cash withdrawal Market decline Establishing a short position Long call purchase | Answer: B. A decline in the market value does not reduce previously established SMA. Taking funds out reduces the SMA and increases the debit balance in a long account. Investors can also utilize SMA to establish a short position or buy calls. |
| S27 Q7: 7. Which of the following does not have loan value? LEAPs US Treasury bond IPO Municipal bonds | Answer: C. An initial public offering does not have immediate loan value. An investor has to wait 30 days before loan value is recognized. LEAPS are long-term options that have loan value. Treasuries and municipals have loan values established by FINRA in |
| S27 Q8: 8. When a brokerage firm receives payment from an executing firm for sending orders to that firm, this arrangement is called: Soft dollars Spinning Payment for order flow Interpositioning | Answer: C. This practice, which must be disclosed to clients, is called payment for order flow. The most relevant point arising out of this practice is that FINRA members must disclose these practices in their quarterly order routing report, accessible on |
| S27 Q9: 9. The switch from the standard method of calculating capital to the alternative minimum method requires: A lower AI/NC ratio More FOCUS 2 filings Final approval from the Commission Notification to the DEA | Answer: D. The standard method looks at the ratio of aggregate indebtedness to net capital. The alternative method bases required capital on assets, specifically the aggregate debit items in the reserve formula calculated under Rule 15c3-3. Notification t |
| S27 Q10: 10. What would trigger an additional capital requirement? A carrying securities firm decides to make markets in two stocks A $5,000 broker dealer engages in simultaneous riskless transactions A $50,000 broker dealer does 12 proprietary trades in | Answer: C. The $50,000 broker dealer would have to maintain at least $100,000 if they engaged in 10 proprietary trades over the course of one year. The general securities firm would not have to increase their capital if they were only making markets in tw |
| S27 Q11: 11. A stock record would be in balance if: Customer long positions - fail to deliver = fail to receive Fail to receive = stock loaned Customer long positions minus - fail to receive = box Fail to deliver - stock borrowed = customer long | Answer: C. Another way of looking at this is: do the longs equal the shorts or does ownership = location Each choice will be analyzed: Fail to deliver is on the long side, so it is not a subtraction. It would be correct if written as customer long plus fa |
| S27 Q12: 12. Deductions from net worth include all of the following except: Unsecured loans and advances AI/NC greater than 12/1 Fixed assets and prepaid assets, Any contributed capital that provided the investor the option to withdraw capital within one | Answer: B. The AI/NC ratio is not a deduction from net worth. It is a standard on which a broker dealer’s net capital is based. The other items are specifically cited in the Net Capital Rule. |
| S27 Q13: 13. Dunlap Securities is computing AI. They have a fail to receive of 500 shares in Cool Aid offset by 500 shares in fail to deliver. The fail to receive is: Not AI Is AI Must be offset by exclusively by stock borrowed to be excluded Partially ex | Answer: A. The fail to deliver constitutes a satisfactory offset to the fail to receive; stock borrowed would also constitute a satisfactory offset. Under the exclusions from AI in the net capital rule the verbiage is as follows: Amounts payable against s |
| S27 Q14: 14. All of the following are deductions from net worth except: Prepaid rent The amount by which the market value of securities failed to receive outstanding longer than thirty calendar days exceeds the contract value of such fails to receive; Org | Answer: D. Satisfactory subordinations are additions to net worth; the other items are deductions. |
| S27 Q15: 15. USA Trading has just overhauled its written supervisory procedures. The retention requirement on the old procedures is: 3 years 5 years 6 years Lifetime | Answer: A. The firm must keep the old procedures manual for 3 years. |
| S27 Q16: 16. Your spouse works for Calista’s Warehouse, which is going public. A purchase can be made at the offering price by your spouse if: A bona fide offering is made and there are leftover shares Under no circumstances The issuer has directed shares | Answer: C. An issuer may direct shares to persons who would otherwise be restricted under the rule. This would normally include employees, officers and directors. This exception enables an associated person or their spouse to purchase equity IPO. |
| S27 Q17: 17. The SEC reporting rules regarding delivery of a firm’s unaudited statement of financial condition indicate that a balance sheet must be made available: Within 30 days of the financial statement date Within 45 days of the financial statement d | Answer: C. The financial reporting rules for broker-dealers under 17a-5 of the 1934 Securities Exchange Act specifies 65 days from the financial statement date. |
| S27 Q18: 18. Breakstone Brokerage has entered into an agreement to buy US government securities from another broker-dealer and resell at a later date. The purchase price was for $50 million. Currently the securities have a market value of 48 million. The | Answer: B. Breakstone is engaging in a reverse repurchase agreement. When the market value is less than the contract value, a reverse repurchase deficit is created. |
| S27 Q19: 19. A broker dealer is holding $1 million face amount of preferred stock that is scheduled for redemption in 60 days. The market price is also $1 million. The haircut is: Zero 5% 10% 15% | Answer: A. When a broker dealer is holding securities that are called for redemption within 90 days, there is no haircut. |
| S27 Q20: 20. The partners of Equis Capital contributed $4 million in capital 8 months ago. The firm has been extremely profitable since then and the partners feel the firm is overcapitalized and would like to withdraw some of the contributed capital to ac | Answer: B. The firm needs the written permission of FINRA to withdraw capital contributed within the last 12 months. (c)(1) No equity capital of a member may be withdrawn for a period of one year from the date such equity capital is contributed, unless ot |
| S27 Q21: 21. Equis Capital has 8 million in excess net capital. They would need FINRA’s permission to withdraw, pay a dividend, or provide an unsecured advance that exceeded what percentage of excess net capital? 5% 10% 15% 25% | Answer: B. A carrying or clearing member shall not, without the prior written approval of FINRA, withdraw capital, pay a dividend or effect a similar distribution that would reduce such member's equity, or make any unsecured advance or loan to a stockhold |
| S27 Q22: 22. Hardaway Trading has overpaid its rent. How is this treated for capital purposes? Reduce AI Non allowable asset Add to capital Create suspense account | Answer: B. The overpayment creates prepaid rent, which is a non-allowable asset. |
| S27 Q23: 23. Physical transfers of funds outside of the US would not include: Travelers checks Wire transfer Coin Money order | Answer: B. A wire transfer is not a physical movement of currency. |
| S27 Q24: 24. A $5,000 broker-dealer could engage in all of the following except: Simultaneous riskless trades Agency trades Selling group member in a firm commitment underwriting Proprietary trades | Answer: C. A $5,000 broker dealer could engage in the following activities: Taking an order from a client, buying as principal from another member and immediately selling to a client-this is called a simultaneous riskless principal trade Taking an order f |
| S27 Q25: 25. Who can apply to the Commission to compute deductions for market and credit risk? Mutual fund distributor Firms engaging in derivative transactions Online trading firm Nasdaq market maker | Answer: B. A broker or dealer may apply to the Commission for authorization to compute deductions for market risk pursuant to this Appendix E in lieu of computing deductions pursuant to §§ 240.15c3-1(c)(2)(vi) and (c)(2)(vii) and to compute deductions for |
| S27 Q26: 26. Jupiter Trading has a reverse repo on its books with Saturn Financial. The market price is 57 million and the contract price is 50 million. What must Jupiter do if the collateral is Federal Farm Credit bonds? Unwind the contract prematurely P | Answer: D. This is where its gets tricky. Listen up. Firms engaging in reverse repurchase agreements many require additional net capital when the market value exceeds the contract value, which is the case in this example. If the collateral consists of age |
| S27 Q27: 27. Jupiter Trading engages in a reverse repurchase agreement with Neptune Capital. The contract value is 100 million and the collateral is US Treasury Notes. The collateral rises to 106 million. As a result, Jupiter must: File a supplemental FOC | Answer: D. Here is the relevant citation from the net capital rule: A broker or dealer shall maintain net capital in addition to the amounts required under paragraph (a) of this section in an amount equal to 10 percent of: The excess of the market value o |
| S27 Q28: 28. When is the haircut on US government securities positions reduced by 25%? When the broker dealer computes under the alternative method When the broker dealer computes under 15c3-3 When the broker dealer has at least 1 billion in excess net ca | Answer: D. From the net capital rule: In the case of a Government securities dealer that reports to the Federal Reserve System, that transacts business directly with the Federal Reserve System, and that maintains at all times a minimum net capital of at l |
| S27 Q29: 29. Capital Brokers has the following financial profile: Net capital 5 million AI 12 million Aggregate debit items 60 million They compute under the alternative method They are contemplating a withdrawal of equity capital of 1.0 million. Would th | Answer: . |
| S27 Q30: 30. FINRA rules require that a member with a 10 million net capital requirement notify FINRA if their net capital drops below: 11 million 12 million 15 million 18 million | Answer: C. Under FINRA’s Capital Compliance Rule, if a member’s net capital computed under the standard method is less than 150 percent of its required net capital, notification must be given to FINRA within 24 hours. Notice that this requirement is more |
| S27 Q31: 31. A firm has conducted a public offering of securities. Under what circumstances would funds have to be returned in full to investors? If market circuit breakers were triggered If net capital was less than 120% of the minimum required If the Fo | Answer: D. FINRA members engaging in a public offering must deposit proceeds from the offering into an escrow account in the event that upon completion of the offering, their financial condition is tenuous. The traditional ratios are cited in FINRA Rule 5 |
| S27 Q32: 32. Block Brokerage has just calculated its net capital at 5 million and their requirement is 3.5 million. They purchased a $10 million equity block from an institutional seller early in the day. What is the major financial concern? Financing the | Answer: C. The regulatory consideration is called moment to moment capital compliance, which means a broker dealer must always have a sufficient amount of net capital. In this case, after the purchase of $10 million in stock and applying a 15% haircut, Bl |
| S27 Q33: 33. If FINRA is concerned with the accuracy or integrity of a firm’s financial statements, they may: Seek a court injunction to close the firm down Prevent a firm from participating in after-hours trading Increase the firm’s net capital requireme | Answer: D. FINRA may at any time, due to concerns regarding the accuracy or integrity of a member's financial statements, books and records or prior audited financial statements, direct any member to cause an audit to be made by an independent public acco |
| S27 Q34: 34. A firm has been notified by FINRA that they may not expand their business because they have a deteriorating financial condition. They may have to do which of the following: Reduce trade executions Close branch offices Refuse to take on new pr | Answer: C. Of the choices cited, only “take on new proprietary trading commitments” constitutes an expansion of business. See below. No member may expand its business during any period in which FINRA restricts the member from expanding its business for an |
| S27 Q35: 35. A customer has an existing margin account with a free credit balance of $6,000. The customer purchases 1,000 shares of MWC at $28 per share. Notwithstanding the free credit balance, the customer deposits 50% of the purchase amount, how many s | Answer: D. 400 shares would be pledged as collateral for the margin loan; therefore, 600 shares would remain segregated. On a purchase of 1,000 shares at $28 per share, the principal amount is $28,000. 50% of the principal amount is $14,000. Given that th |
| S27 Q36: 36. When a broker-dealer calculates its reserve requirement, it discovers that it must have $450,000 on deposit. The firm currently has $150,000 in U.S. government securities and $350,000 in cash deposited in the account. What is the amount that | Answer: A. The amount that must be on deposit in the customer reserve account is the difference between customer related credits and debits. Currently, there is $500,000 in the reserve account. Because $450,000 is required, there is an excess of $50,000, |
| S27 Q37: 37. A broker-dealer calculates its net capital using the alternative method. Currently, there are aggregate debit items totaling $8,000,000 in the reserve calculation. Below which net capital dollar amount would an early warning require reporting | Answer: C. Under Rule 17a-11, an early warning report must be filed if net capital falls below 5% of aggregate debit items in the reserve formula. 5% of $8 million is $400,000. |
| S27 Q38: 38. A firm’s aggregate debit items in the reserve formula total $10,000,000. If the firm’s current net capital is $425,000 and the net capital requirement is calculated using the alternative method, how much may a retired partner withdraw? $0 $25 | Answer: A. Withdrawals of equity from a broker-dealer are not permitted if net capital falls below 5% of aggregate debit items in the reserve formula. 5% of $10,000,000 is $500,000. Because $425,000 is less than $500,000 equity distributions would not be |
| S27 Q39: 39. What is the maximum deductible permitted by FINRA in a fidelity bond policy acquired by a member? 10% of the coverage amount 25% of the coverage amount 30% of the coverage amount $100,000 | Answer: B. FINRA member may have a deductible of up to 25% of the coverage amount. |
| S27 Q40: 40. When does the deductible on a fidelity bond policy become a deduction from net worth? If greater than 10% of the coverage If greater than 20% of the coverage If greater than 25% of the coverage If greater than $100,000 | Answer: A. If the deductible exceeds 10% of the coverage amount, there is a deduction from net worth. |
| S27 Q41: 41. An extension request under 15c3-3 or Reg T would be submitted to: FINRA SEC FRB SIAC | Answer: A. If a client cannot pay for their trade in time or deliver securities sold on time, firms can make an extension request with FINRA. |
| S27 Q41: 41. How often must a carrying firm submit the total of all debit balances and free credit balances to FINRA? Monthly Quarterly Semiannually Upon request by FINRA | Answer: A. FINRA Rule 4521 requires member firms that carry customer margin accounts to submit—via the Customer Margin Balance Form—the total of all debit balances in securities margin accounts, and all free credit balances in all cash accounts and all se |
| S27 Q42: 42. Fairmont Brokerage receives an order from an investment advisory firm to buy 9000 shares of Netflix. The shares will be allocated to numerous accounts. When does Fairmont have to receive the breakdown of shares allocated to specific accounts? | Answer: C. Fairmont must obtain the allocation of the Netflix order by noon of the next business day. It the order was on behalf of a brokerage client, the account name or designation would have to be obtained beforehand. |
| S27 Q43: 43. When a carrying member enters into a sale and leaseback arrangement with respect to its assets, prior written approval from FINRA is needed when the arrangement: Increases net capital by 5% Increases tentative net capital by 10% Increases net | Answer: B. This provision only applies to carrying members. The prior written approval of FINRA is needed if a sale and leaseback transaction, an outright sale, or a factoring or financing arrangement would increase tentative net capital by 10% or more. |
| S27 Q44: 44. A broker-dealer must prepare a written expense sharing agreement between the broker and a third party. Notification must be provided to its DEA if the broker dealer: Assumes responsibility for at least 50% of the costs of a shared expense Rec | Answer: C. A broker dealer must make a record of each expense incurred relating to its business, including the value of any goods or services used in its business, when a third party has furnished the goods or services or has paid or has agreed to pay the |
| S27 Q45: 45. According to the guidance provided by the SEC in July 2003 (The Letter) concerning expense sharing agreements, one proper method to record the expense is to use a reasonable basis determined according to an allocation by the third party. Acco | Answer: C. A broker dealer meets the requirements of the Letter if it records its expenses as incurred in amounts determined according to a reasonable allocation, applied on a consistent basis, of the costs assumed by the third party. A reasonable basis i |
| S27 Q46: 46. A third party has agreed to assume responsibility for the expenses relating to the business of Braddock Capital. The expense is not recorded on the reports that Braddock files with the Commission or with its DEA. Any corresponding liability w | Answer: B. The complete set of conditions that must be met in order to avoid having the net worth of a broker-dealer charged are as follows: If the expense results in a payment owed to a vendor or other party, the vendor or other party has agreed in writi |
| S27 Q47: 47. Does FINRA have the authority to impose capital requirements above the standards set in 15c3-1? With SEC approval With exchange approval To keep out riffraff For the protection of investors and to support the firm’s operations on a continuing | Answer: D. The passage below is taken from a FINRA commentary: What to Expect After You Apply as a New Broker-Dealer FINRA may impose higher net capital requirement than dictated by 15c3-1 for the following reasons. In order to support the Applicant's int |
| S27 Q48: 48. After a broker dealer has registered with the SEC, FINRA will examine a firm for compliance with the financial responsibility rules within: 3 months 6 months 9 months 48 hours if the firm does not maintain 120% of their net capital requiremen | Answer: B. Each self-regulatory organization that has responsibility for examining a broker or dealer member (including members that are government securities brokers or government securities dealers registered pursuant to section 15C(a)(1)(A) of the Act) |
| S27 Q49: 49. A firm has recently registered with the SEC but has not commenced operations within six months. FINRA should inspect the firm: When the firm says they are ready for such an inspection On the first day the firm engages in trading or investment | Answer: D. In each case where the examining self-regulatory organization determines that a broker or dealer member has not commenced actual operations within six months of the member's registration with the Commission, it shall delay the inspection pursua |
| S27 Q50: 50. Z-Trade registered with the SEC in March and became a FINRA member in May. By the following March, what type of regulatory review/inspection should have been conducted? SIPC inspection for purpose of collecting assessments SEC inspection for | Answer: C. Each self-regulatory organization that has responsibility for examining a broker or dealer member (including members that are government securities brokers or government securities dealers registered pursuant to section 15C(a)(1)(A) of the Act) |
| S27 Q51: 51. In the case of reverse repurchase deficit, the deduction shall be: A minimum of $500,000 One half the deficit, not to exceed $1 million One half the deficit The deficit | Answer: D. A reverse repurchase agreement deficit means the difference between the contract price for resale of the securities under the reverse repurchase agreement and the market value of those securities, if the contract is less than the market value o |
| S27 Q52: 52. For each set of proxy material processed, FINRA members may seek reimbursement: By debiting a client’s account for 50 cents Sending an annual invoice to cover the services provided at a reasonable amount From the issuer based on a sliding sca | Answer: C. FINRA members are entitled to receive reimbursement for proxy services from the issuer. From the FINRA Proxy Reimbursement Rule : For each set of proxy material, i.e., proxy statement, form of proxy and annual report when processed as a unit, a |
| S27 Q53: 53. Rep Kirby has indicated that his client, Jimi Davis, has moved. The recordkeeping requirement is to send notification to Jimi’s address within; 10 days 30 days 45 days The client said he moved so just update the internal records | Answer: B. The SEC recordkeeping requirement is to send notification of this change to the customer’s old address no later than 30 days after the firm receives notice. |
| S27 Q54: 54. Osborne Corp. shares are sold short by client Harrison to client Foster prior to the ex-date. Harrison’s broker dealer, Melbourne Securities, borrow shares from Republic Trading. Which of the following statement is true regarding the payment | Answer: D. The shares were acquired by client Foster prior to ex-dividend date; therefore, Foster should be on Osborne Corporation’s books on the record date. Additionally, Harrison is liable for the dividends on shares borrowed from Republic Trading. Mel |
| S27 Q55: 55. A broker dealer utilizing the alternative method for computing net capital takes a deduction in the reserve formula of: 1% of the aggregate debit balances 3% of the debit balances No deduction against debit balances 1% of debit balances after | Answer: B. The debit balances in the reserve formula are reduced by 3% for firms computing net capital under the alternative method. |
| S27 Q56: 56. When using the alternative method for calculating minimum net capital, all of the following are true about broker-dealers that engage in transactions involving credit derivatives EXCEPT: A. Firms must maintain tentative net capital above $1 b | Answer: D. When using the alternate method for calculating minimum net capital, broker-dealers that engage in transactions involving credit derivatives must maintain tentative net capital at a level that exceeds $1 billion, and net capital that exceeds $5 |
| S27 Q57: 57. The alternative method for calculating a broker-dealers net capital is based on: A. The greater of $250,000 or 1,600% of aggregate indebtedness B. The greater of $250,000 or 2% of aggregate debit items in the reserve formula C. $1,500,000 min | Answer: B. Under the alternative method for calculating minimum net capital a broker-dealer must maintain the greater of $250,000 or an amount equal to 2% of the aggregate debit items in the reserve formula. Debit items in the reserve formula include, cus |
| S27 Q58: 58. When engaging in a reverse repurchase agreement with any one party, a broker-dealer must maintain additional net capital an amount equal to 10% of the market value over: I. 103% of the contract price (including accrued interest) for all secur | Answer: C. When engaging in a reverse repurchase agreement with any one party, a broker-dealer must add to net capital an amount equal to 10% of the market value over 105%, of the contract price for Treasury securities, over 110% of the contract price for |
| S27 Q59: 59. Which of the following is NOT TRUE when engaging in the process of fair value measurement? A. Unobservable inputs are values it is assumed that other market participants would place on an asset or liability in the absence of readily available | Answer: D. When valuing an asset or liability, observable inputs are inputs that are based on currently available market data, such as contemporaneous market prices for an asset or liability. These inputs are independent of the person or entity performing |
| S27 Q60: 60. Which of the following are true of Levels 1, 2, and 3 when making fair value measurements of an asset or liability? I. Level 1 uses contemporaneous market prices that are adjusted for factors like lack of liquidity. II. Level 1 uses observabl | Answer: D. When performing fair value measurements, the Financial Accounting Standards Board (FASB) Standard No. 157 states: “Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has |
| S27 Q61: 61. An introducing broker dealer with a net capital requirement of $5000 would like to expand and offer mutual funds through wire orders. What is the increase in their net capital requirement? a. 0 b. 5000 c. 20000 d. 45000 C. A firm offering mut | Answer: . |
| S27 Q62: 62. A broker dealer utilizes the alternative calculation for the reserve formula under 15c3-3.What must they deposit if they have excess credits over debits: a. 100% of the deposit requirement b. 105% of the deposit requirement c. 120% of the dep | Answer: . |
| S27 Q63: 63. A firm has had a short securities difference in Digital Data for 13 business days. The capital charge is: a.25% b.50% c.75% d.100% A. There is a 25% charge in the 7-13 business day period. As the time period increases, the capital charge incr | Answer: . |
| S27 Q64: 64. Cardi bought 100 shares of Salesforce in her personal account and did not pay for the trade. Her firm did not request an extension. She trades through other accounts as well, reflecting individual and joint ownership., and retirement accounts | Answer: . |
| S27 Q65: 65. Icloud is making a public offering . Who is not a restricted person? a. Mother in law b. Daughter in law c. Brother of associated person d. First cousin D. Immediate family members are restricted person and include the following: a person's p | Answer: . |
| S27 Q66: 66. Goddard Brokerage is being liquidated under SIPC. What values is used to determine the value of customer claims? a. Original purchase price b. End of previous month c. Average value of prior year d. Value on date SIPC trustee is appointed D. | Answer: . |
| S27 Q67: 67. Martha works at Tuttle Brokerage. She was unable to produce readable fingerprints. How long does Tuttle keep the fingerprint records? a. They don’t keep them; they are in possession of the FBI b. 3 years after Martha is terminated c. 6 years | Answer: . |
| S27 Q68: 68. Dillard Brokerage sells 60 million in Treasury notes at par to Monroe Brokerage and agrees to buy them back in two weeks. One week later, the value of the notes has risen to 65 million. Dillard must recognize that this is a: a. reverse repurc | Answer: . |
| S27 Q69: 69. Dillard Brokerage sells 60 million in Treasury notes at par to Monroe Brokerage and agrees to buy them back in two weeks. One week later, the value of the notes has risen to 65 million. What is the deduction? a. It depends on the maturity dat | Answer: A. The excess of the repurchase agreement deficit over 5 percent of the contract price for resale of United States Treasury Bills, Notes and Bonds, 10 percent of the contract price for the resale of securities issued or guaranteed as to principal |
| S27 Q70: 70. Registration with the PCAOB is required for: The chief compliance officer of a broker dealer The derivatives principal A broker-dealer’s independent accountant A clearing corporation | Answer: C. Rule 17a-5 of the 1934 Securities Exchange Act states that the independent public accountant that prepares the broker dealer annual report must be registered with the PCAOB, the Public Company Accounting Oversight Board. This entity was created |
| Fidelity bond deductible | >10% of coverage — Excess reduces net worth |
| Subordinated loan (net capital) | 1 year minimum — To count as capital |
| Sub loan filing lead time | 10 days — Before effective date |
| Sub loan seasoning | 30 days — To be fully allowable |
| Sub loan for debt/equity | 3 years minimum — Equity credit |
| Debt/Equity ratio formula | Loan in both numerator & denominator — Series 27 definition |
| Long common stock haircut | 15% — SEC & SRO |
| Short common stock haircut | 15% (SRO) — Not 30% |
| Long/Short offset threshold | 25% — Excess haircut rule |
| Initial margin (Reg T) | 50% |
| Bank loan limit (Reg U) | 50% |
| Maintenance margin (equity) | 25% |
| Options contract multiplier | 100 shares |
| Unsold firm fails to receive | NOT AI |
| Sold firm fails (no offset) | AI |
| Customer credit balances | AI |
| Subordinated loans | NOT AI |
| Reserve computation frequency | Weekly |
| Customer vs PAB reserves | Separate accounts |
| Cash account securities | 100% in control |
| Discretionary agreement | 3 years after authority ends |
| Account records | 6 years after account closes |
| Easily accessible | 2 years |
| Exchange membership discontinued | 2 business days (17a-5) |
| Net capital deficiency notice | Immediate / calendar (17a-11) |
| SIC reporting | 1 business day |
| Cert numbers delivery | 2 business days |
| Introducing BD | $100k–$250k |
| Executing broker (prime) | $1,000,000 |
| Prime broker | $1,500,000 |
| Carrying firm | Higher capital tier |
| Customer Reserve vs PAB: Who is protected | Retail & institutional customers — Other broker-dealers’ proprietary accounts |
| Customer Reserve vs PAB: Full name | Special Reserve Account for the Exclusive Benefit of Customers — Special Reserve Account for the Exclusive Benefit of PAB Customers |
| Customer Reserve vs PAB: PAB meaning | N/A — Proprietary Accounts of Broker-Dealers |
| Customer Reserve vs PAB: Governing rule | SEC Rule 15c3-3 — SEC Rule 15c3-3 |
| Customer Reserve vs PAB: When required | BD carries customer funds/securities — BD carries PAB accounts |
| Customer Reserve vs PAB: Calculation frequency | Weekly (as of close of business Friday) — Weekly (same timing) |
| Customer Reserve vs PAB: Formula used | Customer Reserve Formula — PAB Reserve Formula |
| Customer Reserve vs PAB: Funds deposited | Net credits owed to customers — Net credits owed to PAB customers |
| Customer Reserve vs PAB: Segregation purpose | Protect customer assets — Protect BD-to-BD assets |
| Customer Reserve vs PAB: Used for proprietary trading? | ❌ Never — ❌ Never |
| Customer Reserve vs PAB: Reported on FOCUS | Yes — Yes |
| Customer Reserve vs PAB: Offset between accounts? | ❌ No — ❌ No |
| Rule 17a-5 vs 17a-11: Primary purpose | Reporting to the SEC — Early warning notifications |
| Rule 17a-5 vs 17a-11: Who receives it | SEC (and DEA copies) — SEC + DEA (FINRA) |
| Rule 17a-5 vs 17a-11: Timing standard | Business days — Calendar days |
| Rule 17a-5 vs 17a-11: Typical deadline | 2 business days — Prompt / 24 hours / calendar days |
| Rule 17a-5 vs 17a-11: What it covers | Financial & operational reports, special reports — Capital & financial condition alerts |
| Rule 17a-5 vs 17a-11: FOCUS reports | ✔ Yes — ❌ No |
| Rule 17a-5 vs 17a-11: Exchange membership discontinued | ✔ Yes (2 business days) — ❌ No |
| Rule 17a-5 vs 17a-11: Annual audited financials | ✔ Yes — ❌ No |
| Rule 17a-5 vs 17a-11: Net capital deficiency alerts | ❌ No — ✔ Yes |
| Rule 17a-5 vs 17a-11: AI ratio violations | ❌ No — ✔ Yes |
| Prime brokerage: Customer relationship | Maintains the customer account — Does not maintain the customer relationship |
| Prime brokerage: Holds customer funds/securities | ✅ Yes — ❌ No (positions carried at prime broker) |
| Prime brokerage: Clearing responsibility | ✅ Yes — ❌ No |
| Prime brokerage: Minimum net capital requirement | $1,500,000 — $1,000,000 |
| Prime brokerage: Customer Reserve (15c3-3) | ✅ Required — ❌ Not required |
| Prime brokerage: PAB Reserve | ✅ Often required — ❌ Not required |
| Prime brokerage: Books & records burden | Highest — Moderate |
| Prime brokerage: Margin responsibility | Maintains margin accounts — Executes trades only |
| Prime brokerage: FOCUS reporting complexity | Highest — Lower than prime broker |
| Prime brokerage: AI exposure | Higher — Lower |
| Introducing vs clearing: Carries customer accounts | ❌ No — ✅ Yes — Drives many obligations |
| Introducing vs clearing: Holds customer funds/securities | ❌ No — ✅ Yes — Triggers Rule 15c3-3 |
| Introducing vs clearing: Minimum net capital | Lower (e.g., $5k–$250k typical) — Higher (often $1M+) — ✔️ Affected |
| Introducing vs clearing: Net capital calculation | Simpler — More complex — ✔️ Affected |
| Introducing vs clearing: FOCUS filing frequency | Quarterly — Monthly — ✔️ Affected |
| Introducing vs clearing: Customer Reserve Formula | ❌ Not required — Required — ✔️ Affected |
| Introducing vs clearing: Segregation of customer assets | ❌ No — ✅ Yes — ✔️ Affected |
| Introducing vs clearing: Books & records burden | Lower — Much higher — ✔️ Affected |
| Introducing vs clearing: Operational responsibility | Limited — Full clearing responsibility — ✔️ Affected |
| Introducing vs clearing: Subordinated loan eligibility | Same rules — Same rules — ❌ NOT affected |
| Introducing vs clearing: Clearing agreements | Required with another firm — Self-clearing — Structural change |
| Sub loan treatment: Net Capital (Rule 15c3-1) | ✅ YES — Included in Tentative Net Capital — Must be approved & effective; 30-day rule applies |
| Sub loan treatment: Debt / Equity Ratio | ✅ YES — Appears in both numerator and denominator — Series 27 definition — not GAAP |
| Sub loan treatment: Aggregate Indebtedness (AI) | ❌ NO — Excluded from AI — Sub debt ≠ current liability |
| Sub loan treatment: Equity for AI Ratio | ✅ YES — Included as equity — Helps reduce AI % |
| Sub loan treatment: Minimum Net Capital Requirement | ❌ NO — Does not change requirement — Affects amount held, not required |
| Sub loan treatment: GAAP Balance Sheet – Liabilities | ✅ YES — Long-term liability — Accounting only |
| Sub loan treatment: Customer Reserve Formula (15c3-3) | ❌ NO — Not customer-related — No impact on reserve |
| Sub loan treatment: Haircuts | ❌ NO — Not a position — Only applies to securities |
| Sub loan treatment: Liquidity Test | ⚠️ Indirect — Supports capital base — Must still meet liquid asset tests |
| Sub loan treatment: FOCUS Report Equity Section | ✅ YES — Reported as allowable capital — Only if effective |
| Memory hook | Every debit gets 1%. Monthly = 105%. |
| History Q: $5,000 broker-dealer may engage in all EXCEPT (riskless/agency/selling group/proprietary) | Answer: Selling group member in a firm commitment underwriting. $50,000 net capital required for firm-commitment underwriting selling group participation; $5,000 BD can do agency and riskless principal; limited proprietary trades. |
| History Q: Long 1,000 HFM @42 + Long 10 Apr 40 puts @1.75 — required haircut? | Answer: $2,000. Long stock hedged by a long put: haircut is based on the unprotected amount above the put strike (market − strike) × shares = (42−40)×1,000 = 2,000. |
| History Q: Maintenance requirement for $900,000 purchase of 2x leveraged ETF on margin | Answer: $450,000 (50% maintenance for leveraged ETFs in this exam-style question). |
| History Q: FINRA members must file all of the following, EXCEPT (open short positions; customer complaint summaries; outside employment activities; var annuity & UIT ads) | Answer: Outside employment activities. Firms must receive written notice from the rep, but this is not filed with FINRA; open short positions and certain ads are filed; customer complaint data is reportable. |
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