Series 27 Cheatsheet — High-Yield Concepts & Decision Traps

Series 27 is “protect customers + keep the firm solvent + document everything.” The best answer is usually the one that (1) classifies the issue into the right rule bucket, (2) stops/escalates if customer assets or capital are at risk, and (3) fixes the record and creates a clean audit trail.

Series 27 at a glance

• Items (reference): 145
• Time (reference): 225 minutes
• Pace target: ~1:33 per question

Exam map (quick priorities)

• Function 2 - Operations, General Securities Industry Regulations, and Preservation of Books and Records — 29%
• Function 4 - Net Capital — 28%
• Function 1 - Financial Reporting — 17%
• Function 3 - Customer Protection — 17%
• Function 5 - Funding and Cash Management — 9%

“Best answer” checklist (Series 27 style)

1. Classify the issue: reporting/FOCUS, books and records, customer protection, net capital, or cash/margin.
2. Ask the two FINOP questions: does this impact customer assets or net capital right now?
3. If yes: stop/hold activity as needed, escalate to the right principal/department, and document.
4. Reconcile and correct: breaks, fails, suspense, and differences must be resolved quickly or charged/deducted.
5. File/notify when required: late or incorrect reporting is often worse than promptly escalating and amending.

Net capital: the computation story (exam level)

Series 27 is not “memorize haircut tables.” It is “know the flow and what gets deducted.”

Net capital in one page (concept)

1Net capital (concept) =
2  Net worth
3  + approved regulatory capital items (concept)
4  - non-allowable / illiquid assets
5  - market-risk haircuts on positions
6  - operational charges (fails, deficits, differences, etc.)

High-yield move: if the stem gives a trial balance snapshot, the first step is usually to identify non-allowable assets and obvious charges/deductions.

Allowable vs non-allowable assets (what the exam wants)

• Net capital focuses on liquidity: “can we turn this into cash quickly without heavy loss?”
• Examples of items that often become deductions: illiquid assets, aged/unsecured receivables, certain intangibles, and unresolved suspense/differences (exam-level themes).

Operational charges (the break-fix section)

• Aged fails, margin deficits, unconfirmed trades, and security differences often lead to deductions and escalation.
• Correct answers emphasize: research, resolve, document, and charge/deduct when required.

Monitoring and escalation (high level)

• Net capital can change intraday with positions/financing; monitoring is continuous.
• If net capital drops toward minimums, the safe answer is: curtail activity, escalate, and notify as required.

Customer protection: possession/control + reserve logic (exam level)

Possession or control (3.1)

• Stock record and location control concepts drive many questions (ownership/location and whether securities are in control locations).
• Hypothecation and pledging customer securities improperly is a major “never do this” theme.

Reserve computations (3.2 / 3.3)

The exam expects you to recognize the reserve formula conceptually:

• Customer reserve: if customer credits exceed customer debits, the firm must maintain the difference in a special reserve bank account for the exclusive benefit of customers (high level).
• PAB reserve: similar concept for proprietary accounts of broker-dealers (PAB) and correspondent activity (high level).

Reserve bank account controls (3.4)

• Proper titling/control language and bank acknowledgment concepts matter.
• Withdrawal restrictions and approvals are common test points: do not treat reserve funds like general operating cash.

Exemptions (3.5)

• Some business models may qualify for exemptions (high level), but exemption status can be lost if the firm starts holding customer funds/securities in a way that triggers the rule.

Function 2 (29%) – Operations + books and records (where points come from)

Operations workflow (2.1)

• Settlement, processing, reconciliations, and exception management: find breaks early, fix them, and keep evidence of review.

Financial records (2.2)

• Many questions reduce to: “what record must exist and how long must it be preserved?” (high level).
• If an item cannot be supported, the safe answer is usually: treat conservatively, charge/deduct, and escalate.

Fundamental regulatory knowledge (2.3)

• Know the intent: protect customers, promote accurate reporting, and ensure firms have sufficient liquid capital.

Function 1 (17%) – Financial reporting and filings (concept)

• Financial statements must be accurate and timely; errors require remediation and often amendments.
• FOCUS and supplemental reporting concepts: correct classification, correct timing, and escalation when material issues arise (high level).
• “Material/unusual transaction” questions often test disclosure and documentation discipline.

Function 5 (9%) – Funding and cash management (margin themes)

• Margin activity, excesses/deficits, and financing flows require controls and documentation.
• Cash management answers often turn on segregation of duties, approvals, and reconciliations.

Common miss patterns (what to fix first)

• Treating unresolved breaks/suspense as “later”: Series 27 rewards conservative charge/deduct + escalation.
• Mixing up customer protection vs net capital buckets (reserve/possession-control vs haircut/allowable assets).
• Ignoring documentation requirements (approvals, evidence of review, support for classifications).
• Picking an operationally convenient answer that violates control language or reserve restrictions.

Glossary (fast definitions)

• AI: aggregate indebtedness (concept).
• FOCUS: broker-dealer financial reporting (concept).
• Haircut: market-risk deduction applied to positions (concept).
• Net capital: liquid capital measure after regulatory deductions (concept).
• PAB: proprietary account of a broker-dealer.
• Reserve bank account: special account for the exclusive benefit of customers (concept).