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Series 24
2 Supervision of General BD Activities - Net capital focused
| Question | Answer |
|---|---|
| OSJ onsite s24 req'd? y/n | Yes |
| OSJ must have onsite copy of WSP for how many years from last use? | 3 years; 2 years easily accessible |
| A Branch Office is defined as what? Is an onsite Series 24 needed? | A place where 1 or more persons conducts securities business - can be retail storefront. No onsite Series 24 needed |
| the exemption from branch office registration applies provided the locations does less than X transaction / year or less then X days of securities activity / year? | <25 transactions/year or <30 days of securities activity/ year. |
| OSJ Inspection how often? | Annual |
| Supervisory Branch Inspection how often? | Annual |
| Non-supervisory branch inspection how often? Non-branch office how often? | 3 years; Periodic..as frequent as firm deems needed |
| Reporting of erroneous trades within how many mins? | 30 |
| New firms should expect inspection by SEC in how many months after starting biz? | 6 |
| CEO of BD must certify compliance processes and WSP how often? | annually |
| If branch office relocates, notify FINRA within? | 30 days |
| Are complaints preserved at a branch? | no, at the OSJ |
| Annual firm compliance meeting attended by RR's or all registered persons? | ALL registered personnel |
| Compliance report submitted to Board and Audit committee a by | Earlier of next schedule mtg or in 45 days of CEO certification |
| Selling away (Private Transactions) by RR require what level of firm supervision if the RR is getting compensated | Require firm supervision just like if transaction was executed my member firm ! |
| Disciplined firm def? | expelled from SRO membership or subject to SEC order revoking BD registration |
| RR Outside activities: selling real estate requires ? | Prior notification before activity |
| RR Outside activities: working as bartender requires? | simple notification |
| RR Outside activities: selling variable life insurance requires? | notify + written permission |
| RR Outside activities: opening outside securities acct | Prior written permission of principal (not just notification) |
| What triggers firm taping req. | 20% of RR's are from firms disciplined in past 3 years |
| Taping Timeline | 30 days to 'cure' by reducing / firing; 60 days taping must begin |
| Tapes must be easily accessible and retained for how long? | 2 yrs accessible/ 3 yrs from keep from creation |
| Staff fired during 30 day curing period can't be hired for? | 180 days |
| under code of procedure, how many days until disciplinary sanction comes into effect? | 30 days |
| WSP's are maintained at ? | Each OSJ |
| Old WSP's keep for how long? | 3 years |
| firms must review supervisory systems/procedures + senior mgmt must receive a report on status of wsp's at least how often? | annually |
| under code of arbitration, simplified arb. is available for disputes up to what $ | 50k. More than 50K can be heard by 3 or more arbitrators with a majority of the arbitrators being nonsecurities personnel. |
| business continuity plan must be made available to which body? | FINRA on request - not fully disclosed to SEC or to clients |
| Annual compliance mtg can be combined into other meeting/topics? | yes |
| CCO - firm must designate - Can there be more than 1? Can they delegate authority? | yes - Firms can have multiple CCOs over diff. specialized biz lines . The chief compliance officer (CCO) of the BD may not delegate their responsibility |
| CEO/CCO must meet how frequently | every 12 months |
| When is final compliance report presented to Board and Audit Commitee? | 45 days after CEO certification |
| a client can conduct securities and banking activities in same area of shared office? | no - need physical separation |
| Comms and disclosures of BD must detail ? | not FDIC insured; no bank guarantee; may lose value |
| Notification required for selling away & private securities transactions? (without compensation such as joining a nonprofit board) | Notification required (for example if serving @ board member at non profit). When there's compensation, firm permission is required and firm must supervise |
| What activities cannot be gifted to clients ? | Travel & Entertainment can't be gifted to clients - a rep must attend |
| Can you make charitable contribution to client causes? | yes, but can't be reciprocity driven |
| Can reps make loans to clients generally? | no |
| Can rep make Loans to or from family members? | yes freely |
| Can rep Loan to or from banks (mortgage) | yes freely |
| Loans based on friends or biz relationships? | need permission |
| Loans to other RR's at same firm? | need permission |
| What outside brokerage transactions don't req. permission or duplicate statements/confirms? | Mutual funds, 529 plans, variable contracts |
| Sharing in Customer Account | requires permission from cust; from firm. Sharing must by proportionate to contribution. Exception to proportionality is shared w/ immediate family |
| RR who is censured, pays $ 2500 and waivers right to appeal, has committed a: | minor rule violation |
| Under code of procedure, which penalty is not stayed pending an appeal? | bar or expulsion - these happen immediately |
| Can Finra punish a rep by jail or termination? | no |
| Business Continuity Plan (BCP) must be designed to let firm meet CLIENT obligations if there's a disruption. What is excluded? | employee payroll. BCP focuses on giving customers access to funds/securities; systems/ data backup; regulatory reporting/recordkeeping; alternative comms channels |
| BCP emergency contact | BD's may designate 1 member of senior mgmt, who is a registered principal; and 1 member who unregistered (like a person offsite or disaster recovery firm)....or 2nd registered principal |
| BCP emergency contact if member has only one associated person? | its ok - 2nd contact just needs to know the business/operations. could be accountant, lawyer |
| Customers receive a full copy of BCP? T/F | false |
| Summary BCP to customers provided when? | Acct opening, on request, on firms website. Not auto-sent annually. Finra gets full copy on request. |
| DPP: what is it? | Direct Partic Program. Gives investor PASSIVE ownership of an underlying biz--> Shares of S-Corp, units of LLP; oil & gas leases, real estate programs, equipment leasing trusts. Higher-risk; illiquid; longer term. Principal's concern: SUITABILITY |
| DPP suitability requires investor can realize financial benefits offered w special emphasis on? | Tax benefits |
| DPP customer must have a net worth sufficient to bear: | Total loss |
| Firms can only offer DPPs (and unlisted REITs that will diclose | per share estimated value - calculated in reasonable manner; and an valuation date and methodology used. |
| DPP disclosure goes on acct statements says what about return of capital, est. per value share, and liquidity? | Distribution may include return of capital , which reduces estimated per value share; investments may be illiquid if sold, provider lower price than estimated |
| DPP require customer written consent? | YES, written consent req'd - even for a discretionary acct controlled by registered rep |
| 1035 exchange is a tax free exchange between like contracts. what is exclusion and why? | annuities exchange to insurance is exclusion. Annuities are hybrid securities. You can't exchange annuity for life insurance as it might hurt the customer |
| Principal reviews 1035 exchange application suitability in how many days before sending to insurance co? | 7 business days |
| Before letting cust open margin acct, they have to sign margin agreement which has what 3 components? | Hypothecation agreement (you're pledging something as security), credit agreement, loan consent agreement |
| Margin disclosure. statement is delivered when? 2 occasions | Delivered prior or at opening; describes basic facts/risks; delivered to all retail customers ANNUALLY |
| Initial margin (Reg T as set by Fed) for long and short is? | 50% |
| Min. Margin Maintenance (set by FINRA)? | Long maintenance is 25%; short maintenance is 30% |
| FINRA long market maintenance - computation? | divide debt balance by .75. MV-Debit=Equity. you get margin call if long mkt value of securities falls below, loan size divided by .75 |
| House minimum margin can be higher give example? | e.g. long and short maintenance can be 35%. set by firm advance notice of change not req'd |
| What is DPP rollup? | By combining the partnerships investors try for better returns and realize greater liquidity. DPP roll ups usually combine two or more direct participation programs into one large DPP. |
| Can BD's receive compensation contingent on successful rollup deal? | NO. BD can only be involved in solicitation of votes/tenders if comp will be paid regardless of whether LP votes for or against deal |
| Public offers of DPPs/REITS must disclose what about value/valuation? | annual per share estimated value of security, developed in reasonable manner. explanation of method and date of valuation |
| If BD is selling securities of affiliate into a discretionary acct, does it need permission prior to execution? | yes |
| Can IPO's (new issues) be purchased on margin - how long must trade in secondary market? | NO; they must trade in secondary market for at least 30 days. Mutual funds can't be purchased on margin; |
| LEAPS, long term options eligible for purchase on margin? | yes; Reg T requirement is 75% of option premium |
| Hypothecation agreement basic definition ? | Customer pledging securities as collateral for their margin loans |
| Rehypothecate ? | Repledge collateral. BD's don't have much capital so they use banks and re-pledge cust securities. The amt of cust securities that can be pledged to bank is 140% of client's debit (loan) value |
| Can you lose more funds than you deposit in margin account? t/f | True |
| you can choose which securities are liquidated to meet a margin call? | false |
| Pattern day trader def? | 4+ trades in 5 biz days |
| Pattern day trades must maintain min equity of ? | $25K. For reference the FINRA initial margin req'd is only $2K |
| SIPC (securities investor protection corp) protects cust from what? | protects customers if firm fails (bankruptcy / liquidation). |
| SIPC Covers how much total and in cash? | $500K total, $250K cash. NO Coverage for mkt loss, issuer fraud etc. Each SEPARATE customer gets 500K total protection (joint accts aggregated into 1 customer acct if same beneficial owners) |
| SIPC: if person has a cash account and margin acct at same firm, how many separate customers is this for SIPC? | One |
| BDs that are EXEMPT from SIPC membership include? | Firms whose principal business is conducted outside the US; ' Broker-dealers exclusively selling open-end funds or variable annuities are not required to be SIPC members. |
| Insider Trading: Duty of Trust Def | Trading on info that should be known to be confidential. Don't tell dad about pending merger! |
| Insider Trading: Penalties civil and criminal? | Civil Penalty (3x profit made or treble damages) and / or Criminal ($5MM fine, 20 years prison) |
| Insider Trading: Rule 10b5-1. insiders must buy/sell securities on pre-arranged basis to avoid allegations of insider trading. what are some components? | Plan must exist before possessing insider info; includes shares, prices, trade dates; insider cannot exert control. Must be passive/automatic. |
| Insider Trading: Rule 10b5-1. must be publicly dislosed? | No pub disclosure |
| Broker-Dealer Introducing BD does what (some typical functions) | new accts, kyc, makes recommendations that are suitable, accepts orders, resolves complaints; monitors accounts |
| Type of BD's: Clearing (carrying, full service) BD does what? | Receives/delivers fund, securities; executes transactions; sends confirmations; custody/safekeeping (holds cust funds/securities); pays dividends, interest; sends statements; extends credit/margin |
| Carrying Agreement: what is it | governs rel'shp between introducing and carrying BD |
| Carrying firm sends introducing firm CEO/CCO annual listing of exception reports by? where else does the report need to go? | By July 1 of each year. This list must also be sent to FINRA. |
| Carrying agreement requires ok by what body what to be effective? | FINRA approval |
| Can firm carry accoutns for non-FINRA membes or foreign BDs? | yes |
| Net Capital: Prime brokers need a min. of how much net capital? | $1.5MM (more than a block positioner/executing broker which is $1MM!!. |
| Penny Stock: initial margin? | greater of the reg T 50% ...or...FINRA'S $2,000 requirement |
| SMA (special memoranda acct)? | Created in connection w margin account if MV of securities INCREASES above initial cost. Each $1 increase creates 50% of SMA. |
| BD must receive permission from FINRA prior to implementing a portfolio margin program for customers? y/n | yes. this is used to achieve higher leverage |
| Net Capital: a new firm has $2MM of net capital, what is the max AI (aggregate indebtedness). | $16MM; new firms have 8:1 ratio of AI to Net Capital |
| Net Capital: Est'd firm has $45MM of AI; what is net capital ? | $3MM. Est'd firms have max AI of 15:1 |
| Pattern day trader has buying power of ? | 4x maintenance margin excess |
| Pattern day traders must have how much min. equity on any day they trade? | $25K. what is FINRA initial margin req'd? $2K! |
| BD's that revise margin acct credit policies must given how many days notice? | 30 days |
| if BD fails, SIPC values customer acct claim how/when? | Acct valued based on MV of securities as of court filing date |
| Net Capital: A firm that has only 120% of req'd net capital must report promptly (how long?) | 24 hours to SEC |
| Net Capital: For qualified block positioner/executing broker? | must have $1MM in net capital (not $1.5MM, which is prime brokerage!!) |
| Net Capital: firm's debt/equity ratio can't exceed how much for how long? | 70% for 90 consecutive days. Alternatively equity can't go below 30% |
| Net Capital: Focus report details financial & operating perf. filed when, who signs? | CEO, CFO, COO (not board). Filed monthly, quarterly |
| Net Capital: Early warning is what | When BD net capital falls below 120% of required minimum, or ratio of AI to net cap is exceeds 12:1 |
| Net Capital: what are ratios in same order corresponding with (a) Restrictions on expansion, (b) reduction of business, (c) early warning, (d) 'SEC Violation ratios? | >10:1, >12:1, >12:1, >15:1 |
| Net Capital Rule: what # of prop transactions in what time frame defines a securities dealer? What is net cap req. minimum? | 10 proprietary transactions in a 12 month period. Firm will be subject to net capital requirement of $100,000 |
| Fail to Deliver (FTD): a customer FTD position will be closed by BD in how many settlement days? | 10 settlement days, or technically T+2 plus 10 settlement days |
| Focus Reports: along w working papers and memos must be retained for ? | 3 years |
| Member firms must provide balance sheet to cust when? trial balances prepared how often and retained for how long? | B/S goes to cust on request; no copy of income statement given. Trial balances prepared monthly - retain for 3 years |
| BD change of auditor - notify SEC within how many days? | 15 |
| BD funds transfer records - what is threshold above which you retain ? | any transfer more than $3000 |
| Blotters record transactions (purchases, sales, receipts, deliveries) but not? Blotter and G/L retain for? | commissions. 6 years |
| Cust Acct records: retain for how long? | 6 years from acct closing |
| Fidelity Bonds protect customers against loss from forgery, theft, embezzlement, misappropriation. Does not cover | Errors and Omissions |
| Fidelity bond value when reset is based on B-D's net cap requirement over last | last 12 months, not last calendar year |
| Fidelity bond coverage reviewed how often? If fidelity bond coverage is substantially modified, cancelled or terminated, FINRA must be advised when? | annually; notify immediately |
| Fidelity bond: if net capital req is below $250K, req'd fidelity bond is the greater of | 120% of net capital or 100K |
| Trust Indenture was credit to provide legal requirements for what? | issuance / distribution of corporate debt, including convertible debt. DOES NOT APPLY TO EQUITY |
| Mutual Funds: must disclose total & after tax return over which years? | 1,5,10 (if fund hasn't existed for 10, show longest period) |
| Mutual Funds: Max Sales Charge for Funds and UITs ? | 8.5% |
| Mutual Funds: Breakpoint Discount are what - and apply to which class of shares? | Breakpoint discounts are volume discounts to the front-end sales load charged to investors who purchase Class A mutual fund shares. |
| Mutual Funds: Share classes (A,B,C) | Charge diff fees/expense for exposure to same underlying portfolio. These shares charge a front-end load at purchase; which can be reduced by Breakpoint discounts. Also charge 12b-1 fees less than Class B, C shares. Most suitable for LT large inv. |
| Mutual Funds: 12b-1 fees are calculated from | Net Fund Assets |
| Mutual Funds: Letter of intent? | A Letter of Intent (LOI), allows the investor to receive breakpoint discounts based upon a commitment to buy a specified number of shares over a period of time, usually 13 months. Non-binding and backdatable up to 90 days |
| Mutual Funds: what is 12b-1 fee? | A 12b-1 fee is an annual marketing or distribution fee on a mutual fund. |
| Mutual Funds: To charge max 8.5% sakes charge a fund can't: | Impose/charge 12b-1 fee, MUST offer breakpoints must offer breakpoints, rights of accumulation (investors can aggregate other open-end investments for lower charge) and Div reinvestment at NAV per share |
| Mutual Funds: Soft dollars are rebates mgrs receive from BDs in exchange for commission generating trades. What can soft dollars be used for? | Research services, market data, brokerage services, like trade execution. CANNOT be used for physical items, mass publications (like newspaper), office equip, office space) |
| REIT: An entity that owns/operates income producing real estate. Qualified REIT's can deduct distributions (dividends) from taxable income. To qualify REIT must: | 75/75/90. 75% income from RE, + 75% of assets in RE - Distribute 90% of taxable income to shareholders annually |
| Deferred Annuity: app requires review from principal (Y/N)?; by when must review occur? | Y; app must be reviewed in 7 days of receiving |
| Finra Code of Arbitration resolves biz disputes between: | Firm vs. Firm; Associated Person vs. Firm (except harassment/discrimination; Cust vs. Firm (but really doesn't apply since most all custs sign pre-dispute arbitration agreement |
| Finra Code of Arbitration: how paid, when, appealable? Less expensive, easier way to settle? | Money only, payable in 30 days, not appealable; use mediation to more easily settle |
| Books & Records: 3 year records...name some | retail, institutional communications; cust trade confirmations, Form U4/U5, Fingerprint records |
| Books & Records: 4 year record, what is the only one? | Customer complaints |
| Books & Records: 5 year record, what is the only one? | Anti-money laundering (AML) records |
| Books & Records: 6 year records are most important to the firm. name some | Ledger, blotter, securities record of positions; record of person at each who can explain records + principal overseeing compliance |
| Books & Records: All records must be easily accessible for? | 2 years |
| Net Capital: Introducing (non-carrying) firms must maintain net capital of: | $50,000 (firm receives client assets to pass to carrying firm) ...OR...$5,000 (firm never touches client assets) note: these firms may not participate as a syndicate member in an underwriting. |
| Net Capital: carrying BD must have a minimum of: | $250,000 in net capital; whether it uses the standard or alternative method of calculating required net capital. |
| Net Capital: A firm that has only 120% of its required net capital | must promptly (within 24 hours) to SEC |
| Net Capital: Alternative Method for Net Capital Calculation | Firms can elect to use an alternative net capital calculation: The greater of: $250K ....or 2% of the debits in the reserve . computation (early warning is at 5% of the reserve computation. Early warning is at 5% of aggregate debit items in same calc. |
| Subordinated Loans: approved loans are added to firms net capital. some typical terms | 1 year min, for a specific amount, written/binding; can't push firm to exceed 70% of total capital for 90 days. Firms are limited to 3 temp sub loans in any 12 month period. Also, the max duration of each loan is 45 days |
| Net Capital: Amount for Clearing Firm? | $250K - holds cust assets, receives cust funds. Public offerings? Can do all underwritings |
| Net Capital: Introducing BD (non-Clearing Firm)? | $5K - Cannot accept cust funds/securities for forwarding to clearing firm. Underwritings? NO Firm commitments underwritings - best efforts only |
| Net Capital: smaller Introducing BD (non-Clearing Firm)? | $50K - CAN accept cust funds/securities for PROMPT forwarding to clearing firm. Underwritings? Can be a selling group member in a FIRM COMMITMENT underwriting. |
| Net Capital-Early Warning is when net capital falls below what % or Aggregate indebtedness : Net Capital is below what ratio (12:1). You must notify when? | net capital below 120% or 12:1; requires notice within 24 hours |
| Net Capital Violation: books and records not current requires notice when? | immediate |
| Net Capital: Hard Dollar Amount of Carry Firm, aka Clearing Firm | $250,000 |
| Net Capital: Hard Dollar Amount of Prime Broker | $1,500,000 |
| Net Capital: Hard Dollar Amount of Executive Broker aka Block Positioner | $1,000,000. |
| Net Capital: Hard Dollar Amount for Market Maker (floor) $100,000 and (ceiling) $1,000,000 | $5 or less stock value, $1000/security. More than $5, $2500/security |
| The Trust Indenture Act of 1939 applies to | corp bonds sold intrastate |
| Focus IIa report must be filed by introducing BD by | 17th day after quarter end |
| Fidelity Bond: if net capital req is below $250K, req'd fidelity bond is the greater of ? | 120% of net capital or 100K |
| Fidelity Bond: a firm has a net capital requirement of $350,000. Under FINRA rules, it must maintain a fidelity bond of NOT less than? | A member must maintain min coverage of no less than 120% of its net capital req ($420K in this case). However, if the amount of min net capital exceeds $250K then peg to Fidelity Bond Coverage Table. |
| Can IPO's (new issues) be purchased on margin - how long must trade in secondary market? | NO; they must trade in secondary market for at least 30 days. Mutual funds can't be purchase on margin; |
| Penny Stock Initial Margin? | greater of the reg T 50% ...or...FINRA'S $2,000 requirement |
| Net Capital: For Prop Trading Firm:, what # of prop transactions in what time frame defines a securities dealer? What is net cap req. minimum? " | 10 proprietary transactions/ 12 month period. Firm will be subject to net capital requirement of $100,000 |
| Insider Trading: Penalties civil and criminal. | Civil Penalty (3x profit made or treble damages) and / or Criminal ($5MM find, 20 years prison) |
| Net Capital: Introducing firms (5 or 50K net cap) can occasionally make prop trades. (also called a securities dealer) if they do X per month then what does that do to net cap | 100K |
| Net Capital: member offering mutual fund shares, UITs or variable annuities?. | firms that accept wire, minimum is $25K - or only $5K if subscription only |
| Clearing firm must count securities how often? | Quarterly |
| Net Capital: an executing broker in prime brokerage relationship must maintain min. net cap of? | $1MM |
| A firm that has only 120% of net cap must provide? | prompt notice to SEC (24 hours) |
| If a BD has is req'd to have $250K of net capital, it must notify SEC when? | At $300K, which is 120% of $250K. Notice in 24 hours |
| Under the alternative net capital computation, early warning req'd if? | Net capital below 5% of debits in reserve computation |
| Net Capital: Securities dealer is defined as doing 10 prop trades in 12 months.... is subject to min. net capital of? | $100K |
| Focus Reports: signed by? | CEO , CFO |
| Focus Reports for B-D's registered with the SEC must file audited financial statements (an audited FOCUS II or IIA) within? | 60 days of the fiscal year-end |
| Blotters detail daily securities transaction but exclude? | commissions |
| Under Sarbanes Oxley, annual compliance certification signed by | CEO, CFO |
Created by:
drossow
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