Free FINRA Series 27 Practice Exam: Financial and Operations Principal

This free full-length FINRA Series 27 practice exam includes 145 original Finance Prep questions across the official topic areas.

These are original Finance Prep practice questions aligned to the exam outline. They are not official FINRA Series 27 questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with mixed sets, topic drills, and timed mock exams in Finance Prep.

How to use this fixed set

FINRA presents 155 items: 145 scored and 10 unidentified pretest items, in 225 minutes. This page has 145 practice questions; it does not reproduce the additional pretest load or official scoring. FINRA outline .

• Learning pass: work in short groups after studying the topic; open explanations as needed. Record it as guided practice, not an unaided mock.
• Assessment pass: answer before revealing solutions, use no notes, and keep an answer sheet. About 210 minutes for this 145-item set approximates FINRA’s overall per-item pace; this is our pacing exercise, not an official time limit.
• Review: record wrong, guessed, slow and recognized items. Correct guesses still need review. A repeat attempt on this fixed page measures memory as well as learning.

Use the study plan if concepts are unfamiliar. A practice percentage does not establish readiness or predict a FINRA score.

Exam snapshot

Full-length exam mix

Practice questions

Questions 1-25

Question 1

Topic: Customer Protection

A carrying broker-dealer prepares separate weekly customer and PAB reserve computations. A correspondent registered broker-dealer maintains a proprietary account subject to a written PAB agreement.

Account balances:

• PAB account debit: $900,000
• Readily marketable common stock: $520,000 market value
• U.S. Treasury securities: $80,000 market value
• Restricted stock with no ready market: $150,000 stated value
• Separate customer margin-account debit: $250,000, fully secured

For reserve purposes, the restricted stock provides no qualifying support. Assume no liens, concentration deductions, aging adjustments, or other valuation adjustments apply. Before the aggregate debit reduction, what PAB debit amount is eligible for the PAB reserve computation?

• A. $750,000 as the eligible PAB debit
• B. $850,000 as the eligible PAB debit
• C. $900,000 as the eligible PAB debit
• D. $600,000 as the eligible PAB debit

Best answer: D

Explanation: The partly secured PAB debit is eligible only to the extent of the $520,000 marketable stock plus the $80,000 Treasury securities.

A debit in a partly secured PAB account is included only to the extent supported by qualifying collateral. The qualifying collateral is the readily marketable common stock plus the Treasury securities:

The restricted stock provides no qualifying support under the stated facts. Therefore, the eligible amount is the lesser of the $900,000 PAB debit and the $600,000 qualifying collateral value, or $600,000. The separate $250,000 customer debit belongs in the customer reserve computation and cannot be combined with the PAB debit. The requested amount is determined before applying the ordinary aggregate debit reduction.

• The $900,000 amount includes the unsecured portion of the correspondent’s debit.
• The $750,000 amount improperly treats the restricted stock as qualifying collateral.
• The $850,000 amount improperly combines the eligible PAB debit with the separate customer debit.

Question 2

Topic: Operations and Records

A broker-dealer receives the following transfer request on September 10, 2026.

Transfer agent procedure:

For securities registered solely to a deceased holder, submit all original certificates, a certified death certificate, court-certified evidence of the representative’s appointment dated within 60 calendar days, and a medallion-guaranteed assignment executed in the representative’s capacity. Existing certificate denominations may be split during re-registration.

Transfer file:

• Registration: Leah Morgan, individually, with no joint or transfer-on-death designation
• Certificates surrendered: 200 shares and 300 shares
• Requested registration: 350 shares to one beneficiary and 150 shares to another
• Certified death certificate: dated August 20, 2026
• Letters testamentary: name Jordan Morgan as executor; clerk certification dated June 15, 2026
• Stock power: signed Jordan Morgan, Executor of the Estate of Leah Morgan and medallion-guaranteed
• Distribution decree: directs the requested 350-share and 150-share allocations

What should the financial and operations principal direct staff to do?

• A. Obtain a newly clerk-certified copy of the letters testamentary, then submit the updated estate package.
• B. Obtain medallion-guaranteed stock powers from both beneficiaries, then submit the current estate package.
• C. Treat the medallion guarantee as proof of executor authority, then submit the current estate package.
• D. Obtain replacement certificates in 350-share and 150-share denominations, then submit the current estate package.

Best answer: A

Explanation: The existing certification is older than 60 days, so current appointment evidence is required despite the guaranteed executor signature.

Because the securities are registered solely to the deceased holder, the executor must establish representative authority before directing the transfer. The letters testamentary name Jordan Morgan as executor, but their June 15 certification is more than 60 calendar days old when the request arrives on September 10. A newly certified copy is therefore necessary under the transfer agent’s procedure.

The medallion guarantee supports the authenticity of Jordan’s signature on the stock power; it does not replace the required current evidence of appointment. The surrendered certificates total 500 shares, matching the requested 350-share and 150-share registrations. Their existing 200-share and 300-share denominations do not prevent delivery because the transfer agent may split them during re-registration. The beneficiaries do not sign the transfer documents because they are recipients, not the current registered holder or estate representative.

• Exchanging certificate denominations is unnecessary because the surrendered total matches the transfer request and splitting is permitted during re-registration.
• Beneficiary stock powers are inappropriate because the beneficiaries are not the current registered owners making the assignment.
• Relying on the medallion guarantee confuses authentication of the executor’s signature with evidence of current fiduciary authority.

Question 3

Topic: Operations and Records

A carrying broker-dealer plans to replace its WORM storage platform. The financial and operations principal documents the following:

• The firm will operate the replacement system on infrastructure under its control.
• The system maintains a complete time-stamped audit trail of record creation, modification, and deletion and can recreate original records.
• Testing confirms required indexing, retention, retrieval, and prompt production capabilities.
• The COO is a senior executive with direct access and the ability to download and furnish the records. The proposed designated-executive-officer undertaking contains the required commitments and appointments.
• The software vendor is not responsible for maintaining the records and will not execute a designated-third-party undertaking.

Which assessment of the proposed arrangement is correct?

• A. The audit-trail platform is permissible, but the vendor must provide a designated-third-party undertaking.
• B. The platform must retain WORM storage, although the COO may provide the designated-executive-officer undertaking.
• C. The platform must retain WORM storage, and the vendor must provide a designated-third-party undertaking.
• D. The audit-trail platform is permissible, and the COO may provide the designated-executive-officer undertaking.

Best answer: D

Explanation: Rule 17a-4 permits both the compliant audit-trail alternative and a qualifying designated executive officer undertaking.

Current Rule 17a-4 does not make WORM storage the exclusive electronic-recordkeeping method. A broker-dealer may use an audit-trail system that maintains a complete time-stamped history of modifications and deletions and permits recreation of original records. The system must also satisfy applicable retention, indexing, retrieval, integrity, and regulator-access requirements.

The rule also permits a qualifying designated executive officer to execute the required access undertaking instead of requiring the historical designated-third-party arrangement. Here, the COO is a senior executive with tested access and the ability to furnish records, and the proposed undertaking contains the required commitments. The vendor’s refusal therefore does not invalidate the arrangement. The undertaking and the recordkeeping method remain separate requirements: executive access does not excuse deficiencies in the audit trail or retrieval capabilities.

• Requiring the vendor’s undertaking incorrectly treats the historical third-party arrangement as the exclusive method.
• Requiring continued WORM storage overlooks the permitted audit-trail recordkeeping alternative.
• Requiring both WORM storage and a vendor undertaking incorrectly rejects both current alternatives.

Question 4

Topic: Customer Protection

A carrying broker-dealer prepares separate customer and PAB reserve computations. The following balances appear at the close of business:

Assume there are no other balances or adjustments. What total should the carrying firm include as credit balances in its PAB reserve computation?

• A. $1,450,000
• B. $1,400,000
• C. $350,000
• D. $1,250,000

Best answer: D

Explanation: The $900,000 correspondent clearing deposit and $350,000 non-DVP proprietary account credit are PAB credits, totaling $1,250,000.

PAB treatment depends on the owner and nature of the balance, not merely its GAAP ledger caption or the activity secured. The $900,000 clearing deposit is refundable to the introducing broker-dealer and therefore represents its proprietary balance, even though it secures all obligations under the clearing arrangement. The ordinary $350,000 proprietary securities-account credit is also included.

The calculation is $900,000 + $350,000 = $1,250,000 of PAB credits. The DVP account is specifically excluded from PAB treatment. Accrued commissions recorded outside a securities account are not automatically PAB credits. The $1,100,000 of retail free credits belongs in the separate customer reserve computation.

• $350,000 omits the correspondent clearing deposit because of the activity it secures rather than recognizing the introducing broker-dealer’s ownership.
• $1,400,000 improperly treats the accrued commission payable as a PAB securities-account credit.
• $1,450,000 improperly includes the credit in the excluded DVP account.

Question 5

Topic: Net Capital

A FINRA member using the basic net capital method plans a cash distribution that will reduce its equity capital. The compliance file contains the following record:

The proposed distribution would withdraw part of the December contribution. After the distribution, the firm would have no scheduled payment obligation affecting the withdrawal tests.

Which compliance treatment is required?

• A. Submit written notice to FINRA before the withdrawal, then provide the Rule 15c3-1(e)(1)(ii) notice within two business days afterward.
• B. Obtain FINRA’s written permission before the withdrawal, then submit the Rule 15c3-1(e)(1) notice at least two business days beforehand.
• C. Obtain FINRA’s written permission before the withdrawal, then submit the Rule 15c3-1(e)(1)(ii) notice within two business days afterward.
• D. Complete the withdrawal after documenting the capital safeguards, then report it to FINRA and the SEC within two business days.

Best answer: C

Explanation: The capital is less than one year old, and the withdrawal equals 24% of excess net capital, requiring FINRA permission before withdrawal and SEC notice afterward.

Excess net capital before the withdrawal is $2,500,000: $2,750,000 minus the $250,000 minimum. The proposed $600,000 withdrawal is 24% of excess net capital. Because it exceeds 20% but not 30%, Rule 15c3-1(e) requires notice within two business days after the withdrawal rather than two business days’ advance notice. The $500,000 aggregate exception is unavailable.

The post-withdrawal net capital would be $2,150,000, and the aggregate-indebtedness ratio would be approximately 2.79:1, so the stated capital safeguards are satisfied. That does not override FINRA’s separate restriction. Equity capital generally may not be withdrawn within one year after contribution unless FINRA permits the withdrawal in writing. The contribution is only eight months old, so written FINRA permission must be obtained before the distribution. Regulatory notice alone does not provide that permission.

• The advance SEC notice threshold is not reached because the withdrawal is 24%, rather than more than 30%, of excess net capital.
• Written notice to FINRA is not equivalent to FINRA’s written permission during the one-year restriction period.
• Reporting the transaction afterward cannot cure the failure to obtain FINRA permission before withdrawing recently contributed capital.

Question 6

Topic: Net Capital

A broker-dealer is computing net capital as of Tuesday’s close. Its provisional net capital subtotal is $1,200,000 before any effect of the following commitment.

Underwriting blotter:

Agreement: Binding firm-commitment underwriting
Purchase: 25,000 issuer common shares at $32 per share
Current market price: $28 per share
Settlement: Wednesday; shares not yet delivered
Security: Readily marketable common stock
Offsets or concentration charges: None

Applicable commitment treatment:

• Include a binding unsettled purchase commitment in the computation.
• Deduct any loss measured as contract cost minus current market value.
• After recognizing that loss, deduct a 15% haircut from current market value.

What amount of net capital should the broker-dealer report after applying only these commitment adjustments?

• A. $1,100,000
• B. $1,095,000
• C. $995,000
• D. $1,200,000

Best answer: C

Explanation: The $100,000 market loss and $105,000 haircut reduce the $1,200,000 subtotal to $995,000.

The binding underwriting agreement is an open contractual commitment even though settlement and delivery occur after the computation date. Contract cost is 25,000 x $32, or $800,000. Current market value is 25,000 x $28, or $700,000, producing a $100,000 unrealized loss. The prescribed haircut is then applied to current market value: 15% x $700,000 = $105,000. Total commitment deductions are therefore $205,000. Subtracting that amount from the $1,200,000 provisional subtotal produces final net capital of $995,000. Ignoring the commitment until inventory arrives would omit an existing binding exposure.

• $1,095,000 deducts the haircut but omits the decline from contract cost to market value.
• $1,100,000 recognizes the market loss but omits the required haircut.
• $1,200,000 incorrectly postpones recognition until settlement or delivery.

Question 7

Topic: Net Capital

A carrying broker-dealer uses the alternative net capital method and performs an ordinary weekly customer reserve computation. It has not elected the 2% debit reduction. The following records are from Friday’s close.

Reserve workpaper:

Net capital workpaper:

• GAAP equity is $2,000,000 and already reflects all customer liabilities and trading gains or losses.
• An unsecured affiliate receivable of $200,000 is nonallowable.
• A prepaid expense of $50,000 is nonallowable.
• Proprietary readily marketable common stock is carried at its current $600,000 market value and receives a 15% haircut.
• No other net capital adjustments apply.

The bank acknowledgment confirms that reserve cash is held in the firm’s name for the exclusive benefit of customers, remains an allowable cash asset, and is free of liens. The required wire settles in full with no fee or new liability.

After the firm makes the minimum additional reserve deposit, which amounts should it report as final net capital and unrestricted firm cash?

• A. Net capital of $1,710,000 and unrestricted cash of $425,000
• B. Net capital of $1,660,000 and unrestricted cash of $425,000
• C. Net capital of $1,660,000 and unrestricted cash of $325,000
• D. Net capital of $1,185,000 and unrestricted cash of $425,000

Best answer: B

Explanation: Net capital is $2,000,000 less $200,000, $50,000, and a $90,000 haircut, while the required $475,000 cash transfer leaves $425,000 unrestricted.

Apply the 3% debit reduction before determining the reserve requirement:

$3,000,000 - ($2,500,000 x 97%) = $575,000.

Because $100,000 is already in the reserve account, the minimum additional deposit is $475,000. Unrestricted cash therefore becomes $900,000 - $475,000 = $425,000.

Final net capital is calculated independently. The unsecured affiliate receivable and prepaid expense are nonallowable. The stock haircut is $600,000 x 15% = $90,000. Thus, net capital is $2,000,000 - $200,000 - $50,000 - $90,000 = $1,660,000.

The reserve deposit transfers cash between two firm-owned asset accounts. It restricts the firm’s general liquidity, but it creates no expense or additional liability and the documented reserve cash remains allowable. Consequently, the transfer itself does not reduce net capital.

• Reducing net capital by $475,000 incorrectly treats the reserve transfer as an expense or capital deduction.
• Reducing unrestricted cash by $575,000 ignores the $100,000 already held in the reserve account.
• Reporting $1,710,000 omits the $50,000 deduction for the nonallowable prepaid expense.

Question 8

Topic: Funding and Cash Management

A carrying broker-dealer borrowed common stock from another broker-dealer to complete delivery for a customer’s short sale.

Financing terms:

• The firm is the securities borrower and has posted cash collateral to the lending counterparty.
• The loan covers 20,000 shares.
• Cash collateral is reset daily to 102% of the shares’ current market value, with no threshold or rounding.
• The existing collateral is $979,200, based on the previous $48 mark price.
• The new mark price is $52.
• Customer reserve cash and other customer assets are unavailable for the payment.

What collateral movement should treasury include in its unrestricted cash forecast?

• A. An $81,600 cash inflow from returned collateral
• B. An $81,600 cash outflow for additional collateral
• C. An $80,000 cash outflow for additional collateral
• D. A $60,800 cash outflow for additional collateral

Best answer: B

Explanation: As borrower, the firm must increase collateral from $979,200 to $1,060,800, producing an $81,600 cash outflow.

The broker-dealer is the securities borrower, so a price increase raises the cash collateral it must post to the lending counterparty. The new requirement is 20,000 shares x $52 x 102% = $1,060,800. Existing collateral is $979,200, so the required movement is $1,060,800 - $979,200 = $81,600. Treasury must therefore forecast an $81,600 outflow of unrestricted firm cash. The customer short sale explains why the securities were borrowed, but it does not make restricted customer assets available to satisfy the firm’s collateral obligation.

• The $80,000 outflow applies the $4 price increase but omits the agreement’s 102% collateral convention.
• The $60,800 outflow compares the new market value with existing collateral rather than comparing the new and existing collateral requirements.
• An inflow reverses the direction of the mark; a borrower posts more collateral when the borrowed securities increase in value.

Question 9

Topic: Operations and Records

A broker-dealer’s registration review contains this record:

Associated person: Morgan Lee
Registration category: Financial and Operations Principal
April 8: Charged in state court with felony theft
April 9: Charging document sent to the chief compliance officer
April 10: Manager recorded the charge in the personnel file
Current status: No conviction, plea, regulatory order, or CRD amendment

Lee’s duties and the firm’s business activities have not changed. Which registration action must the member take?

• A. File a Form U4 amendment no later than 10 days after April 9.
• B. File a Form U4 amendment no later than 30 days after April 9.
• C. File a Form U4 amendment no later than 30 days after the proceeding ends.
• D. File a Form BD amendment no later than 30 days after April 9.

Best answer: B

Explanation: The pending felony charge is reportable on Form U4 within 30 days after the member learns of it, but it does not itself create a statutory disqualification.

A member must keep an associated person’s Form U4 current by filing a supplementary amendment within 30 days after learning of reportable facts. A felony charge is reportable even while the proceeding remains pending. The 10-day amendment deadline applies when the facts give rise to a statutory disqualification. Here, there is no conviction, plea, or order creating that status, so the ordinary 30-day deadline applies from April 9, when the member received the charging document.

The unchanged duties and business activities mean no new registration category is required. Recording the event in an internal personnel file also does not update the individual’s registration record in CRD; the member remains responsible for submitting the required Form U4 amendment.

• The 10-day deadline would apply if the event created a statutory disqualification, which a pending charge alone does not do.
• Form BD concerns the broker-dealer’s registration information rather than this individual’s criminal disclosure.
• Waiting for the proceeding to end would leave the Form U4 inaccurate beyond the required amendment period.

Question 10

Topic: Operations and Records

A carrying broker-dealer uses the audit-trail alternative under SEC Rule 17a-4 for electronic order tickets, blotters, and customer communications. The firm plans to replace its recordkeeping platform in 10 days.

A test export produces readable final files and creation dates, but it omits:

• The indexes mapping records by account, date, and record series
• The time-stamped histories of modifications and deletions

Files can be retrieved individually by filename, but a test request covering multiple accounts and dates cannot be produced promptly. The existing platform remains fully accessible.

What should the financial and operations principal require before approving decommissioning of the existing platform?

• A. Approve decommissioning after placing the exported files on WORM storage, generating a new filename index, and documenting the migration checksums.
• B. Retain the existing platform until the migration includes the indexes and audit histories and testing confirms accurate reconstruction and prompt production.
• C. Approve decommissioning after reconciling the exported file count, retrieving a representative sample, and preserving the readable final records.
• D. Transfer the exported files to a third party that provides a regulator-access undertaking, maintains duplicate copies, and meets a retrieval service level.

Best answer: B

Explanation: The existing platform must remain accessible until the migrated records preserve required audit-trail information, indexing, reconstruction, and retrieval capabilities.

Rule 17a-4 permits either compliant WORM storage or the audit-trail alternative, but an electronic export must preserve more than readable final files. Under the audit-trail alternative, the system must retain complete time-stamped information needed to recreate original records and subsequent changes. Required indexes and retrieval capabilities must also support prompt regulatory production.

Here, the export loses both the indexes and modification histories, and testing demonstrates that records cannot be produced promptly across accounts and dates. The firm should therefore keep the existing compliant platform accessible until the migration preserves all required information and successful testing confirms accurate reconstruction and timely retrieval. Changing storage media, validating checksums, or obtaining a third-party undertaking does not restore information omitted from the export.

• WORM storage can preserve migrated content against alteration, but it cannot restore omitted audit histories or complete indexing.
• File-count reconciliation and sample retrieval do not demonstrate reconstruction of changed records or prompt production across the retained population.
• A third-party undertaking supports regulator access, but it does not cure incomplete records or deficient indexing and retrieval functionality.

Question 11

Topic: Customer Protection

A carrying broker-dealer’s customer reserve computation requires a $25 million deposit. At the applicable deposit deadline, no reserve assets other than those listed below are available.

Applicable conditions:

• Cash or qualified securities must be actually deposited in a properly designated customer reserve account supported by the bank’s written acknowledgment.
• Cash deposited with an affiliated bank is excluded.
• Cash at a nonaffiliated bank is recognized only up to 15% of the bank’s equity capital reported in its latest Call Report.
• Qualified securities are not subject to this cash concentration limit.

Balances at the deadline:

• Independent Bank holds $15 million of cash in a compliant reserve account. Its reported equity capital is $80 million.
• Affiliate Bank holds $6 million of cash in a compliant reserve account. The bank and broker-dealer are controlled by the same parent.
• Custody Bank holds qualified U.S. Treasury bills with a market value of $8 million in a compliant reserve account.
• The firm has $10 million in an ordinary operating account. Before the deadline, it initiated a $5 million wire to Custody Bank, but the wire was not credited until after the deadline.

Which conclusion should the financial and operations principal reach?

• A. Recognize $23 million, resulting in a $2 million reserve deficiency.
• B. Recognize $25 million, resulting in no reserve deficiency.
• C. Recognize $26 million, resulting in a $1 million reserve excess.
• D. Recognize $20 million, resulting in a $5 million reserve deficiency.

Best answer: D

Explanation: The firm may recognize $12 million at Independent Bank and $8 million at Custody Bank, totaling $20 million against the $25 million requirement.

Independent Bank’s recognizable cash is limited to 15% of its $80 million equity capital, or $12 million. The remaining $3 million at that bank is excluded. All $6 million held at Affiliate Bank is excluded because common control makes the bank affiliated, even though the account designation and acknowledgment are otherwise compliant.

The $8 million of qualified Treasury bills at Custody Bank is recognizable because it was properly deposited and is not subject to the supplied cash concentration limit. The ordinary operating-account balance is not a reserve deposit. The initiated wire also cannot be counted because Custody Bank had not credited it by the deadline. Recognized assets therefore total $12 million plus $8 million, or $20 million, leaving a $5 million deficiency.

• Recognizing $23 million improperly counts all $15 million at Independent Bank instead of applying its $12 million limit.
• Recognizing $26 million applies the concentration limit but improperly includes the $6 million held at the affiliated bank.
• Recognizing $25 million improperly treats the initiated but uncredited $5 million wire as an actual reserve deposit.

Question 12

Topic: Net Capital

An established carrying broker-dealer uses the basic net capital method. Its month-end records contain the following liabilities:

• Customer free credit balances: $900,000
• Unsecured vendor trade payable due in 30 days: $120,000
• Unsecured trade payable due in 7 days to its corporate parent: $180,000
• Approved satisfactory subordinated loan: $500,000

The parent payable is an ordinary invoice with no subordination agreement. The firm’s customer reserve bank account is fully funded, and no other aggregate indebtedness exclusions apply.

What amount should the firm include in aggregate indebtedness from these balances?

• A. $1,700,000
• B. $1,020,000
• C. $300,000
• D. $1,200,000

Best answer: D

Explanation: Customer free credits and both trade payables are included, while the satisfactory subordinated loan is excluded.

Aggregate indebtedness generally includes money liabilities arising from the broker-dealer’s business, including customer free credit balances and unsecured trade payables. Neither a short payment term nor an obligation to a corporate parent creates an exclusion. The satisfactory subordinated loan is excluded because its approved regulatory treatment differs from ordinary debt.

The calculation is:

Funding the customer reserve account does not remove customer free credit balances from aggregate indebtedness. The reserve computation and the net capital aggregate indebtedness calculation serve separate regulatory purposes.

• $300,000 improperly excludes customer free credit balances because they are customer-related liabilities.
• $1,020,000 improperly treats the short-term parent payable as excluded based on maturity or ownership.
• $1,700,000 improperly includes the approved satisfactory subordinated loan in aggregate indebtedness.

Question 13

Topic: Net Capital

An established carrying broker-dealer has elected the alternative net capital method. Its activity-based fixed minimum is $250,000, and no other requirement produces a higher fixed minimum. Customer margin purchases settle, producing the following changes:

GAAP equity and actual net capital remain unchanged. The firm’s separate customer reserve computation continues to use the ordinary 3% debit reduction.

By how much does the broker-dealer’s required minimum net capital increase?

• A. $120,000 increase
• B. $80,000 increase
• C. $50,000 increase
• D. $100,000 increase

Best answer: C

Explanation: The minimum rises from the $250,000 floor to 2% of $15,000,000, or $300,000, producing a $50,000 increase.

Under the alternative method, required minimum net capital is the greater of $250,000 or 2% of qualifying aggregate debit items. Before the change, 2% of $11,000,000 is $220,000, so the $250,000 fixed floor controls. After the change, 2% of $15,000,000 is $300,000, which exceeds the floor. Required minimum net capital therefore increases by $50,000.

The change in aggregate indebtedness does not determine the requirement because the firm elected the alternative method. The 3% reserve-formula debit reduction is also a separate customer protection calculation and is not the alternative-method net capital percentage. Because actual net capital remains unchanged, the firm’s capital cushion declines by $50,000, although the firm remains above its new $300,000 minimum.

• The $80,000 calculation applies 2% to the $4,000,000 debit increase but ignores that the fixed floor controlled before the change.
• The $100,000 calculation applies the basic-method AI/15 formula to the $1,500,000 increase in aggregate indebtedness.
• The $120,000 calculation applies the reserve computation’s 3% debit reduction to the $4,000,000 change.

Question 14

Topic: Funding and Cash Management

A stockholder funded a broker-dealer with $900,000 under a FINRA-approved Appendix D specific-amount subordination agreement. The original term was January 1, 2024 through December 31, 2026.

On September 1, 2026, when four months remained, a FINRA-approved renewal became effective and extended maturity through December 31, 2029. The renewed term therefore has 40 months remaining. All required restrictions on accelerated maturity and capital withdrawal remain in effect, and the agreement is otherwise satisfactory.

The renewal required no additional funding, and no cash was transferred on September 1. Which conclusion should the financial and operations principal reach?

• A. Continue recognizing the $900,000 as subordinated capital, classify it as equity for the regulatory debt-equity test, and record no increase in available cash.
• B. Continue recognizing the $900,000 as subordinated capital, classify it as debt for the regulatory debt-equity test, and record no increase in available cash.
• C. Recognize the $900,000 only through the original maturity, classify it as debt for the regulatory debt-equity test, and record no increase in available cash.
• D. Continue recognizing the $900,000 as subordinated capital, classify it as equity for the regulatory debt-equity test, and increase available cash by $900,000.

Best answer: A

Explanation: The approved renewal provides more than three years of remaining term, allowing the stockholder subordination to qualify as equity while creating no new cash.

A satisfactory Appendix D agreement can receive net capital recognition independently of its classification under the Rule 15c3-1(d) debt-equity test. For that test, qualifying stockholder subordination must have the required term, at least 12 months remaining, and restrictions against accelerated maturity and capital withdrawal.

Before renewal, only four months remained, so the agreement would not qualify as equity for the debt-equity test. The FINRA-approved renewal became effective with 40 months remaining and retained the required restrictions. The $900,000 therefore continues receiving subordinated capital treatment and qualifies as regulatory equity rather than entering the subordinated-debt numerator.

Renewal changes the agreement’s maturity and regulatory classification, but it does not itself supply liquidity. Because no additional funds were transferred, available cash does not increase.

• Debt treatment would apply if less than 12 months remained, but the effective renewal provides 40 months.
• Limiting recognition to the former maturity ignores the FINRA-approved extension of the satisfactory agreement.
• Increasing cash confuses regulatory capital treatment with an actual transfer of funds.

Question 15

Topic: Net Capital

A carrying broker-dealer is preparing its month-end net capital computation. No adjustments apply other than those listed.

• Reported GAAP equity: $1,200,000
• Proprietary readily marketable common stock:
  • Recorded cost: $400,000
  • Current market value: $340,000
  • The $60,000 unrealized loss was omitted from accounting equity.
  • The applicable haircut is 15% of market value.
• Nonallowable assets: $100,000
• Satisfactory subordinated loan: $300,000, recorded as a liability under an approved agreement meeting all regulatory requirements
• Shareholder demand loan: $200,000, recorded as an ordinary liability with no subordination agreement

What is the broker-dealer’s final net capital?

• A. $1,289,000
• B. $1,280,000
• C. $1,349,000
• D. $1,489,000

Best answer: A

Explanation: Final net capital is reported equity less the omitted loss, plus satisfactory subordinated funding, less nonallowable assets and the haircut on marked market value.

First reduce reported GAAP equity by the omitted $60,000 unrealized loss, producing supported net worth of $1,140,000. Add the $300,000 satisfactory subordinated liability because it qualifies for regulatory capital treatment. The ordinary $200,000 shareholder demand loan receives no addition merely because a shareholder provided it.

Tentative net capital before the haircut is $1,140,000 + $300,000 - $100,000 = $1,340,000. The haircut is calculated separately using the marked market value: 15% x $340,000 = $51,000. Final net capital is therefore $1,340,000 - $51,000 = $1,289,000. Recognizing the market loss and applying the haircut are separate adjustments and do not duplicate one another.

• $1,349,000 omits the $60,000 accounting mark while still applying the market-value haircut.
• $1,489,000 incorrectly adds the ordinary shareholder loan as regulatory capital.
• $1,280,000 calculates the 15% haircut from the $400,000 recorded cost rather than the $340,000 market value.

Question 16

Topic: Net Capital

A broker-dealer is calculating net capital as of January 31, 2027.

• Tentative net capital before the proprietary securities deduction is $1,300,000.
• The firm owns restricted common stock with a supported GAAP carrying value of $400,000.
• Unrestricted shares of the same issuer have a quoted market value of $500,000.
• Transfer-agent records and outside counsel’s cutoff-date memorandum confirm that the firm’s shares cannot be publicly resold until April 15, 2027. No registration statement, waiver, or resale exemption is available before that date.
• A cutoff search identified no other contingent liabilities, commitments, or required deductions.

What amount should the firm report as net capital?

• A. Final net capital of $1,225,000
• B. Final net capital of $1,300,000
• C. Final net capital of $800,000
• D. Final net capital of $900,000

Best answer: D

Explanation: The firm deducts the restricted position’s entire $400,000 carrying value from tentative net capital.

The resale restriction remains effective at the January 31 cutoff, so the position is not readily marketable for net capital purposes. A public quote for unrestricted shares does not make the firm’s restricted shares freely saleable. The firm therefore deducts 100% of the position’s supported GAAP carrying value rather than applying the ordinary 15% marketable-equity haircut.

The calculation is:

The firm cannot anticipate the restriction’s April expiration when calculating capital at January 31. The transfer-agent records and counsel’s memorandum provide cutoff-date support for the restriction, while the commitment search establishes that no additional deductions are required.

• Reporting $1,300,000 disregards the deduction required for a position that cannot currently be resold.
• Reporting $1,225,000 applies a 15% haircut to the $500,000 quote, which is inappropriate for the restricted position.
• Reporting $800,000 deducts the unrestricted shares’ quoted market value rather than the firm’s supported carrying value.

Question 17

Topic: Net Capital

A broker-dealer is reviewing a subordinated loan under SEC Rule 15c3-1(d). Assume the agreement otherwise qualifies as satisfactory subordination and there are no other debt-equity components.

Capital record:

• Stockholder equity and applicable adjustments: $300,000
• Loan from a 30% voting stockholder: $800,000
• Other satisfactory subordinated debt: $100,000
• Stockholder loan original term: 4 years
• Stockholder loan remaining term: 18 months

Agreement extract:

“If an interest installment remains unpaid for 30 days, the lender may accelerate maturity, subject to the approvals required by the agreement.”

The balances are expected to remain unchanged for 120 consecutive days. No Commission extension has been requested or granted. Which assessment correctly applies Rule 15c3-1(d)?

• A. Classify the stockholder loan as equity; the ratio is 8.3%, and the planned 120-day period requires no Commission extension.
• B. Classify both subordinations as debt; the ratio is 75.0%, and satisfactory-subordination approval permits the planned 120-day period.
• C. Classify both subordinations as debt; the ratio is 75.0%, and remaining above 70% for 120 days requires a Commission extension.
• D. Classify both subordinations as debt; the ratio is 75.0%, and the 70% limit is violated on the first day above the threshold.

Best answer: C

Explanation: The acceleration clause prevents equity treatment, producing a debt-equity ratio of 75.0% that cannot remain above 70% for more than 90 days without a Commission extension.

A satisfactory stockholder subordination can qualify as equity only if it meets the relationship, term, remaining-term, acceleration, and withdrawal restrictions. Although this loan has a qualifying stockholder lender, a four-year original term, and 18 months remaining, its accelerated-maturity provision prevents equity treatment.

The debt numerator therefore includes both subordinations: $800,000 + $100,000 = $900,000. The regulatory debt-equity total is $900,000 of subordinations plus $300,000 of equity, or $1,200,000. The ratio is $900,000 / $1,200,000 = 75.0%.

Exceeding 70% is subject to a duration test rather than an immediate first-day violation. Because the excess is expected to continue for 120 days, the firm must reduce the ratio or obtain a Commission extension before it remains above the limit for more than 90 days.

• Meeting the stockholder and term tests does not overcome the accelerated-maturity provision.
• A ratio above 70% does not violate the duration condition on the first day it exceeds the threshold.
• Approval as satisfactory subordination is not the same as a Commission extension of the 90-day period.

Question 18

Topic: Funding and Cash Management

A carrying broker-dealer borrowed common stock to complete a proprietary short delivery and delivered cash collateral to the securities lender. Customer reserve account assets are not available to fund the transaction.

Treasury record:

Agreement extract:

Cash collateral must equal 102% of the borrowed securities’ closing market value. Any daily mark is transferred on the next business day.

Which next-business-day cash-forecast entry is required?

• A. Record a $71,400 collateral outflow, leaving $28,600 of unrestricted cash.
• B. Record an $887,400 collateral outflow, leaving a $787,400 unrestricted-cash deficit.
• C. Record a $71,400 collateral inflow, leaving $171,400 of unrestricted cash.
• D. Record a $70,000 collateral outflow, leaving $30,000 of unrestricted cash.

Best answer: A

Explanation: The required collateral increases to $887,400, so the borrower must deliver an additional $71,400 from unrestricted cash.

The broker-dealer is the securities borrower and has delivered cash collateral to the lender. Because the borrowed stock’s price increased, the required collateral also increases.

Required collateral = 20,000 x $43.50 x 102% = $887,400.

The lender already holds $816,000, so the required movement is $887,400 - $816,000 = $71,400. This is an outflow from the borrower to the lender. After the transfer, unrestricted proprietary cash is $100,000 - $71,400 = $28,600. Customer reserve assets cannot be treated as general liquidity available to satisfy this proprietary securities-borrowing obligation.

• The $70,000 outflow reflects only the stock’s market-value increase and omits the agreement’s 102% collateral convention.
• A collateral inflow reverses the direction of the mark; a price increase requires the securities borrower to post more cash.
• The $887,400 amount is the total collateral requirement, not the incremental transfer after recognizing collateral already held.

Question 19

Topic: Customer Protection

A carrying broker-dealer’s weekly customer reserve computation requires $9.2 million in its Special Reserve Bank Account by 10:00 a.m. Tuesday.

Account status:

• The properly designated account has the required written bank acknowledgment.
• Its opening balance is $7.6 million in eligible cash.
• A $1.0 million wire is credited at 9:35 a.m.
• A separate $0.6 million wire, initiated at 9:15 a.m., is rejected at 9:40 a.m. because of incorrect routing information.
• The ordinary operating account has $1.2 million of unrestricted cash after the rejection.
• No reserve-account withdrawals occur.

Which assessment and action are correct as of 10:00 a.m.?

• A. Record a funded balance of $8.6 million and a $0.6 million shortfall, and arrange an eligible replacement deposit into the reserve account.
• B. Record a funded balance of $7.6 million and a $1.6 million shortfall, and defer recognition of both wires until the next reserve computation.
• C. Record a funded balance of $9.8 million and a $0.6 million excess, and include the available operating cash while the rejected wire is resubmitted.
• D. Record a funded balance of $9.2 million and no shortfall, and treat the rejected instruction as effective because it was initiated before the deadline.

Best answer: A

Explanation: Only the opening balance and successfully credited wire fund the designated reserve account, leaving a $0.6 million shortfall.

A reserve deposit is recognized when eligible assets are actually credited to the properly designated Special Reserve Bank Account, not when a transfer instruction is merely initiated. The rejected $0.6 million wire therefore contributes nothing to the funded balance at the deadline. The successfully credited $1.0 million wire does count.

The actual funded balance is $7.6 million plus $1.0 million, or $8.6 million. Compared with the $9.2 million requirement, this produces a $0.6 million shortfall. Although the operating account has sufficient liquidity, cash held there is not segregated in the designated reserve account and cannot satisfy the requirement. The firm must arrange a replacement deposit of eligible assets; retaining proof that the rejected wire was initiated on time does not cure the shortfall.

• Timely initiation does not make a rejected wire an effective reserve deposit.
• The successfully credited $1.0 million wire is recognized immediately and is not deferred until another computation.
• Unrestricted operating cash remains outside the designated reserve account and cannot be included in its funded balance.

Question 20

Topic: Operations and Records

A carrying broker-dealer receives a complaint concerning a check issued from a customer’s brokerage account.

Disbursement file:

• Account owner: Juniper Labs Inc.
• Check payee: Redwood Title LLC
• Request log: Naomi Cole requested the check by telephone.
• Customer-signed standing designation: Redwood Title LLC may receive checks from the account when requested by Naomi Cole.
• Other records: canceled-check image, cash-disbursement blotter entry, and written customer complaint

The customer disputes making the specific telephone request. Which record and retention treatment satisfy the authorization-record requirement for the negotiable instrument?

• A. The customer-signed recipient designation; preserve it at least six years, with the first two years readily accessible.
• B. The written customer complaint and response; preserve them at least four years in the firm’s complaint records.
• C. The cash-disbursement blotter entry; preserve it at least six years, with the first two years readily accessible.
• D. The canceled check and bank image; preserve them at least three years, with the first two years readily accessible.

Best answer: A

Explanation: The signed designation records the customer-authorized payment recipient and is retained under the six-year default period, with two-year ready accessibility.

FINRA Rule 4514 requires a member to maintain a record of persons designated by a customer to whom, or in whose name, payments may be made. The customer-signed standing designation naming Redwood Title LLC is the direct evidence of that authorization. Because Rule 4514 does not specify another retention period, FINRA’s general six-year retention requirement applies, and the record must be readily accessible during the first two years.

The disputed telephone instruction may require separate investigation, but the dispute does not change which document satisfies the negotiable-instrument authorization-record requirement. Transaction, accounting, and complaint records remain subject to their own preservation rules.

• A canceled check proves that payment occurred and identifies the payee, but it does not establish the customer’s prior designation of that recipient.
• A blotter records the cash disbursement, not the customer’s authority for making payment to the named recipient.
• A complaint record documents the later dispute rather than the authorization governing the payment.

Question 21

Topic: Funding and Cash Management

A carrying broker-dealer reviews a customer’s mixed margin account after the market close.

• Long securities market value: $90,000
• Long-account debit balance: $70,000
• Short securities market value: $40,000
• Short-account credit balance: $60,000
• Regulatory maintenance: 25% of long market value and 30% of short market value
• Firm house maintenance: 35% of long market value and 40% of short market value

Assume no offsets or other withdrawal restrictions apply. What action should the firm take under its house maintenance policy?

• A. Permit a $5,500 maintenance withdrawal.
• B. Permit a $1,500 maintenance withdrawal.
• C. Require a $7,500 house maintenance deposit.
• D. Require a $3,500 house maintenance deposit.

Best answer: C

Explanation: Account equity is $40,000, which is $7,500 below the $47,500 house maintenance requirement.

Account equity combines the long and short sides: $90,000 - $70,000 + $60,000 - $40,000 = $40,000. The house requirement is calculated separately for each position type: 35% of $90,000 is $31,500, and 40% of $40,000 is $16,000. Total required house maintenance is therefore $47,500. Because equity is only $40,000, the customer must deposit $7,500.

The regulatory requirement would be $22,500 plus $12,000, or $34,500. Although the account exceeds that regulatory floor by $5,500, a broker-dealer may enforce a higher written house requirement. The regulatory excess therefore does not permit a withdrawal under the stated policy.

• The $3,500 deposit applies the house percentage to the long position but the regulatory percentage to the short position.
• The $1,500 withdrawal applies the regulatory percentage to the long position and the house percentage to the short position.
• The $5,500 withdrawal uses both regulatory minimums and disregards the higher house requirements.

Question 22

Topic: Operations and Records

A carrying broker-dealer’s natural-person customer tells the registered representative that she has retired and wants her investment objective changed from growth to income. The representative records the conversation only in a sales contact note. The electronic customer account record still shows the prior employment status and objective.

Firm procedures:

• The electronic customer account record is the official account profile.
• A designated principal must approve material profile changes in that record’s audit trail.

The account remains open. Which action should the financial and operations principal require?

• A. Update the official account record, capture approval in its audit trail, send the revised record within 30 days, and retain the superseded information for three years, with two years easily accessible.
• B. Update the official account record, document approval only in the sales contact note, send the revised record within 30 days, and retain the superseded information easily accessible for six years after replacement.
• C. Update the official account record, capture approval in its audit trail, send the revised record within 30 days, and retain the superseded information easily accessible for six years after replacement.
• D. Update the official account record, capture approval in its audit trail, send a change reminder with the next periodic statement, and retain the superseded information easily accessible for six years after replacement.

Best answer: C

Explanation: The investment-objective change requires an updated customer account record, documented approval, timely delivery to the customer, and six-year preservation of the replaced information.

A natural-person customer’s investment objective and employment status are customer account information under SEC Rule 17a-3(a)(17). A sales contact note documents the conversation but does not replace the official customer account record. Because the investment objective changed, the broker-dealer must furnish the customer with the updated account record within 30 days. The firm’s procedures also require the designated principal’s approval to appear in the profile’s audit trail.

Under Rule 17a-4(e)(5), replaced or updated account-record information must be preserved in an easily accessible place for at least six years after the earlier applicable event. Because the old information is being replaced while the account remains open, the superseded information follows the six-year period measured from replacement.

• Waiting for the next periodic statement misses the specific 30-day delivery requirement for an investment-objective change.
• Recording approval only in the contact note does not satisfy the firm’s required profile audit-trail evidence.
• The three-year schedule applies to other record categories, not the six-year requirement for customer account information.

Question 23

Topic: Operations and Records

Alder Securities introduces customer accounts to Beacon Clearing on a fully disclosed basis. Their written carrying agreement assigns preparation and transmission of customer confirmations to Beacon and requires Alder to provide complete and accurate trade data.

A retail customer orders 100 callable corporate bonds with $1,000 face value each. After receiving the order, Alder buys the bonds for its proprietary account at 98 and sells them to the customer the same day at 99. Assume the dealer purchase establishes the prevailing market price and the transaction meets the debt-markup disclosure conditions.

Alder incorrectly reports the trade as agency, and Beacon sends a confirmation showing a $1,000 commission but no callable-debt notice. All other confirmation fields are correct. The firms discover the errors before settlement but disagree about who should correct them.

Which resolution complies with the firms’ responsibilities and the confirmation requirements?

• A. Beacon should issue a corrected confirmation stating agency capacity, a $1,000 commission equal to approximately 1.02% of purchase cost, and the callable-debt notice; Alder should correct its trade data.
• B. Beacon should issue a corrected confirmation stating principal capacity, a $1,000 markup equal to approximately 1.02% of prevailing market price, and the callable-debt notice; Alder should correct its trade data.
• C. Alder should issue a corrected confirmation stating principal capacity, a $1,000 markup equal to approximately 1.02% of prevailing market price, and the callable-debt notice; Beacon should withdraw its original confirmation.
• D. Beacon should issue a corrected confirmation stating principal capacity and a $1,000 markup equal to approximately 1.02% of prevailing market price; Alder should provide the callable-debt warning through a separate disclosure.

Best answer: B

Explanation: Beacon has the allocated confirmation-delivery function, while the actual principal trade requires markup and callable-debt disclosures based on accurate data from Alder.

The carrying agreement assigns confirmation preparation and delivery to Beacon, so Beacon should transmit the correction. Alder nevertheless remains responsible for supplying accurate transaction information and for its own conduct.

Alder bought the bonds into its proprietary account after receiving the customer order and then sold them to the customer. The confirmation must therefore report principal capacity rather than agency capacity. The markup is $1,000: the customer price is $99,000 and the prevailing market price is $98,000. The percentage is approximately $1,000 / $98,000, or 1.02%.

Because the bonds are redeemable before maturity, the confirmation must also contain the applicable callable-debt statement. Allocating confirmation delivery does not permit either firm to misstate the actual transaction or omit required disclosures.

• Agency treatment misstates Alder’s actual principal capacity and incorrectly characterizes the price spread as a commission.
• Requiring Alder to deliver the correction disregards the carrying agreement’s allocation of confirmation transmission to Beacon.
• A separate bond disclosure does not replace the callable-debt statement required on the confirmation.

Question 24

Topic: Funding and Cash Management

A carrying broker-dealer has a FINRA-approved Appendix D secured demand note. All requirements unrelated to collateral value remain satisfied.

Tuesday close record:

Agreement extract:

Recognized collateral equals market value less applicable haircuts and must be at least the note principal. The lender may supply sufficient additional collateral before noon on the business day following transmittal of the required deficiency notice. Otherwise, the prescribed sale/payment or approved principal-reduction procedures apply.

The firm immediately transmitted written deficiency notice to the lender and examining authority on Tuesday. There is no intervening holiday. The note remains unfunded until payment is demanded and received. Pledged collateral remains lender-owned and segregated while supporting the note.

Which conclusion identifies the minimum deposit needed by the deadline and the proper cash-management treatment?

• A. Obtain $222,857.15 in cash collateral before Wednesday noon; restore support for the $800,000 note and report $0 of available treasury cash.
• B. Obtain $156,000 in cash collateral before Wednesday noon; restore support for the $800,000 note and report $156,000 of available treasury cash.
• C. Obtain stock worth $156,000 before Wednesday noon; restore support for the $800,000 note and report $0 of available treasury cash.
• D. Obtain $156,000 in cash collateral before Wednesday noon; restore support for the $800,000 note and report $0 of available treasury cash.

Best answer: D

Explanation: The 30% stock deduction leaves $644,000; $156,000 of cash collateral cures the shortfall before Wednesday noon without increasing operating cash.

Appendix D stock collateral value is $920,000 x 70% = $644,000. The shortfall against $800,000 principal is $156,000. Eligible cash collateral counts dollar-for-dollar, so $156,000 is the minimum cash cure. Tuesday transmittal of the required notice makes the collateral-addition deadline before noon Wednesday.

An equivalent stock contribution would require at least $156,000 / 70% = $222,857.15 in market value when rounded up to cents. The cash cure restores collateral support but does not provide unrestricted operating cash. The note has not been demanded or funded, and the pledged cash remains collateral.

• $222,857.15 unnecessarily applies the stock deduction to a cash contribution.
• Stock worth $156,000 contributes only $109,200 after the deduction and leaves a $46,800 shortfall.
• The $156,000 cash pledge is restricted collateral rather than available treasury cash.

Question 25

Topic: Customer Protection

A carrying broker-dealer is reviewing an account labeled Institutional Professional Account.

• The account holder is an SEC-registered investment adviser that is not a broker-dealer, government securities broker or dealer, or municipal securities dealer.
• The adviser beneficially owns the account’s assets; they are not pooled assets of its advisory clients.
• The adviser is not affiliated with the carrying firm, and its claim is not subordinated to the firm’s creditors.
• The account has a $900,000 free credit balance.

Under SEC Rule 15c3-3, how should the carrying firm classify this balance for reserve purposes?

• A. Classify it as a noncustomer institutional account and exclude the $900,000 from both reserve computations.
• B. Classify it as a customer account and include the $900,000 in the customer reserve computation.
• C. Classify it as a PAB account and include the $900,000 in the PAB reserve computation.
• D. Classify it as an omnibus customer account and allocate the $900,000 among the underlying advisory clients.

Best answer: B

Explanation: The investment adviser is a customer because its actual legal status does not place it within a customer exclusion.

Rule 15c3-3 classification depends on the account holder’s actual legal status, not labels such as professional or institutional. An investment adviser is not excluded from the customer definition merely because it is a regulated financial professional or manages assets for others. Here, the adviser is not a broker-dealer or another excluded securities intermediary, and it beneficially owns the free credit balance. The balance therefore belongs in the carrying firm’s customer reserve computation. It is not a PAB balance because PAB treatment generally applies to proprietary securities accounts of broker-dealers. The balance also should not be allocated among advisory clients because the facts establish that the funds belong to the adviser itself.

• PAB treatment does not apply merely because the account holder is a financial professional; the adviser is not a broker-dealer.
• Institutional status and financial sophistication do not create a noncustomer exclusion.
• Allocation among advisory clients would require assets held for those clients, rather than the adviser’s own treasury assets.

Questions 26-50

Question 26

Topic: Operations and Records

A carrying broker-dealer’s purchase blotter and settlement ledger contain the following record. Assume no fees, interest, cancellations, or price adjustments.

Security: XYZ common stock
Trade date: Monday, August 10, 2026
Settlement: Regular-way
Side: Buy
Matched quantity: 2,400 shares
Contract price: $31.25 per share
Comparison status: Matched on August 10 for the full quantity
August 11 activity: 1,500 shares received; $46,875 paid

At the close of August 11, what remaining delivery receivable and related contract-price payable should the firm carry?

• A. 900 shares receivable and $46,875 payable
• B. 1,500 shares receivable and $28,125 payable
• C. 2,400 shares receivable and $75,000 payable
• D. 900 shares receivable and $28,125 payable

Best answer: D

Explanation: The partial settlement discharged 1,500 shares and $46,875, leaving 900 shares and $28,125 unsettled.

The trade was executed and matched for 2,400 shares on August 10, establishing the full contractual obligation. Regular-way settlement for a U.S. equity trade is T+1, making August 11 the settlement date. Matching confirms the trade terms but does not prove that delivery occurred.

The original contract amount was 2,400 x $31.25 = $75,000. On August 11, delivery and payment occurred for 1,500 shares, representing 1,500 x $31.25 = $46,875. The residual quantity is 2,400 - 1,500 = 900 shares. The associated unpaid amount is 900 x $31.25 = $28,125. The firm therefore continues to carry only the unsettled portion, not the original or settled quantities.

• Carrying the full 2,400 shares and $75,000 ignores the recorded partial settlement.
• Pairing 900 shares with $46,875 treats the cash already paid as the remaining payable.
• Pairing 1,500 shares with $28,125 combines the settled share quantity with the residual cash amount.

Question 27

Topic: Operations and Records

A carrying broker-dealer self-clears listed equity transactions. Its written business continuity plan identifies settlement and related funding as mission-critical functions with a same-business-day recovery objective.

During an annual test that assumes the primary operations center is unavailable:

• Operations staff successfully work from the alternate location.
• Staff can access trade records, books and records, email, and telephone service.
• Connections to the clearing agency’s settlement system and the settlement bank’s payment platform fail.
• The network provider estimates that the required circuits could be activated within 48 hours.
• The firm has no documented and tested manual settlement process or alternate connection.

How should the financial and operations principal classify and address the test results?

• A. Classify workspace recovery as successful but settlement recovery as failed; document the gap, remediate connectivity, and complete an end-to-end retest.
• B. Classify workspace recovery as successful and settlement recovery outside the location test; review vendor continuity plans, verify escalation contacts, and retain annual oversight.
• C. Classify workspace recovery as successful and settlement recovery as conditionally successful; document the vendor dependency, obtain activation commitments, and close the test.
• D. Classify workspace recovery as successful and settlement recovery under a 48-hour objective; revise the plan, communicate the new timing, and retest next year.

Best answer: A

Explanation: The failed connections prevent same-business-day settlement and funding, so workspace availability alone does not recover the critical function.

Business continuity testing must demonstrate recovery of the critical business function, not merely the availability of personnel, equipment, and records. Here, the alternate location supports staff operations but cannot connect to the systems needed to complete settlement and related funding. The provider’s 48-hour activation estimate also conflicts with the firm’s same-business-day recovery objective.

The firm remains responsible for its operational obligations even when performance depends on network providers, clearing agencies, or banks. The principal should separately document the successful workspace component and the failed settlement component, assign remediation for alternate connectivity or a tested workaround, and conduct an end-to-end retest. The settlement function should not be treated as recovered until testing demonstrates that staff can perform the necessary transactions from the alternate environment.

• A vendor activation commitment does not demonstrate that settlement can actually be completed within the recovery objective.
• Revising an internal recovery objective does not defer the firm’s external settlement and funding obligations.
• External connectivity remains a critical dependency within recovery testing even when vendors operate the underlying systems.

Question 28

Topic: Net Capital

An established carrying broker-dealer is preparing its month-end net capital workpaper. Ignore income tax effects. No other deductions, haircuts, offsets, or concentration charges apply.

What final net capital amount should the firm report?

• A. $1,181,000
• B. $781,000
• C. $1,141,000
• D. $1,175,000

Best answer: A

Explanation: The firm has $1,250,000 of tentative net capital before deducting the $69,000 haircut on the stock’s current market value.

Begin with supported GAAP equity, which already includes the $40,000 market loss. Add the $400,000 satisfactory subordination because it qualifies for net capital treatment and is not included in equity. Deduct the $180,000 furniture balance, the $70,000 unsecured affiliate advance, and the $60,000 operational charge.

Tentative net capital = $1,160,000 + $400,000 - $180,000 - $70,000 - $60,000 = $1,250,000.

The haircut is based on current market value: 15% x $460,000 = $69,000. Therefore, final net capital is $1,250,000 - $69,000 = $1,181,000. The previously recorded market loss must not be deducted again.

• $1,141,000 deducts the $40,000 market loss a second time.
• $1,175,000 calculates the haircut using the stock’s $500,000 pre-mark value instead of current market value.
• $781,000 fails to include the effective satisfactory subordinated loan in regulatory capital.

Question 29

Topic: Net Capital

A broker-dealer has completed all required procedures for a permitted partial repayment of subordinated debt. Its records immediately before repayment show:

Agreement and transaction details:

• The lender is not a stockholder, and its agreement does not qualify as equity under Rule 15c3-1(d).
• The stockholder agreement had a four-year original term, has 18 months remaining, and contains the required restrictions on accelerated maturity and capital withdrawals.
• The firm repays $150,000 of the lender subordination. No other balances or regulatory adjustments change.

What is the firm’s regulatory debt-equity ratio immediately after the repayment, rounded to the nearest tenth of a percent?

• A. 50.0%, based on $450,000 / $900,000
• B. 37.5%, based on $450,000 / $1,200,000
• C. 42.9%, based on $450,000 / $1,050,000
• D. 61.9%, based on $650,000 / $1,050,000

Best answer: C

Explanation: The repayment leaves $450,000 of debt-classified subordination and reduces the debt-equity total to $1,050,000, producing 42.9%.

Rule 15c3-1(d) uses debt-classified satisfactory subordinated principal as the numerator. The qualifying stockholder subordination is excluded from that numerator but remains part of the regulatory debt-equity total.

Before repayment, the total is $600,000 + $200,000 + $250,000 + $150,000 = $1,200,000. Repaying $150,000 of the lender subordination reduces both the debt numerator and the total:

Aggregate indebtedness is not the denominator for this calculation. The resulting ratio is below the 70% regulatory debt-equity threshold.

• The 37.5% calculation reduces the numerator but incorrectly leaves the pre-repayment denominator unchanged.
• The 50.0% calculation incorrectly uses aggregate indebtedness as the denominator.
• The 61.9% calculation incorrectly includes the equity-qualifying stockholder subordination in the debt numerator.

Question 30

Topic: Net Capital

A carrying broker-dealer identifies these unresolved stock-record differences:

• LQX common stock: short 1,000 shares at $48 per share.
• MRP common stock: long 600 shares at $50 per share.
• Both differences were discovered 10 business days ago.
• The applicable schedule requires a deduction for an unresolved short difference after 7 business days.
• The securities have different CUSIPs, no records link the differences, and no specific reserve was established.

The controller proposes netting their market values and recording an $18,000 deduction. What operational deduction should the firm include in its net capital computation?

• A. $18,000
• B. $48,000
• C. $30,000
• D. $78,000

Best answer: B

Explanation: The aged short difference requires a $48,000 deduction, and the long difference in another CUSIP cannot offset it.

Stock-record differences are evaluated security by security. LQX is an unresolved short difference beyond the applicable seven-business-day aging period, so its current market value must be deducted: 1,000 x $48 = $48,000. MRP is a long difference involving a different CUSIP, and the records do not establish any security-specific connection between the two differences. Its $30,000 market value therefore cannot reduce the LQX deduction. The long difference also is not added as a second short exposure. Because no specific reserve was established, the full $48,000 reduces net capital. Dollar-value netting across unrelated securities would conceal the aged operational exposure.

• $18,000 improperly nets market values for two different securities.
• $78,000 incorrectly treats the long difference as an additional required deduction.
• $30,000 charges the long difference instead of the aged short difference.

Question 31

Topic: Net Capital

A carrying broker-dealer advances cash in a reverse repurchase agreement and receives securities from the counterparty. At the computation time, the counterparty has not met a margin call.

Financing record:

Applicable net capital schedule:

• Required collateral equals 102% of the total receivable, including accrued interest.
• Recognized collateral value equals market value less a 3% valuation reduction.
• Unsupported exposure equals required collateral minus recognized collateral, with a minimum of zero.
• The unsupported exposure is deducted in full from tentative net capital.

What deduction should the firm apply to tentative net capital?

• A. A $70,000 deduction
• B. A $170,400 deduction
• C. A $318,900 deduction
• D. A $218,500 deduction

Best answer: C

Explanation: Required collateral of $5,120,400 less recognized collateral of $4,801,500 produces a $318,900 unsupported exposure.

The reverse repo creates a financing receivable supported by securities received from the counterparty. Total receivable is $5,000,000 + $20,000 = $5,020,000. Applying the contractual margin requirement gives required collateral of $5,020,000 x 102% = $5,120,400.

The collateral must be recognized after the prescribed valuation reduction: $4,950,000 x 97% = $4,801,500. Therefore, unsupported exposure is $5,120,400 - $4,801,500 = $318,900. Because the schedule requires the unsupported exposure to be deducted in full, tentative net capital is reduced by that amount.

• $70,000 compares the receivable with unadjusted collateral and omits both prescribed adjustments.
• $170,400 applies the 102% margin requirement but values collateral at its full market value.
• $218,500 applies the valuation reduction but compares collateral with only the receivable rather than the required 102% support.

Question 32

Topic: Net Capital

A carrying broker-dealer uses the basic method and plans an immediate $550,000 cash distribution to its sole shareholder.

Capital facts:

• Net capital before withdrawal: $1,400,000
• Aggregate indebtedness (AI): $9,000,000
• Fixed minimum net capital: $250,000
• The withdrawal reduces net capital dollar for dollar and does not change AI.
• No other withdrawals occurred during the preceding 35 calendar days.

Applicable withdrawal requirements:

• SEC advance notice is required when aggregate withdrawals exceed 30% of excess net capital during the relevant 30-day period. The $500,000 exception does not apply here.
• A withdrawal is prohibited if post-withdrawal AI exceeds 10 times net capital.
• FINRA prior written approval is required when withdrawals exceed 10% of excess net capital during a rolling 35-calendar-day period.
• Assume all other withdrawal safeguards are satisfied.

Which conclusion should the financial and operations principal reach?

• A. The firm must classify the withdrawal as a basic-method capital deficiency and file the applicable deficiency notices.
• B. The firm may execute the withdrawal after filing the SEC advance notice and obtaining FINRA prior written approval.
• C. The firm may execute the withdrawal after obtaining FINRA approval and then filing the SEC notice within two business days.
• D. The firm must not execute the withdrawal, even if it files the SEC advance notice and obtains FINRA approval.

Best answer: D

Explanation: Post-withdrawal AI would equal 10.59 times net capital, exceeding the separate 10-to-1 withdrawal limit.

The basic-method minimum is the greater of $250,000 or AI divided by 15. AI of $9,000,000 produces a $600,000 requirement, so current excess net capital is $800,000. The $550,000 withdrawal equals 68.75% of excess net capital, triggering SEC advance notice and FINRA prior written approval.

After the distribution, net capital would be $850,000. That remains above the $600,000 basic-method minimum, so the firm would not have a minimum net capital deficiency. However, the separate withdrawal test is more restrictive: $9,000,000 divided by $850,000 equals 10.59 to 1, exceeding the permitted 10-to-1 post-withdrawal ratio. SEC notice and FINRA approval requirements are procedural conditions; satisfying them does not override the SEC prohibition.

• Advance notice and FINRA approval do not cure a post-withdrawal ratio exceeding 10 to 1.
• A withdrawal exceeding 30% requires SEC advance notice, not merely notice after completion.
• Remaining above the 15-to-1 basic-method minimum prevents a capital deficiency, although the separate withdrawal safeguard is breached.

Question 33

Topic: Customer Protection

A carrying broker-dealer is preparing its customer reserve computation. Before considering the existing reserve bank balance, it has the following items:

• Atlas Advisers LLC is an SEC-registered investment adviser, but it is not a broker-dealer, municipal securities dealer, or government securities broker-dealer.
• Atlas has a $900,000 free credit balance in one account and a separate $400,000 fully secured, collectible margin debit that qualifies as a reserve-formula debit.
• The Atlas accounts contain unrelated positions.
• Other customers have $300,000 of free credit balances.
• The applicable aggregate debit reduction is 3%, and there are no other formula items or adjustments.

Operations proposes netting Atlas’s two accounts before performing the reserve computation. What amount of excess total credits should the firm report?

• A. Report $300,000 of excess total credits.
• B. Report $788,000 of excess total credits.
• C. Report $800,000 of excess total credits.
• D. Report $812,000 of excess total credits.

Best answer: D

Explanation: Atlas is a customer, so credits total $1,200,000 and the reduced eligible debit is $388,000, producing $812,000.

An investment adviser is not excluded from the customer definition merely because it is a professional or institutional entity. Because Atlas is not a broker-dealer or another specified excluded dealer, its balances belong in the customer reserve computation.

The unrelated Atlas credit and debit balances must enter the governing formula separately rather than being netted at the entity level. Customer credits are $900,000 plus $300,000, or $1,200,000. The eligible debit is reduced by 3%:

$400,000 x 97% = $388,000.

Excess total credits are therefore $1,200,000 minus $388,000, or $812,000. The debit reduction decreases the allowable debit offset, which increases excess credits relative to simply subtracting the full debit.

• $800,000 results from netting the Atlas balances or subtracting the full debit without applying the required debit reduction.
• $788,000 incorrectly treats the 3% reduction as an additional deduction from credits rather than a reduction of the allowable debit.
• $300,000 incorrectly excludes Atlas because of its investment-adviser status, which does not itself remove the entity from the customer population.

Question 34

Topic: Customer Protection

A carrying broker-dealer subject to SEC Rule 15c3-3 reviews one common stock. Customer accounts own 10,000 fully paid shares, and the security-specific stock ledger agrees with the total held at the recorded locations. There are no short positions.

Location record:

The bank and borrowing broker-dealer acknowledge that the customers retain beneficial ownership of the applicable shares.

Which conclusion and response are correct?

• A. Classify 8,500 shares as in possession or control and a 1,500-share deficit; count both bank positions as controlled and recall the loaned shares.
• B. Classify all 10,000 shares as in possession or control with no deficit; retain the locations based on the acknowledgments and reconciled balances.
• C. Classify 7,500 shares as in possession or control and a 2,500-share deficit; count the recallable loan as controlled and release the pledged shares.
• D. Classify 6,000 shares as in possession or control and a 4,000-share deficit; release the pledged shares and recall the loaned shares.

Best answer: D

Explanation: Only the free DTC shares and unencumbered bank-held shares are in qualifying control locations.

Rule 15c3-3 requires a carrying broker-dealer to obtain and maintain physical possession or control of customers’ fully paid securities. A matching ownership ledger establishes the quantity owed to customers, but it does not establish that every share is at a qualifying control location.

The 4,000 shares in the free DTC account and 2,000 unencumbered shares held by the bank are available for delivery and count as controlled. The 2,500 pledged shares are subject to the bank’s lien for the firm’s borrowing. The 1,500 loaned shares are held by another broker-dealer, and a contractual recall right is not current possession or control. Therefore, only 6,000 shares qualify, leaving a 4,000-share deficit for which the firm must initiate retrieval steps. Beneficial ownership acknowledgments do not convert encumbered or loaned locations into control locations.

• Counting both bank positions overlooks that the lender’s lien prevents the pledged shares from qualifying as controlled.
• Counting the securities loan confuses a contractual recall right with current possession or control.
• Relying on reconciled quantities and ownership acknowledgments addresses ownership, not the regulatory status of each location.

Question 35

Topic: Financial Reporting

A carrying broker-dealer subject to the customer reserve requirements is preparing its annual reports. Its independent registered public accounting firm obtained sufficient appropriate evidence and found no other reporting issues.

Annual engagement record:

Fiscal year-end: December 31, 2026
January-August: Required review of reserve-formula input mapping did not operate.
Assessment: The failure created a reasonable possibility that material
noncompliance would not be prevented or detected timely. Management and the
accountant classified it as a material weakness.
Substantive testing: Reserve computations and deposits were accurate and timely.
Remediation: A replacement review operated effectively from September 1 through year-end.
Financial statements: Fairly presented with no adjustment resulting from the failure.

Which annual reporting treatment is most appropriate?

• A. Management should describe the material weakness and report effective control during the year and at year-end because all reserve results were correct; the accountant should issue an unmodified financial-statement opinion and separately report on the compliance examination.
• B. Management should describe the material weakness and report ineffective control during the year and at year-end despite the remediation; the accountant should issue an unmodified financial-statement opinion and separately report on the compliance examination.
• C. Management should describe the material weakness and report ineffective control during the year but effective control at year-end; the accountant should issue an unmodified financial-statement opinion and separately report on the compliance examination.
• D. Management should describe the material weakness and report ineffective control during the year but effective control at year-end; the accountant should qualify the financial-statement opinion and separately report on the compliance examination.

Best answer: C

Explanation: The material weakness prevents a during-year effectiveness assertion, while successful remediation supports year-end effectiveness and the absence of misstatement supports an unmodified financial-statement opinion.

A material weakness in internal control over compliance depends on the reasonable possibility that material noncompliance will not be prevented or detected timely. An actual reserve error or financial-statement misstatement is not required. Because the review control failed from January through August, management cannot assert that internal control over compliance was effective during the fiscal year and must describe the weakness.

The replacement control operated effectively from September through December, supporting an assertion that control was effective as of year-end. The financial-statement audit and compliance examination are separate engagements. Accurate reserve computations, timely deposits, sufficient audit evidence, and fairly presented financial statements permit an unmodified financial-statement opinion despite the control weakness. The accountant must still examine and report on management’s compliance-report assertions under the applicable PCAOB standards.

• Correct reserve results do not make a material weakness ineffective during the period in which the control failed.
• A compliance-control material weakness does not by itself require qualification of fairly presented financial statements.
• Successful remediation before December 31 supports year-end effectiveness, although it does not erase the earlier weakness.

Question 36

Topic: Financial Reporting

A carrying broker-dealer performs mandatory daily customer reserve computations. FINRA is its designated examining authority. All listed dates are business and banking days, and the reserve bank opens at 9:00 a.m.

Reserve deposit record:

Under SEC Rule 15c3-3, which conclusion most accurately identifies the reportable event, responsible party and notice clock?

• A. The broker-dealer had no reportable failure because the corrected wire settled that business day, so it should document the delay in its reserve records.
• B. The broker-dealer failed at 10:00 a.m. and must notify the required SEC offices and FINRA immediately, with transmission no later than Thursday’s close of business.
• C. The reserve bank failed at 9:18 a.m. and must notify the required SEC offices and FINRA, with transmission no later than Thursday’s close of business.
• D. The broker-dealer failed at 9:18 a.m. and must notify the required SEC offices and FINRA immediately, with transmission no later than Wednesday’s close of business.

Best answer: B

Explanation: The required deposit was not actually credited by the one-hour deadline, triggering the broker-dealer’s immediate notice duty despite the later cure.

For a daily reserve computation made as of Monday’s close, the additional deposit was due no later than one hour after banking business opened on the second following business day. Because the bank opened at 9:00 a.m. Wednesday, the deadline was 10:00 a.m. An accepted wire instruction is not an asset in the reserve account. The account remained unfunded at the deadline, so the broker-dealer failed to make the required deposit.

Rule 15c3-3 places the notification duty on the broker-dealer. Notice must be given immediately to the required SEC offices and the designated examining authority, with transmission no later than the close of business on the following business day. The 11:12 a.m. credit cured the shortage prospectively but did not erase the reportable failure that existed at 10:00 a.m.

• The 9:18 a.m. rejection indicated a likely delay, but the required deposit deadline had not yet passed.
• Crediting the replacement wire later Wednesday did not eliminate the failure that existed at 10:00 a.m.
• The reserve bank’s rejection did not transfer the broker-dealer’s regulatory reporting responsibility to the bank.

Question 37

Topic: Operations and Records

During its annual business continuity plan review, a carrying broker-dealer tests restoration of electronic general ledger and customer subledger records maintained under the audit-trail alternative of SEC Rule 17a-4.

Recovery standard: Restore all approved ledger activity through the prior business day’s 6:00 p.m. close and validate completeness against source transaction totals.

Expected recovery point: Friday 6:00 p.m.
Approved source entries: 1,284
Backup jobs: 4:00, 5:00, and 6:00 p.m. marked successful
Restore job: 4:00 p.m. snapshot selected
Restored entries: 1,246
Missing entries: 38 approved between 4:10 and 5:45 p.m.
Other results: Files opened, indexes worked, and hashes matched the 4:00 p.m. backup

Which assessment and follow-up should the financial and operations principal document?

• A. Record the close recovery as incomplete; correct snapshot selection, restore through 6:00 p.m., and reconcile restored entries to the approved source total.
• B. Record the close recovery as incomplete; retain the 4:00 p.m. snapshot, append the 38-entry source report, and close testing after the combined counts agree.
• C. Record the close recovery as incomplete; classify the backup as corrupt, recreate the 4:00 p.m. backup, and close testing after its hashes agree.
• D. Record the close recovery as incomplete; select the successful 6:00 p.m. backup job, retain its completion log, and close testing without restoring that snapshot.

Best answer: A

Explanation: The hash and retrieval results validate the selected snapshot, while the 38 missing entries show that the required end-to-end recovery capability remains unproven.

A restoration test must validate more than file readability. The matching hashes show that the selected 4:00 p.m. snapshot was restored without alteration, and the functioning indexes demonstrate retrieval capability for that snapshot. They do not establish that records through the required 6:00 p.m. close can be recovered.

The source control total identifies 38 approved entries missing from the restored environment. Although later backup jobs were marked successful, job-status messages alone do not prove that their contents are complete and recoverable. The test therefore provides partial evidence of integrity and retrieval but fails the firm’s defined recovery objective. The firm should correct the recovery-point selection process and repeat an end-to-end restoration, reconciling the result to the source transaction total. This connects documented testing to the firm’s business continuity and electronic record-preservation responsibilities.

• Appending a source report does not demonstrate that the later approved entries were restored into the ledger environment.
• Matching hashes support the integrity of the selected snapshot; rebuilding it at the same cutoff would not recover the missing later entries.
• A successful backup log is not a demonstrated restoration and completeness reconciliation.

Question 38

Topic: Net Capital

An established broker-dealer uses the basic net capital method. During review of its month-end workpaper, the FINOP identifies a stale price for a proprietary equity position.

• Aggregate indebtedness: $9,000,000
• Pre-correction GAAP net worth: $1,800,000
• Proprietary common stock recorded at: $1,400,000
• Correct market value of the stock: $1,200,000
• Nonallowable assets: $150,000
• Applicable stock haircut: 15% of corrected market value
• No other net capital adjustments apply

The valuation correction reduces GAAP net worth, while liabilities and aggregate indebtedness remain unchanged. What is the firm’s corrected aggregate-indebtedness-to-net-capital ratio?

• A. 7.09 to 1
• B. 7.26 to 1
• C. 6.25 to 1
• D. 8.41 to 1

Best answer: A

Explanation: Corrected net capital is $1,270,000, producing a $9,000,000 / $1,270,000 ratio of approximately 7.09 to 1.

The $200,000 valuation decrease is first recognized as a reduction of GAAP net worth. Corrected net worth is therefore $1,600,000. Deducting $150,000 of nonallowable assets produces tentative net capital of $1,450,000.

The haircut must be calculated using the corrected $1,200,000 market value:

Final net capital is $1,450,000 - $180,000 = $1,270,000. The basic-method capital ratio is aggregate indebtedness divided by net capital, so $9,000,000 / $1,270,000 is approximately 7.09 to 1. The market loss reduces GAAP equity once; deducting that same loss again as a separate net capital charge would double count it.

• The 6.25 ratio retains both the stale stock value and the stale haircut.
• The 7.26 ratio reduces equity but continues using the haircut based on the stale price.
• The 8.41 ratio recognizes the valuation loss in equity and then deducts the same loss again.

Question 39

Topic: Operations and Records

A FINRA member reported $80 million in gross revenue on its prior-year audited financial statements. The firm has identified its financial and operations principal to FINRA as the principal responsible for its supervisory control system.

First-line supervisors perform and sign daily trade-exception and account-transmittal reviews. For the annual supervisory control assessment, management proposes treating a report showing that 99% of these reviews were signed on time as the complete test. No one has examined whether the reviews identified and resolved the underlying exceptions.

Which approach should the designated principal use to satisfy the firm’s annual supervisory control testing and reporting responsibilities?

• A. Review procedures for regulatory updates, obtain attestations from line supervisors, incorporate the conclusions into the CEO certification, and provide those materials to senior management.
• B. Require line supervisors to complete an additional month of reviews, certify their signoffs and unresolved items, and report the completion results annually to senior management.
• C. Verify that required signoffs exist and were timely, reconcile completion totals to supervisory logs, and report documentation gaps annually to senior management.
• D. Direct sample-based inspection and reperformance of completed reviews, assess exceptions and necessary procedure changes, and report the results annually to senior management.

Best answer: D

Explanation: Testing the substance of completed reviews evaluates control effectiveness and supports the required annual supervisory control report.

FINRA Rule 3120 requires the designated principal to establish, maintain and enforce supervisory controls that test and verify whether the firm’s supervisory procedures are reasonably designed and functioning effectively. Records showing timely signoffs demonstrate that a control was documented, but they do not establish that supervisors substantively investigated and resolved the underlying exceptions. Sample-based inspection or reperformance can evaluate the quality and effectiveness of the completed reviews.

The annual report to senior management must summarize the supervisory control system, test results, significant exceptions, and resulting additions or amendments to supervisory procedures. The expanded reporting provisions applicable to firms with at least $200 million in gross revenue do not apply here, but the baseline testing and annual report requirements still do. The CEO certification under Rule 3130 is a separate obligation and cannot replace Rule 3120 testing or reporting.

• Additional reviews performed by the same line supervisors repeat the control rather than test whether it operates effectively.
• Verifying signoff existence and timeliness tests documentation compliance but not the substance of the supervisory review.
• Regulatory-update review and supervisor attestations may support Rule 3130 processes, but the CEO certification does not replace Rule 3120 testing and reporting.

Question 40

Topic: Operations and Records

A carrying broker-dealer’s operations principal reviews an interdealer transaction in which both firms acted as principals. No customer margin account is involved.

Fail and notice record:

Buyer: Harbor Securities
Seller: Summit Brokerage
Quantity: 2,000 XYZ shares
Contract price: $25 per share
Settlement date: August 18
Status at settlement: Summit did not deliver; contract remains open
Agreed market price at demand: $28 per share
August 19, 10:00 a.m.: Harbor sent a timely written demand
Demand terms: Immediate cash deposit with Harbor under FINRA Rule 11740
Prior mark deposits: None
Buy-in or other closeout notice: None

All listed dates are business days. Which treatment should the operations principal direct?

• A. Require Summit to deposit $56,000 with Harbor and keep the $50,000 contract open pending delivery or a separate closeout.
• B. Require Summit to deposit $6,000 with Harbor and keep the $50,000 contract open pending delivery or a separate closeout.
• C. Require Summit to deposit $6,000 with Harbor and reprice the contract to $56,000, thereby closing the original fail.
• D. Require Harbor to deposit $6,000 with Summit and keep the $50,000 contract open pending delivery or a separate closeout.

Best answer: B

Explanation: The $6,000 market increase exposes Harbor to replacement-cost risk, while the mark deposit does not terminate the original contract.

Harbor has a fail to receive, and Summit has the corresponding fail to deliver. Because XYZ increased from $25 to $28, Harbor is exposed to the higher cost of replacing the securities if Summit does not perform.

The required mark is the market difference:

Summit therefore deposits $6,000 with Harbor. The deposit collateralizes Harbor’s replacement-cost exposure; it does not revise the $50,000 contract price, constitute delivery, or terminate the fail. The contractual obligation remains open until Summit delivers the shares or the transaction is closed through a separate valid enforcement procedure, such as a buy-in. Accounting for the mark also does not trigger a customer margin liquidation, particularly because this is an interdealer principal transaction.

• Requiring Harbor to deposit reverses the exposure; the rising market places Summit’s performance risk on Harbor.
• Repricing to $56,000 incorrectly treats the collateral deposit as a new settlement price and closeout.
• Depositing $56,000 uses the full current value rather than the $6,000 difference between market and contract prices.

Question 41

Topic: Operations and Records

A FINRA member receives an authenticated email from an existing retail customer through its general service inbox rather than its complaint portal. The customer names a registered representative and states:

“I rejected the recommended purchase, but the representative entered it anyway. Reverse the trade and reimburse the charges.”

The service team resolves the matter the same day. The message is neither signed nor submitted on paper. Which record treatment should the financial and operations principal require?

• A. Route it for supervisory complaint review, record the complaint and disposition, retain it at least three years, and keep it easily accessible for the first two years.
• B. Route it for customer-account review, append the matter to the account file for six years after closure, and keep it easily accessible for the first two years.
• C. Route it for supervisory complaint review, record the complaint and disposition, retain it at least four years, and keep it easily accessible for the first two years.
• D. Route it for correspondence review, preserve the email and resolution notes at least three years, and keep them easily accessible for the first two years.

Best answer: C

Explanation: The customer’s electronic grievance is a written complaint subject to the four-year FINRA retention period and applicable accessibility requirement.

A customer’s written expression of dissatisfaction concerning securities activity is a written complaint regardless of whether it arrives by email, paper letter, or a designated complaint portal. Same-day resolution and the absence of a signature do not change its classification.

The member must create or preserve a complaint record identifying the customer and account, receipt date, associated person, nature of the complaint, and disposition. FINRA Rule 4513 requires preservation for at least four years. The record must be maintained in a medium compliant with SEC Rule 17a-4, and the SEC accessibility requirement applies during the first two years. The complaint must also enter the firm’s supervisory review process rather than being handled solely as routine correspondence.

• Ordinary correspondence treatment overlooks that classification depends on the grievance’s content, not the inbox used.
• Customer-account retention does not replace the distinct written-complaint record and its retention period.
• The three-year SEC recordkeeping period does not satisfy FINRA’s longer four-year complaint requirement.

Question 42

Topic: Net Capital

A FINOP is completing a broker-dealer’s month-end net capital workpaper.

Capital base:

• Preliminary trial-balance equity is $1,200,000 before recording a proprietary stock position’s decline from its $650,000 cost to its $600,000 current market value.
• A $500,000 liability is covered by an effective satisfactory subordination agreement and qualifies for net capital treatment.

Deductions:

• Assets included in the trial balance consist of $80,000 of office furniture and a $120,000 unsecured advance to a shareholder. Both are nonallowable.
• An unresolved securities difference requires a $75,000 operational charge.
• The proprietary stock is readily marketable common stock subject to a 15% haircut, with no offset or concentration treatment.

There are no other adjustments. What tentative net capital and final net capital should the FINOP report?

• A. Tentative net capital of $1,325,000 and final net capital of $1,235,000
• B. Tentative net capital of $1,375,000 and final net capital of $1,285,000
• C. Tentative net capital of $1,425,000 and final net capital of $1,335,000
• D. Tentative net capital of $1,375,000 and final net capital of $1,277,500

Best answer: B

Explanation: Adjusted equity plus the satisfactory subordination, less nonallowable assets and the operational charge, produces $1,375,000 before the $90,000 haircut.

First recognize the $50,000 market loss, reducing equity from $1,200,000 to $1,150,000. Add the $500,000 satisfactory subordination because it qualifies for net capital treatment. Then deduct the $200,000 of nonallowable assets and the $75,000 operational charge:

$1,150,000 + $500,000 - $200,000 - $75,000 = $1,375,000 tentative net capital.

Tentative net capital is measured before securities haircuts. The haircut is based on the position’s current market value, not its historical cost:

$600,000 x 15% = $90,000.

Final net capital is therefore $1,375,000 - $90,000 = $1,285,000. The market loss adjusts equity once; it is not deducted again as a separate net capital charge.

• The $1,425,000 tentative amount omits the required $50,000 mark-to-market loss.
• The $1,277,500 final amount applies the 15% haircut to the $650,000 historical cost instead of current market value.
• The $1,325,000 tentative amount deducts the $50,000 market decline a second time after adjusting equity.

Question 43

Topic: Funding and Cash Management

A broker-dealer reviews a customer’s single margin account after the market close. Both positions are ordinary listed common stocks, and no concentration or special maintenance charges apply. A cash deposit increases account equity dollar-for-dollar.

House maintenance schedule: 35% of current market value for long stock and 40% for short stock.

What is the minimum cash deposit required to satisfy the firm’s maintenance requirement?

• A. Deposit $500.
• B. Deposit $5,000.
• C. Deposit $2,000.
• D. Deposit $0.

Best answer: C

Explanation: Combined equity is $31,000 and the position-specific house requirement is $33,000, leaving a $2,000 deficiency.

The long market value is $60,000, and the short market value is $30,000. Combined account equity is calculated as long market value minus the long debit balance, plus the short credit balance, minus the short market value:

The house maintenance requirement must be calculated separately for each position and then added:

The account therefore has a $2,000 maintenance deficiency. Although the regulatory maintenance percentages are lower, a broker-dealer may impose and enforce higher house requirements.

• No deposit results from applying only the lower regulatory maintenance floors and disregarding the house schedule.
• A $500 deposit incorrectly applies the 35% long-position rate to both positions.
• A $5,000 deposit incorrectly applies the 40% short-position rate to both positions.

Question 44

Topic: Financial Reporting

A carrying broker-dealer is preparing its December 31 FOCUS report and annual audited financial statements.

Guarantee records:

• A signed side letter in the legal files unconditionally guarantees an affiliate’s bank loan, including principal and accrued interest.
• The original loan was $1,000,000. At December 31, the bank confirms unpaid principal of $750,000 and accrued interest of $20,000.
• The affiliate defaulted, and the bank demanded $770,000 from the broker-dealer before year-end.
• Counsel concludes that the guarantee is enforceable and payment of the demanded amount is probable and reasonably estimable.
• The broker-dealer has no reimbursement or indemnification right against another party.

No guarantee liability appears in the general ledger because no cash has been transferred. Preliminary net capital is $1,000,000 before considering the guarantee. The applicable minimum net capital is $250,000, no higher ratio-based requirement applies, and there are no other adjustments.

Which year-end reporting treatment should the financial and operations principal apply?

• A. Disclose the $770,000 demand as a contingency, retain net capital of $1,000,000, and reassess accrual when the broker-dealer transfers cash.
• B. Accrue a $750,000 principal guarantee liability and disclose the accrued interest, report net capital of $250,000, and make applicable early-warning notices.
• C. Accrue a $770,000 guarantee liability and disclose the arrangement, report net capital of $230,000, and make the applicable capital-deficiency notices.
• D. Accrue the $1,000,000 original loan commitment and disclose the current demand, report net capital of $0, and make applicable capital-deficiency notices.

Best answer: C

Explanation: The enforceable, probable, and estimable obligation reduces net capital to $230,000, which is $20,000 below the required minimum.

The executed side letter creates an obligation even though it was omitted from the ledger and no cash has moved. The affiliate’s default, the bank’s demand, and counsel’s conclusion establish that payment is probable and reasonably estimable. Because the guarantee covers both principal and accrued interest, the recognized liability is:

With no other adjustments, corrected net capital is:

The firm is therefore $20,000 below its $250,000 minimum. It must correct its accounting and regulatory reports, disclose the guarantee and affiliate relationship, and satisfy the applicable net capital deficiency notice requirements. Off-ledger placement does not change the economic substance of an enforceable guarantee.

• Disclosure alone is insufficient once the obligation is probable and estimable; recognition does not wait for a cash payment.
• Accruing principal alone omits the $20,000 interest expressly covered by the guarantee.
• The original loan amount is not the year-end liability when the supported demand is $770,000.

Question 45

Topic: Net Capital

At month-end, a broker-dealer holds a proprietary crude oil futures position. Its ledger has not recorded the current day’s variation adjustment.

Applicable net capital schedule:

• First adjust ledger net worth for the unrecorded market gain or loss.
• Deduct nonallowable assets to determine tentative net capital.
• Deduct the exchange maintenance margin for the open commodity contracts from tentative net capital.
• Do not apply an ordinary securities haircut. Posted margin cash is allowable, and no offsets or additional charges apply.

What is the broker-dealer’s final net capital before comparison with its minimum requirement?

• A. Report final net capital of $2,650,000.
• B. Report final net capital of $2,710,000.
• C. Report final net capital of $2,633,000.
• D. Report final net capital of $2,770,000.

Best answer: B

Explanation: The $60,000 market loss, $350,000 nonallowable assets, and $130,000 commodity charge reduce ledger net worth to $2,710,000.

The supplied commodity schedule controls instead of the ordinary haircut for readily marketable common stock. The unrecorded market loss is 20 contracts x 1,000 barrels x ($69 - $72), or -$60,000. Adjusted net worth is therefore $3,190,000.

Deducting $350,000 of nonallowable assets produces tentative net capital of $2,840,000. The commodity position charge is 20 contracts x $6,500, or $130,000. Final net capital is therefore $2,840,000 - $130,000 = $2,710,000.

The market loss and the commodity charge serve different purposes. The loss updates the position’s carrying value, while the maintenance-margin charge addresses the continuing exposure. The same loss must not be deducted twice.

• $2,770,000 deducts the maintenance-margin charge but omits the unrecorded $60,000 market loss.
• $2,650,000 deducts the $60,000 market loss twice in addition to the commodity charge.
• $2,633,000 substitutes a 15% securities haircut on current contract value for the supplied commodity schedule.

Question 46

Topic: Customer Protection

A carrying broker-dealer maintains customer accounts and a proprietary account for an unaffiliated introducing broker-dealer. The proprietary account meets the Rule 15c3-3 definition of a PAB account, and no exclusion applies.

Agreement and operations:

• The signed carrying agreement expressly permits the carrying firm to use the PAB securities in the ordinary course of its securities business.
• The stock-loan desk lends some of those securities in routine transactions.
• The correspondent has not signed a customer-style fully paid securities lending agreement.
• The firm maintains separate customer and PAB reserve computations and properly designated reserve bank accounts.

Which treatment should the financial and operations principal approve?

• A. Permit ordinary-course use of the securities under the PAB agreement and maintain the PAB reserve separately from the customer reserve.
• B. Require possession or control of the securities under customer standards and combine the PAB balances with the customer reserve.
• C. Permit ordinary-course use of the securities under the PAB agreement and combine the PAB balances with the customer reserve.
• D. Require possession or control of the securities under customer standards and maintain the PAB reserve separately from the customer reserve.

Best answer: A

Explanation: The written PAB permission permits ordinary-course use without customer possession or control, while PAB balances remain subject to a separate reserve process.

Rule 15c3-3 treats PAB and customer accounts differently in two linked respects. Customer possession-or-control requirements do not apply to PAB securities when the carrying broker-dealer has obtained the PAB account holder’s written permission to use those securities in the ordinary course of its securities business. The signed carrying agreement provides that permission, so a customer-style fully paid securities lending agreement is not required for this PAB use.

Separately, PAB credits and debits remain subject to an analogous but distinct reserve computation and a properly designated PAB reserve bank account. The written securities-use permission does not eliminate that reserve obligation, and PAB balances cannot be combined with customer balances merely because both account types are carried on the same platform.

• Customer possession or control would apply if the required written PAB permission were absent, but the signed agreement provides it.
• Combining the balances disregards the required separation between the PAB and customer reserve processes.
• Applying both customer possession-or-control treatment and a combined reserve treatment overlooks both distinct PAB rules.

Question 47

Topic: Funding and Cash Management

On September 18, 2026, a broker-dealer has not adopted FINRA’s new intraday-margin framework and continues to use the permitted transitional legacy day-trading rules. The firm has no higher house equity requirement.

Account record:

What is the minimum cash deposit required before the customer may place another day trade?

• A. Require a $1,500 cash deposit before permitting another day trade.
• B. Require a $16,500 cash deposit before permitting another day trade.
• C. Require a $25,000 cash deposit before permitting another day trade.
• D. Permit another day trade with no additional cash deposit.

Best answer: A

Explanation: The account has $23,500 of equity and needs $1,500 to meet the legacy $25,000 minimum.

Because the firm remains under the permitted transitional legacy regime, the legacy pattern-day-trader requirement applies. A designated pattern day trader must maintain at least $25,000 of account equity before day trading.

Account equity equals the market value of securities minus the margin debit balance:

The required deposit is therefore:

The account may satisfy ordinary maintenance margin because $23,500 exceeds 25% of the $80,000 market value, but maintenance compliance does not replace the separate legacy pattern-day-trader equity condition. The new intraday-margin framework’s removal of the fixed minimum is irrelevant because this firm has not adopted that framework.

• The $16,500 amount incorrectly applies a 50% initial-margin calculation to the existing position.
• The $25,000 amount treats the required total account equity as the required incremental deposit.
• No deposit would leave equity at $23,500, below the applicable legacy pattern-day-trader minimum.

Question 48

Topic: Operations and Records

A carrying broker-dealer receives physical certificates to settle a sale of 470 shares of readily transferable common stock.

Delivery facts:

• Certificates tendered: 200 shares, 100 shares, 90 shares, and 80 shares.
• All certificates have proper registration, endorsements, signature guarantees, and ownership evidence.
• The delivery unit is 100 shares, with any remainder treated as a separate unit.
• A certificate in an exact multiple of 100 may cover full units. Other certificates may be combined to equal a required unit, but a certificate cannot be partially allocated between units.

How many shares constitute the deficient portion of the delivery?

• A. 170 shares
• B. 470 shares
• C. 70 shares
• D. 90 shares

Best answer: A

Explanation: The 90-share and 80-share certificates cannot be allocated into the required 100-share and 70-share units, so all 170 shares are deficient.

The 470-share contract requires four 100-share units and one 70-share remainder. The 200-share certificate satisfies two full units, and the 100-share certificate satisfies another, making 300 shares deliverable. The remaining certificates total 170 shares, but their denominations are 90 and 80. They cannot be arranged as the outstanding 100-share unit and 70-share remainder unless one certificate is divided, which the stated delivery standard prohibits. Therefore, the deficient portion is 90 + 80 = 170 shares. Proper registration, endorsements, signature guarantees, and ownership evidence do not cure incompatible denominations.

• 70 shares counts only the contractual remainder and overlooks the unsatisfied 100-share unit.
• 90 shares treats only one incompatible certificate as deficient, although the 80-share certificate also cannot satisfy either remaining unit.
• 470 shares rejects the entire tender even though the 200-share and 100-share certificates provide good delivery for 300 shares.

Question 49

Topic: Financial Reporting

A SIPC-member carrying broker-dealer has a fiscal year ending December 31, 2026. Its auditor expects to complete the audit on February 26, 2027. The firm must:

• File its annual audited report with the SEC.
• File SIPC-7 and pay the assessment after applying its properly reported SIPC-6 credit.
• Furnish the required annual audited financial information to customers.

No extensions or exceptions apply, and all calculated due dates are business days. Which latest-date timetable complies with these obligations?

• A. SEC annual report: April 15, 2027; SIPC-7: March 1, 2027; customer information: April 15, 2027.
• B. SEC annual report: March 1, 2027; SIPC-7: March 1, 2027; customer information: April 15, 2027.
• C. SEC annual report: March 1, 2027; SIPC-7: March 1, 2027; customer information: March 31, 2027.
• D. SEC annual report: March 1, 2027; SIPC-7: April 15, 2027; customer information: April 15, 2027.

Best answer: B

Explanation: The SEC annual report and SIPC-7 are due within 60 calendar days after year-end, while the customer information has a 105-day deadline.

The three obligations have separate purposes and must be tracked independently. The broker-dealer’s annual audited report is generally due to the SEC within 60 calendar days after fiscal year-end. SIPC-7, which reports the annual assessment and accounts for the SIPC-6 interim payment, is also due within 60 calendar days after fiscal year-end. For a December 31, 2026 year-end, the 60th day is March 1, 2027.

The annual audited financial information required for customers follows the 105-day baseline. The 105th day after December 31, 2026 is April 15, 2027. The auditor’s February 26 completion date does not change any deadline; it merely permits the firm to satisfy the earlier March 1 filing obligations.

• Applying the 105-day period to SIPC-7 incorrectly treats an assessment filing as a customer disclosure.
• Applying the 105-day period to the SEC annual report misses its separate 60-calendar-day filing deadline.
• Using March 31 for customer information applies a 90-day period instead of the established 105-day baseline.

Question 50

Topic: Customer Protection

A carrying broker-dealer has not elected daily reserve computations. On Monday, September 14, 2026, its financial and operations principal reviews the following record:

Banking calendar: Friday, September 11 was the last business day of the week. Monday through Wednesday are business and banking days, with banking business opening at 9:00 a.m. each day. There are no holidays.

The firm has never previously been subject to mandatory daily reserve computation.

What deposit must the firm make, and by what deadline?

• A. Deposit $11.0 million by 10:00 a.m. Tuesday, September 15.
• B. Deposit $11.0 million by 10:00 a.m. Wednesday, September 16.
• C. Deposit $8.0 million by 10:00 a.m. Tuesday, September 15.
• D. Deposit $8.0 million by 10:00 a.m. Monday, September 14.

Best answer: C

Explanation: The 12-report average is $480 million, so the weekly Friday computation requires the $8.0 million deposit by one hour after banking opens on the second following business day.

Mandatory daily reserve computations apply when average combined customer and PAB total credits are at least $500 million, measured using the applicable 12 filed month-end FOCUS reports. The firm’s average is $5.76 billion divided by 12, or $480 million. The latest month’s $540 million balance does not independently trigger daily treatment, and the firm made no voluntary daily election.

The firm therefore remains on the weekly schedule. Its operative computation is the $8.0 million additional deposit calculated as of Friday’s close. The deposit is due no later than one hour after banking business opens on the second following business day. Monday is the first following business day and Tuesday is the second, producing a Tuesday deadline of 10:00 a.m. The Monday $11.0 million internal estimate does not replace the official weekly computation.

• The Monday deadline counts only the first following business day after Friday’s computation.
• Using $11.0 million with a Tuesday deadline improperly substitutes the Monday internal estimate for the weekly computation.
• The Wednesday deadline and $11.0 million amount treat Monday’s estimate as a required daily computation.

Questions 51-75

Question 51

Topic: Operations and Records

A broker-dealer has 24 associated persons. On September 4, 2026, its secondary emergency contact left the firm, and the person’s telephone number was disabled. No regulatory contact update has been submitted.

Contact record:

• Primary: current CEO and associated person; reached during the September 8 test.
• Secondary: former FINOP; not reached during the September 8 test.
• Proposed internal replacement: current associated person who manages treasury operations; telephone number verified.
• Proposed external replacement: clearing firm’s relationship officer who knows the member’s operations.

Written procedure:

After a failed communication test caused by a personnel change, update regulatory and internal contact records and rerun the failed path within two business days after correction.

Which response best satisfies the member’s emergency-contact obligation and written procedure?

• A. Submit the internal replacement through FINRA’s prescribed system, revise the internal contact records, and rerun the failed communication path.
• B. Submit the internal replacement through FINRA’s prescribed system, revise the internal contact records, and close the failed test using the verified number.
• C. Designate the internal replacement in the firm’s records, rerun the failed communication path, and submit the FINRA change during the annual review.
• D. Submit the clearing-firm officer through FINRA’s prescribed system, revise the internal contact records, and rerun the failed communication path.

Best answer: A

Explanation: The departure requires a prompt FINRA update using an eligible associated person, followed by the documented internal correction and retest.

A member must promptly update its emergency contact information through FINRA’s prescribed system when a material change occurs. Because this firm has more than one associated person, an external clearing-firm contact cannot replace the departed associated person under the exception available to a one-person member. The current treasury operations manager is an associated person and therefore is eligible based on the stated facts.

The regulatory filing does not by itself restore operational readiness. The firm’s procedure requires correction of both regulatory and internal records and a rerun of the failed communication path. Annual contact verification is a periodic control, not permission to defer a known material change. A verified telephone number supports the correction, but the required retest must still demonstrate that the communication path works.

• The clearing-firm officer is not eligible under the exception because the member has 24 associated persons.
• Waiting for annual review fails the prompt-update requirement after a known material change.
• A verified number does not replace the procedure’s required rerun of the failed communication path.

Question 52

Topic: Financial Reporting

A FINOP reviews the following capital record. FINRA is the firm’s designated examining authority, and no special government-securities notice applies.

Firm facts:

• The carrying broker-dealer uses the basic method and has operated for more than 12 months.
• Its applicable fixed minimum net capital is $250,000.
• The proprietary position is readily marketable common stock with a 15% haircut and no special adjustments.

No other July 31 adjustments are required. Which action is required under SEC Rule 17a-11?

• A. The independent accountant must notify the SEC and FINRA within 24 hours because the corrected inventory price affected a previously reported capital amount.
• B. The broker-dealer must notify the SEC and FINRA within 24 hours after the 2:00 p.m. September 15 discovery of the historical deficiency.
• C. The broker-dealer must notify the SEC and FINRA by the end of September 15 under the same-day notice requirement for a current deficiency.
• D. The broker-dealer must amend its July FOCUS filing but need not provide separate notice because its September 15 net capital exceeds the minimum.

Best answer: B

Explanation: Corrected July 31 net capital was $244,500, so the broker-dealer must provide hindsight notice within 24 hours of discovery.

The basic-method requirement is the greater of the fixed minimum or aggregate indebtedness divided by 15. Here, $3,000,000 / 15 equals $200,000, so the $250,000 fixed minimum controls.

Correcting the stock value reduces GAAP net worth by $30,000. The haircut also falls from $15,000 to 15% of $70,000, or $10,500, reducing the haircut deduction by $4,500. Corrected net capital is therefore $270,000 - $30,000 + $4,500 = $244,500, a $5,500 deficiency.

Because the firm discovered that it had been deficient during an earlier period, Rule 17a-11 requires the broker-dealer to notify the SEC and its designated examining authority within 24 hours of discovery. The restored current balance does not erase the historical notification event.

• Same-day notice applies to a current minimum-capital deficiency, not a restored historical deficiency discovered later.
• Amending a FOCUS filing does not replace the separate hindsight-deficiency notice.
• The notification obligation rests with the broker-dealer, not its independent accountant under these facts.

Question 53

Topic: Operations and Records

A FINOP reviews a new domestic LLC brokerage account. The firm’s AML procedures require completion of customer due diligence before activation and escalation of potential red flags to the AML officer.

Ownership disclosed:
- Nora: 30%
- Eli: 30%
- Four other individuals: 10% each

Identity information collected and verified: Nora and Eli
Control-person field: Blank
Dana: Chief operating officer who directs daily operations; owns 0%
Funding instruction: Initial wire proposed from an unrelated overseas company
AML status: Review pending; no crime or SAR determination established

Assume no customer due-diligence exclusion or exemption applies. Which direction should the FINOP give?

• A. Obtain the four 10% owners’ identifying information and verify their identities under the ownership prong; refer the wire instruction for AML review while preserving SAR confidentiality.
• B. Use Nora’s completed ownership verification to satisfy the control prong based on her largest disclosed interest; refer the wire instruction for AML review while preserving SAR confidentiality.
• C. Obtain Dana’s required identifying information and verify her identity under the control prong; refer the wire instruction for AML review while preserving SAR confidentiality.
• D. Verify Dana only under authorized-signer procedures and treat the two ownership verifications as the complete beneficial-ownership record; refer the wire instruction for AML review while preserving SAR confidentiality.

Best answer: C

Explanation: Dana’s management authority makes her the required control person even though she has no ownership interest.

Customer due diligence for a nonexempt legal entity has separate ownership and control prongs. The ownership prong covers each individual who directly or indirectly owns 25% or more, so Nora and Eli are properly identified. The four 10% owners do not meet that threshold.

The control prong requires one individual with significant responsibility to control, manage, or direct the entity. Dana directs daily operations and therefore must be identified under that prong. Her lack of ownership does not change the requirement. The firm must obtain the required identifying information and verify her identity.

The proposed third-party overseas wire is a potential red flag that warrants review under the firm’s AML procedures. It is not proof of criminal conduct. Any SAR determination or filing must remain confidential.

• The four 10% interests are individually below the 25% ownership threshold.
• A 30% interest does not by itself establish that Nora exercises the required control.
• Authorized-signer procedures do not replace the separate control-prong requirement.

Question 54

Topic: Operations and Records

A customer submits a signed instruction to transfer an entire brokerage account to a new broker-dealer.

Account facts:

• The account contains cash, exchange-listed stock, and a nontraded REIT position.
• The receiving firm cannot custody the REIT because of its approved product scope.
• The carrying firm can continue holding the REIT.
• Direct registration and redemption are available, but the customer separately instructs the firms in writing to leave the REIT at the carrying firm.

Which action should the receiving firm’s operations principal direct?

• A. Document the REIT as a nontransferable asset, transfer the cash and stock, and have the carrying firm register the REIT directly to the customer.
• B. Document the REIT as a nontransferable asset, transfer the cash and stock, and have the carrying firm retain the REIT under the customer’s instruction.
• C. Treat the request as a partial transfer, omit the REIT from the transfer records, and have the carrying firm retain the REIT for the customer.
• D. Document the REIT as a nontransferable asset, transfer the cash and stock, and have the carrying firm redeem the REIT and remit the proceeds.

Best answer: B

Explanation: The receiving firm’s custody limitation makes the REIT nontransferable, while the customer’s written instruction permits the transferable assets to move and the REIT to remain.

Under FINRA account-transfer procedures, an asset may be nontransferable because the receiving member cannot hold it within the scope of its business. That exception does not require cancellation or delay of the transfer of assets the receiving firm can accept. The firms should identify the nontransferable position in the transfer records, coordinate the movement of the transferable cash and securities, and follow the customer’s authorized disposition for the remaining position.

Here, the customer expressly directed that the REIT remain with the carrying firm. Redemption and direct registration are possible disposition methods, but neither should replace the customer’s written selection. Omitting the REIT from the records would also fail to document and reconcile the exception properly.

• Redemption conflicts with the customer’s written decision to retain the REIT rather than convert it to cash.
• Direct registration is available but was not the disposition authorized by the customer.
• Omitting the REIT would conceal the transfer exception instead of documenting and reconciling it.

Question 55

Topic: Customer Protection

A carrying broker-dealer performs its weekly customer reserve computation under SEC Rule 15c3-3a. It has not elected daily computations or the 2% debit reduction.

A price decline reduced the collateral in one customer margin account from $6,000,000 to $4,000,000. The account debit remains $4,800,000.

All other customer debits are fully secured and collectible. The identified security is nonexempt and is the sole collateral for its account. No other reserve formula adjustments apply.

Exclude any unsecured portion of a debit. Then reduce debits by the amount that the identified security exceeds 15% of all margin collateral, capped at the remaining debit associated with that security. Apply the ordinary 3% reduction to the resulting aggregate debits.

What minimum additional amount must the firm deposit into its customer reserve bank account?

• A. $1,256,000 additional deposit
• B. $480,000 additional deposit
• C. $2,226,000 additional deposit
• D. $1,450,000 additional deposit

Best answer: C

Explanation: After the $800,000 unsecured exclusion, $1,000,000 concentration reduction, and 3% final debit reduction, the $4,226,000 requirement exceeds the existing balance by $2,226,000.

The price decline creates an unsecured portion of $800,000: $4,800,000 debit minus $4,000,000 collateral. The concentration threshold is 15% of $20,000,000, or $3,000,000. Because the identified collateral is worth $4,000,000, another $1,000,000 must be removed from eligible debits.

Eligible debits before the final reduction are therefore $16,000,000 - $800,000 - $1,000,000 = $14,200,000. Applying the ordinary 3% reduction produces adjusted debits of $14,200,000 x 97% = $13,774,000. The reserve requirement is $18,000,000 - $13,774,000 = $4,226,000. After crediting the existing $2,000,000 qualified reserve balance, the additional deposit is $2,226,000.

Reserve-formula eligibility is distinct from whether a receivable is an allowable net capital asset.

• The $1,256,000 amount excludes the unsecured portion but omits the collateral concentration reduction.
• The $1,450,000 amount applies the concentration reduction but retains the unsecured portion.
• The $480,000 amount applies only the final 3% reduction and ignores both formula-specific restrictions.

Question 56

Topic: Financial Reporting

An established broker-dealer using the basic net capital method is completing its December 31 closing package before filing its FOCUS report.

Late invoice received January 8:

Network monitoring services performed December 1 through December 31: $120,000. Payment is due January 31.

The invoice has not been recorded or paid. It is an ordinary unsecured operating payable included in aggregate indebtedness. There is no tax effect, and the invoice does not change any existing nonallowable asset, haircut, or other deduction.

Unadjusted trial balance:

Unadjusted net capital schedule:

Which corrected amounts should the principal use for total operating expenses, GAAP equity, and net capital in the December 31 filing?

• A. Expenses $1,520,000; equity $1,980,000; net capital $1,650,000
• B. Expenses $1,400,000; equity $2,100,000; net capital $1,650,000
• C. Expenses $1,520,000; equity $1,980,000; net capital $1,410,000
• D. Expenses $1,520,000; equity $1,980,000; net capital $1,530,000

Best answer: D

Explanation: Accruing the $120,000 expense reduces both GAAP equity and net capital by $120,000, with no separate deduction for the recorded payable.

Because the supplier completed the services by December 31, accrual accounting requires recognition of the expense and payable in that period even though the invoice arrived later and remains unpaid. Operating expenses become $1,400,000 + $120,000 = $1,520,000. The payable increases liabilities while assets remain unchanged, so GAAP equity declines from $2,100,000 to $1,980,000.

Net capital begins with corrected GAAP net worth. The other deductions remain unchanged:

$1,980,000 - $300,000 - $100,000 - $50,000 = $1,530,000.

The operating payable increases aggregate indebtedness, but it is not deducted again from net capital after its effect has already reduced GAAP net worth. A second deduction would count the same obligation twice.

• Keeping net capital at $1,650,000 fails to carry the reduced GAAP net worth into the regulatory computation.
• Reporting $1,410,000 deducts the payable twice: once through reduced equity and again as a separate deduction.
• Leaving all amounts unadjusted improperly defers an expense incurred before the reporting date.

Question 57

Topic: Customer Protection

A carrying broker-dealer has not made a voluntary daily reserve-computation election. On July 6, 2026, its financial and operations principal reviews the 12 applicable filed month-end FOCUS reports.

Operations:

• Customer and PAB reserve computations and bank accounts are maintained separately.
• July 6, 7, and 8 are business and banking days.
• Banking business opens at 9:00 a.m. each day.

The firm first met the $500 million average-credit threshold more than six months before this review; the applicable compliance period has elapsed.

Which reserve procedure should the principal establish?

• A. Compute the customer and PAB formulas separately each week as of Friday’s close; fund each Friday-close requirement on the second following business day.
• B. Compute the customer and PAB formulas separately each day as of the prior business day’s close; fund each Monday-close requirement by 10:00 a.m. Wednesday.
• C. Compute customer and PAB credits in one daily reserve formula as of the prior business day’s close; fund the net Monday-close requirement by 10:00 a.m. Wednesday.
• D. Compute the customer formula daily and the PAB formula weekly, each on its applicable as-of date; fund the Monday-close customer requirement by 10:00 a.m. Wednesday.

Best answer: B

Explanation: The 12-month average combined credits are $517.5 million, requiring separate daily computations and deposits by the second following business day.

The customer credits total $5,280 million, producing a 12-month average of $440 million. PAB credits total $930 million, producing an average of $77.5 million. The applicable threshold uses their combined average:

Because $517.5 million is at least $500 million, the carrying firm must compute both reserve requirements daily. The threshold combines customer and PAB credits, but the underlying reserve formulas and bank accounts remain separate. Each daily computation uses the previous business day’s closing balances. For a computation based on Monday’s close, the second following business day is Wednesday. With banking business opening at 9:00 a.m., any required deposit is due no later than 10:00 a.m. Wednesday.

• Using a daily customer cadence but weekly PAB cadence incorrectly applies the threshold to each population in isolation.
• Keeping both computations weekly ignores that the 12-report combined average exceeds $500 million.
• Combining the reserve formulas improperly permits netting between customer and PAB populations; only their credits are combined for the frequency threshold.

Question 58

Topic: Financial Reporting

A broker-dealer records several revenue streams in one general-ledger account. The account has a $1,240,000 credit balance for the FOCUS reporting period. All amounts have been recognized correctly under GAAP.

The FINOP obtains the following independent support:

• Agency execution reports support $420,000 earned while acting as agent.
• Inventory profit-and-loss records support $560,000 of net gains earned while acting as principal.
• Customer billing records support $260,000 of account maintenance and custody fees.

Which FOCUS revenue schedule should the FINOP approve?

• A. Commissions $420,000; principal-trading revenue $560,000; service-fee revenue $260,000; total revenue $1,240,000.
• B. Commissions $980,000; principal-trading revenue $0; service-fee revenue $260,000; total revenue $1,240,000.
• C. Commissions $680,000; principal-trading revenue $560,000; service-fee revenue $0; total revenue $1,240,000.
• D. Commissions $420,000; principal-trading revenue $820,000; service-fee revenue $0; total revenue $1,240,000.

Best answer: A

Explanation: This schedule classifies each supported amount by the firm’s capacity and revenue source while reconciling to the ledger total.

FOCUS revenue classification depends on the underlying activity, not the general-ledger account used to record it. Revenue from agency transactions is classified as commissions. Net gains from transactions in which the broker-dealer owns the securities and acts as principal are classified as principal-trading revenue. Account maintenance and custody charges are service-fee revenue.

The classified total is $420,000 + $560,000 + $260,000 = $1,240,000, which agrees with the ledger control balance. The reporting reclassification changes the presentation among revenue categories but does not change total revenue or earnings.

• Classifying the $560,000 principal-trading gain as commissions disregards the firm’s principal capacity.
• Combining service fees with trading revenue incorrectly treats account services as inventory activity.
• Combining service fees with commissions incorrectly treats recurring account services as agency execution revenue.

Question 59

Topic: Financial Reporting

A financial and operations principal reviews a broker-dealer’s draft annual filing.

Business model: Carries customer accounts and holds customer funds and securities
Rule 15c3-3 status: Does not claim an exemption under paragraph (k)
Draft financial statements: Included
Accountant's audit report on financial statements: Included
Accountant's examination report on compliance: Included
Broker-dealer report containing management's compliance assertions: Omitted
Management note: The accountant's unmodified examination report makes our assertions unnecessary.

Which reporting pair should the principal require in the annual filing?

• A. A broker-dealer exemption report prepared by management and the accountant’s examination report on that exemption report
• B. A broker-dealer exemption report prepared by management and the accountant’s review report on that exemption report
• C. A broker-dealer compliance report prepared by management and the accountant’s review report on that compliance report
• D. A broker-dealer compliance report prepared by management and the accountant’s examination report on that compliance report

Best answer: D

Explanation: The nonexempt carrying firm must provide management’s compliance report together with the accountant’s separate examination report.

SEC Rule 17a-5 separates management’s reporting responsibility from the independent accountant’s work. A carrying broker-dealer that does not claim an exemption under Rule 15c3-3(k) must prepare a compliance report containing the required management assertions about internal control over compliance and specified financial-responsibility rules. The independent accountant performs an examination of that compliance report and issues a separate examination report.

The accountant’s audit report on the financial statements serves another purpose, and an unmodified examination report does not replace management’s compliance report. Because the record identifies a nonexempt carrying firm, management must restore its compliance report while retaining the accountant’s examination report.

• An exemption report and review report apply to a broker-dealer using an applicable Rule 15c3-3 exemption, which this firm does not claim.
• A compliance report is subject to an accountant’s examination rather than the review used for an exemption report.
• Pairing an exemption report with an examination uses both the wrong management report and the wrong level of accountant work for this firm.

Question 60

Topic: Funding and Cash Management

A customer’s margin account holds only ordinary long listed equities. No special regulatory maintenance requirement applies. Prices declined, but the debit balance did not change.

Account terms:

• Debit balance: $35,000
• FINRA baseline long-equity maintenance requirement: 25%
• Firm house maintenance requirement: 30%

What is the account’s deficiency under the baseline regulatory maintenance requirement?

• A. $8,750
• B. $4,200
• C. $11,000
• D. $2,000

Best answer: D

Explanation: Current equity is $9,000, which is $2,000 below the required equity of $11,000.

The positions have a current market value of $44,000: ABC is worth $32,000 and XYZ is worth $12,000. Account equity equals market value minus the debit balance, so current equity is $44,000 - $35,000 = $9,000.

The baseline regulatory maintenance requirement is 25% of current market value, or $44,000 x 25% = $11,000. The maintenance deficiency is the required equity minus current equity: $11,000 - $9,000 = $2,000. The account therefore has no permissible withdrawal under the baseline requirement. The firm’s separate 30% house requirement would produce a larger call, but it does not change the regulatory deficiency requested.

• $4,200 applies the firm’s 30% house requirement rather than the 25% regulatory requirement.
• $8,750 calculates 25% of the debit balance instead of current market value.
• $11,000 is the required maintenance equity, not the difference between required and actual equity.

Question 61

Topic: Customer Protection

A carrying broker-dealer has not voluntarily elected daily reserve computations. On July 6, 2026, its financial and operations principal reviews the applicable 12 filed month-end FOCUS reports. Credit balances are shown in millions.

Calendar facts:

• The mandatory daily regime took effect June 30, 2026.
• Friday, July 10 is the final business day of the computation week.
• Monday, July 13 and Tuesday, July 14 are banking business days.

The firm has never previously been subject to mandatory daily reserve computation.

Which reserve computation and deposit schedule applies?

• A. Continue weekly, compute as of Friday’s close, and make any required deposit within one hour after banking opens Tuesday.
• B. Begin daily, compute as of each previous business day’s close, and make any required deposit by the second following business day.
• C. Continue weekly, compute as of Thursday’s close, and make any required deposit within one hour after banking opens Tuesday.
• D. Continue weekly, compute as of Friday’s close, and make any required deposit within one hour after banking opens Monday.

Best answer: A

Explanation: The 12-month average combined credits are $486.25 million, so the firm remains weekly and deposits by the second following business day.

Mandatory daily reserve computations apply when average combined customer and PAB credits equal or exceed $500 million, measured using the applicable 12 filed month-end FOCUS reports. The combined balances total $5.835 billion, so the average is $5.835 billion / 12 = $486.25 million. December’s combined $540 million balance does not independently trigger daily computations.

Because the average is below the threshold and the firm made no voluntary daily election, it remains on the ordinary weekly schedule even though the mandatory regime’s implementation date has passed. The computation is made as of the close of the final business day of the week, Friday, July 10. Any required deposit is due within one hour after banking opens on the second following business day, Tuesday, July 14.

• Starting daily computations improperly treats the December spike as controlling instead of averaging all 12 filed reports.
• A Monday deposit uses the first following banking business day rather than the second.
• A Thursday computation is premature because Friday is the week’s final business day.

Question 62

Topic: Funding and Cash Management

A broker-dealer has a $1,000,000 secured demand note agreement that was accepted by FINRA before use and otherwise satisfies Appendix D. The note is payable on the firm’s demand, but no demand has been made.

Pledged collateral:

• An independent custodian holds 11,000 shares of fully paid, readily marketable common stock owned by the lender.
• The stock’s market price has declined to $100 per share.
• The applicable Appendix D collateral deduction is 30%, with no concentration or other adjustment.

The agreement requires collateral value after the applicable deduction to equal at least the note’s face amount. The firm must notify the lender and examining authority immediately if the collateral value falls below principal and follow the Appendix D deficiency procedures. The lender may add cash collateral, valued dollar-for-dollar, or more shares of the same stock.

Which assessment correctly states the deficiency, minimum cure, and immediate increase in the broker-dealer’s operating cash?

• A. A $230,000 deficiency; $230,000 cash collateral or 2,300 additional shares; $0 increase in operating cash.
• B. A $230,000 deficiency; $230,000 cash collateral or 3,286 additional shares; $230,000 increase if cash is pledged.
• C. A $230,000 deficiency; $230,000 cash collateral or 3,286 additional shares; $0 increase in operating cash.
• D. No deficiency; no additional cash collateral or shares are required; $0 increase in operating cash.

Best answer: C

Explanation: After the 30% deduction, $770,000 supports the note. The $230,000 deficiency requires cash of that amount or 3,286 shares; operating cash is unchanged.

Gross stock value is 11,000 x $100 = $1,100,000. Appendix D substitutes a 30% deduction for the ordinary 15% other-securities haircut, leaving $770,000 of collateral value. The shortfall against the $1,000,000 note is $230,000.

Cash collateral covers that amount dollar-for-dollar. Each additional share contributes $100 x 70% = $70, so $230,000 / $70 = 3,285.714 shares. Round up to 3,286 whole shares; 3,285 would leave a $50 shortfall. Notify the lender and examining authority and follow the prescribed cure procedure.

Pledged cash or securities remain collateral. They do not become unrestricted operating cash simply because they restore collateral support.

• Pledged cash is restricted collateral, not payment of the note into operating cash.
• 2,300 shares contribute only $161,000 after the haircut, leaving $69,000 uncovered.
• Gross market value exceeding principal does not establish compliance after the required deduction.

Question 63

Topic: Customer Protection

Firm record as of July 31, 2026:

• Combined customer and PAB credits on the 12 most recently filed month-end FOCUS reports totaled $5.64 billion.
• The most recent report showed combined credits of $525 million.
• The firm currently computes weekly and applies the ordinary 3% aggregate debit reduction.

Election log:

• On August 3, all required regulators received the firm’s notice electing voluntary daily computations beginning September 2.
• The firm has not submitted a separate election to use the 2% aggregate debit reduction.

Applicable procedure:

Mandatory daily computation applies when the 12-report average is at least $500 million. A below-threshold firm may begin voluntary daily computation on the 30th calendar day after the required written notice. A daily firm uses 2% only after a separate election; otherwise, 3% applies. Each daily computation uses the previous business day’s close, and any required deposit is due within one hour after banking business opens on the second business day following that as-of date.

The firm has never previously been subject to mandatory daily reserve computation.

August 3 through September 4 contain no relevant banking holidays. Which implementation schedule is correct?

• A. Start daily computations on September 2 using the 2% reduction; use September 1 close and fund any required deposit by September 3.
• B. Start daily computations on August 4 using the 3% reduction; use August 3 close and fund any required deposit by August 5.
• C. Start daily computations on September 2 using the 3% reduction; use September 1 close and fund any required deposit by September 3.
• D. Start daily computations on September 2 using the 3% reduction; use September 1 close and fund any required deposit by September 4.

Best answer: C

Explanation: The firm is below the mandatory threshold, its voluntary notice becomes effective September 2, and the absence of a separate 2% election leaves the 3% reduction applicable.

The mandatory-frequency test uses the average from the 12 most recently filed month-end FOCUS reports: $5.64 billion / 12 = $470 million. Because $470 million is below $500 million, the firm’s single $525 million month does not make daily computation mandatory. The firm may nevertheless elect daily computation voluntarily. Its August 3 notice permits a September 2 start under the stated 30-day rule.

The frequency election does not automatically activate the 2% aggregate debit reduction. Because no separate debit-adjustment election was submitted, the firm continues using 3%. The September 2 computation uses balances as of the September 1 close. September 2 is the first business day following that as-of date, and September 3 is the second, so any required deposit is due within one hour after banking business opens on September 3.

• Using 2% incorrectly treats the voluntary frequency notice as the separate debit-adjustment election.
• Funding on September 4 counts from the computation date rather than the September 1 as-of date.
• Beginning August 4 treats one $525 million report as controlling and disregards the voluntary-election notice period.

Question 64

Topic: Net Capital

A carrying broker-dealer is preparing its month-end Rule 15c3-1 computation. Its draft net capital is $1,000,000 before adjustments related to one proprietary common-stock position. The draft includes the stock at its $400,000 acquisition cost.

Position facts:

• Current market value: $340,000
• The stock is readily marketable and unrestricted.
• No hedge, offset, undue concentration, or other special treatment applies.
• All other net capital adjustments have been recorded.

What final net capital should the firm report after adjusting for this position?

• A. Report final net capital of $889,000.
• B. Report final net capital of $940,000.
• C. Report final net capital of $880,000.
• D. Report final net capital of $949,000.

Best answer: A

Explanation: The firm recognizes the $60,000 market loss and then deducts a 15% haircut of $51,000 from the stock’s $340,000 market value.

A readily marketable proprietary common-stock position is first valued at its current market value, and the ordinary 15% haircut is then applied to that market value. The decline from the $400,000 carrying amount to the $340,000 market value reduces tentative net capital by $60,000:

The market-risk haircut is:

Final net capital is therefore $940,000 minus $51,000, or $889,000. The market loss and haircut are separate deductions, but the haircut is calculated from current market value rather than acquisition cost.

• $949,000 applies the market-value haircut but omits the $60,000 decline from acquisition cost.
• $940,000 recognizes the market loss but omits the required market-risk haircut.
• $880,000 recognizes the market loss but incorrectly calculates the 15% haircut from acquisition cost.

Question 65

Topic: Customer Protection

Atlas Securities is a fully disclosed introducing broker-dealer relying on the Rule 15c3-3(k)(2)(ii) exemption. Atlas directs customers to pay for purchases through its affiliated collection agent.

Collection agreement:

A customer obligation is discharged when PayCo receives payment. Title to the payment passes to PayCo, which owes Atlas an equal unsecured amount and may use the account for its operating obligations.

Daily records:

• Customers wire money to PayCo’s operating account on Monday afternoon.
• PayCo wires an equal amount to the carrying firm by 10:30 a.m. Tuesday.
• The carrying firm records customer credits and includes them in its reserve computation only after receiving the wire.
• The carrying firm maintains all customer securities in a good control location; Atlas and PayCo receive no securities.

Which response should Atlas’s financial and operations principal take?

• A. Continue relying on the exemption, have the carrying firm record PayCo’s payable as a reserve debit, and fund the resulting requirement while maintaining securities controls.
• B. Cease relying on the exemption for this payment flow, route customer money directly to the carrying firm, and address the affiliate exposure separately from securities controls.
• C. Continue relying on the exemption, document PayCo’s next-business-day transfers, and treat the carrying firm’s reserve and securities controls as covering the payment flow.
• D. Continue relying on the exemption, obtain a parent guarantee of PayCo’s payable, and treat the carrying firm’s reserve and securities controls as covering the payment flow.

Best answer: B

Explanation: PayCo takes legal title and creates an unsecured affiliate payable, so Atlas is not transmitting the customer funds to the carrying firm as required by the exemption.

Rule 15c3-3(k)(2)(ii) requires a fully disclosed introducing broker-dealer to promptly transmit all customer funds and securities to the carrying broker-dealer and not otherwise hold them. PayCo acts as Atlas’s collection agent, but the agreement transfers legal title to PayCo and permits operating use of the money. The resulting unsecured payable is an affiliate exposure, not customer money protected at the carrying firm.

A timely transfer of an equal amount does not change the ownership and control of the original funds. The carrying firm’s later reserve computation also does not retroactively protect money while PayCo controls it. Atlas therefore cannot rely on the exemption for this flow and should direct payments to the carrying firm. Customer securities held in a good control location remain a separate possession-or-control matter and do not cure deficient cash handling.

• Next-business-day timing does not overcome the transfer of legal title and unrestricted affiliate use.
• A parent guarantee may reduce credit risk but does not convert PayCo’s payable into transmitted customer funds.
• An unsecured affiliate payable is not automatically an eligible reserve debit, and reserve funding would not restore the exemption.

Question 66

Topic: Net Capital

A carrying broker-dealer is preparing its SEC Rule 15c3-1 net capital computation. No reserve or prior deduction has been recorded for the following difference.

Short securities differences unresolved for seven business days after discovery, including positions not susceptible to count or confirmation, are deducted at market value.

What operational deduction must the firm record?

• A. $7,480
• B. $8,000
• C. $6,600
• D. $8,800

Best answer: D

Explanation: The verified 200-share unresolved shortage is charged at the current $44 market price, resulting in an $8,800 deduction.

Only 800 shares are supported by count or external confirmation: 700 physical certificates plus 100 shares confirmed by the transfer agent. The unsupported transit memo does not establish possession or control of another 50 shares. The unresolved shortage is therefore:

Because the difference has remained unresolved for eight business days, it has passed the seven-business-day threshold. The required deduction uses current market value:

This is an operational deduction for a missing securities position. The discovery-date price is not used, and the ordinary 15% haircut for readily marketable proprietary common stock is not applied to reduce the shortage charge.

• $6,600 improperly treats the unsupported 50-share transit memo as verified and charges only 150 shares.
• $7,480 incorrectly reduces the shortage’s current market value by a 15% common-stock haircut.
• $8,000 values the 200-share shortage at the outdated discovery-date market price.

Question 67

Topic: Operations and Records

A carrying broker-dealer receives a transfer request for a deceased customer’s certificated stock.

Request:

• Three certificates for 40, 35, and 25 shares are registered solely to Jordan Lee, deceased.
• The executor instructs the transfer agent to register 60 shares to one beneficiary and 40 shares to another.

Documents received:

• A stock power covering all 100 shares, signed Morgan Lee, Executor of the Estate of Jordan Lee and medallion guaranteed
• A certified death certificate
• A copy of the will naming Morgan as executor
• No letters testamentary or equivalent court appointment document

The transfer agent may cancel the surrendered certificates and issue the requested denominations. Its procedures require evidence of the representative’s current court appointment, no small-estate alternative applies, and no tax waiver is required.

Which action should the principal direct before submitting the transfer request?

• A. Obtain certificates matching the beneficiary allocations, then submit the stock power and estate documents.
• B. Obtain a court-certified copy of the will, then submit the existing certificates and stock power.
• C. Obtain current court-certified letters testamentary, then submit the existing certificates and stock power.
• D. Obtain another medallion guarantee stating the executor title, then submit the existing certificates and stock power.

Best answer: C

Explanation: The letters establish Morgan’s court-appointed authority to transfer securities registered to the deceased holder.

Securities registered solely to a deceased person must be transferred by a representative whose legal authority is adequately documented. A will can nominate an executor, but the court appointment, ordinarily evidenced by current certified letters testamentary, establishes that the nominee has authority to act for the estate.

A medallion signature guarantee addresses the authenticity of the signature and the guarantor’s financial backing. It does not establish that the signer was appointed executor. The existing certificate denominations are not an obstacle because the certificates total 100 shares and the transfer agent can cancel them and issue new certificates for the requested 60-share and 40-share registrations.

• A certified will confirms the decedent’s nomination but does not establish the nominee’s current court appointment.
• An additional signature guarantee would authenticate the signature again without proving representative capacity.
• Replacement denominations are unnecessary because the transfer agent can cancel and reissue the aggregate shares.

Question 68

Topic: Financial Reporting

A carrying broker-dealer has a June 30 fiscal year-end.

• On August 28, the firm timely filed its annual report under SEC Rule 17a-5(d).
• The firm separately filed its SIPC-7 and paid the related assessment.
• On September 8, the firm posted its annual customer financial information online and mailed the permitted notice offering paper copies at no cost.
• On September 10, a customer used the notice’s toll-free number to request a paper copy.

Which document package should the financial and operations principal arrange to furnish to the customer?

• A. The audited statement of financial condition, its related notes, and the independent accountant’s report
• B. The filed SIPC-7, its assessment calculation, and the related payment confirmation
• C. The annual compliance report, its supporting schedules, and the accountant’s examination report
• D. The filed FOCUS Report, its net capital computation, and the regulatory filing acceptance

Best answer: A

Explanation: These documents constitute the annual audited financial information that must be furnished to customers requesting a paper copy.

The annual customer disclosure obligation is separate from the broker-dealer’s regulatory filing and SIPC assessment obligations. Generally, the customer disclosure must be furnished within 105 days after fiscal year-end and consists of the audited statement of financial condition, appropriate notes, and the independent accountant’s report. A broker-dealer may use the permitted website-and-notice method, but a customer who follows the notice instructions may request a paper copy at no cost.

The annual report filed under Rule 17a-5(d) may contain additional regulatory material that is not part of the customer disclosure. Filing that report does not by itself satisfy the customer furnishing requirement. Likewise, filing and paying SIPC-7 satisfies a separate assessment obligation rather than a financial disclosure obligation to customers.

• A FOCUS Report and net capital computation are regulatory filings, not the prescribed annual audited customer disclosure.
• SIPC-7 and payment evidence concern the SIPC assessment and do not provide the required customer financial statement.
• The compliance report and examination report address the firm’s regulatory compliance and are not the financial information prescribed for customers.

Question 69

Topic: Customer Protection

A broker-dealer relies on the Rule 15c3-3(k)(2)(i) special-account exemption. It has a compliant bank agreement and historically transmits customer funds and securities promptly.

Operations review:

Monday: Customer places a $40,000 purchase order without sending payment.
Tuesday (T+1): The firm pays the clearing broker from its operating account.
Tuesday: The firm records a $40,000 customer debit and directs that the
purchased shares remain in a firm-controlled collateral account.
Friday: The customer's check arrives, is deposited in the designated
special bank account, and is transmitted promptly to reimburse the firm.
The firm charges no interest and has no formal margin agreement.

Which conclusion should the financial and operations principal reach?

• A. The exemption is unavailable during the pilot because accepting customer checks payable to the firm through the designated account is prohibited.
• B. The exemption is unavailable during the pilot because the firm extends credit and carries a customer debit secured by the shares.
• C. The exemption remains available during the pilot because an interest-free debit outstanding for five business days is not a margin account.
• D. The exemption remains available during the pilot because prompt transmission of later customer receipts through the designated account governs eligibility.

Best answer: B

Explanation: The firm’s settlement advance, customer debit, and control of collateral are inconsistent with carrying no margin accounts or customer balances.

Rule 15c3-3(k)(2)(i) depends on the broker-dealer’s actual activities, not its account labels or stated policies. The firm must carry no margin accounts, promptly transmit customer funds and securities, and not otherwise hold customer assets or owe customers money or securities.

Here, the firm uses operating cash to settle the customer’s purchase, records a customer debit, and controls the purchased shares as collateral until repayment. Those facts constitute an extension of credit and the carrying of a secured customer balance. The short duration, absence of interest, and lack of a formal margin agreement do not change the substance of the arrangement. Depositing the customer’s later payment into the properly designated special account also does not cure the incompatible activity. The firm cannot continue relying on the exemption while operating the pilot as described.

• A short-term, interest-free debit can still represent credit and a carried customer balance.
• Promptly transmitting the later payment does not cure the preceding settlement advance and collateral arrangement.
• Properly handled customer checks may pass through the designated special account; that receipt alone does not defeat the exemption.

Question 70

Topic: Operations and Records

A broker-dealer receives an authenticated FINRA Rule 8210 request during an examination. FINRA requests specified supervisory exception reports and related communications within 10 business days.

Record location:

• An outside compliance administrator maintains the records for the member.
• The member has a contractual right to retrieve and export all requested records.
• The administrator can complete an export within three business days.
• Some responsive system logs are scheduled for routine deletion in 48 hours.

Separate proceeding: A customer claimant has informally requested the same records in a pending FINRA arbitration, but the arbitration panel has not issued a discovery order. FINRA has not changed its deadline or agreed to retrieve records directly from the administrator.

Which action should the financial and operations principal take to meet the member’s Rule 8210 obligation?

• A. Direct the administrator to suspend deletion and export the records, then review and produce the responsive set to FINRA by its deadline while handling arbitration separately.
• B. Direct the administrator to suspend deletion and identify it as custodian by the deadline, then await a FINRA subpoena before releasing the underlying records.
• C. Direct the administrator to suspend deletion and grant FINRA vendor-portal access, treating FINRA’s ability to retrieve the material as the member’s completed production.
• D. Direct the administrator to suspend deletion and export the records, then produce through the arbitration schedule first and send the same set to FINRA afterward.

Best answer: A

Explanation: The member controls the administrator-held records and must preserve and timely produce them to FINRA independently of the arbitration process.

FINRA Rule 8210 requires a member to provide requested information and records relating to a FINRA examination, investigation, complaint, or proceeding. Outsourcing record administration does not transfer this regulatory responsibility. The member’s contractual right to retrieve and export the records establishes control over the material.

Because responsive logs face deletion, the member should promptly direct their preservation. It should then obtain, review, and produce the responsive records by FINRA’s deadline. If compliance becomes impracticable, the member should request relief from FINRA rather than assume an extension.

The claimant’s informal arbitration request follows the separate arbitration discovery process. The absence of an arbitration panel order does not delay or limit the Rule 8210 production. FINRA also need not subpoena the outside administrator when the requested records remain within the member’s control.

• The arbitration discovery schedule does not supersede the independent Rule 8210 deadline.
• Unilateral portal access is not a completed production when FINRA has not accepted that method.
• Identifying the custodian and awaiting a subpoena does not satisfy the member’s production duty.

Question 71

Topic: Customer Protection

A carrying broker-dealer is preparing its customer reserve computation. It applies the ordinary 3% aggregate debit reduction, and no other adjustments apply.

• Bank records establish that the entire actual overdraft funded customer settlement activity.
• The remaining $1,400,000 of the facility is undrawn.
• The general-ledger receivable is not a debit balance in a customer securities account and does not qualify under another reserve debit item.

What is the broker-dealer’s customer reserve requirement?

• A. A reserve requirement of $3,300,000
• B. A reserve requirement of $2,912,000
• C. A reserve requirement of $2,700,000
• D. A reserve requirement of $4,700,000

Best answer: A

Explanation: Including the $600,000 actual customer-related overdraft as a credit and reducing $10,000,000 of eligible debits by 3% produces a $3,300,000 requirement.

The actual $600,000 bank overdraft is a reserve-formula credit because bank funds were used for customer settlement activity. The unused $1,400,000 borrowing capacity is not an actual overdraft and has no formula effect. The $400,000 general-ledger receivable is merely an accounting receivable; it is not an allowable formula debit under the stated facts.

Eligible debits after the ordinary reduction are $10,000,000 x 97% = $9,700,000. Aggregate credits are $12,400,000 + $600,000 = $13,000,000. Therefore, the customer reserve requirement is $13,000,000 - $9,700,000 = $3,300,000.

• $2,912,000 improperly includes the $400,000 accounting receivable among aggregate debit items before applying the reduction.
• $2,700,000 omits the actual customer-related bank overdraft from formula credits.
• $4,700,000 treats the full approved overdraft facility as a credit instead of using the amount actually drawn.

Question 72

Topic: Net Capital

A broker-dealer has the following facts for its Rule 15c3-1(d) debt-equity test:

• Applicable equity capital accounts and adjustments total $400,000.
• Its chief financial officer loaned the firm $1,200,000 under an approved satisfactory subordination agreement.
• The officer is not a stockholder and has no other ownership interest in the firm.
• The agreement had a four-year original term, has 18 months remaining, and contains the required restrictions on accelerated maturity and capital withdrawal.
• There are no other satisfactory subordinations.
• These facts have remained unchanged for 95 consecutive days.
• The firm requested a Commission extension on day 85, but no extension has been granted.

Which conclusion should the financial and operations principal reach?

• A. Classify the $1,200,000 as debt, calculate 300%, and conclude that principal must be compared with equity capital alone.
• B. Classify the $1,200,000 as debt, calculate 75%, and conclude that the 70% limit has been exceeded for more than 90 days.
• C. Classify the $1,200,000 as debt, calculate 75%, and conclude that compliance continues while the Commission request remains pending.
• D. Classify the $1,200,000 as equity, calculate 0%, and conclude that the term and acceleration provisions establish compliance.

Best answer: B

Explanation: The nonstockholder officer’s loan remains debt, producing a ratio of $1,200,000 / $1,600,000 = 75% for 95 days without a granted extension.

A satisfactory subordination from a corporate officer does not qualify as equity merely because it satisfies the original-term, remaining-term, and acceleration restrictions. For this treatment, the lender must have the qualifying partner or stockholder relationship. Because the officer owns no stock, the $1,200,000 remains in the regulatory debt numerator.

The debt-equity total includes both satisfactory subordinated debt and applicable equity capital:

The ratio therefore exceeds the 70% limit. It has remained above that limit for 95 consecutive days, which exceeds the permitted 90-day period. Filing an extension request does not itself extend the period; the Commission must grant the extension.

• Equity treatment is unavailable because satisfying the maturity restrictions does not replace the required stockholder or partner relationship.
• A pending extension request does not suspend the 90-day condition; an extension must be granted.
• The 300% calculation incorrectly divides subordinated debt by equity capital rather than by the regulatory debt-equity total.

Question 73

Topic: Operations and Records

A carrying broker-dealer’s FINOP reviews an aged debit balance that the controller wants to eliminate before month-end.

Record extract:

Suspense clearing debit balance: $84,000
Age of balance: 210 days
Proposed entry: Debit operations loss $84,000
                Credit suspense clearing $84,000

Independent checks:

• Bank statements, clearing-firm statements, and customer and PAB subsidiary ledgers show no corresponding transaction.
• No trade ticket, invoice, wire detail, or customer instruction supports the balance.
• The internal suspense schedule shows only the amount and age, and the general ledger is in balance.

Current capital workpaper:

• GAAP net worth: $1,200,000
• Deduction for the nonallowable suspense asset: $84,000
• Other net capital deductions: $216,000
• Final net capital: $900,000
• All other capital items will remain unchanged.

Which assessment should the FINOP make before deciding whether to approve the entry?

• A. Treat the proposal as a completed reconciliation, obtain controller signoff before approval, and calculate that posting would reduce GAAP net worth to $1,116,000 while final net capital remains $900,000.
• B. Treat the balance as a documented timing difference, defer the proposed entry pending external confirmation, and continue reporting GAAP net worth of $1,200,000 and final net capital of $900,000.
• C. Treat the proposal as an unsupported write-off, continue source-level tracing before approval, and calculate that posting would reduce GAAP net worth to $1,116,000 and final net capital to $816,000.
• D. Treat the proposal as an unsupported write-off, continue source-level tracing before approval, and calculate that posting would reduce GAAP net worth to $1,116,000 while final net capital remains $900,000.

Best answer: D

Explanation: The entry would expense the unsupported asset, while eliminating the existing $84,000 net capital deduction offsets the decline in GAAP net worth.

A balanced general ledger establishes arithmetic equality, not the completeness, ownership, or classification of an aged balance. Reconciliation requires comparison with independent source records. Because none of the examined records explains the $84,000 debit, the proposed entry is an unsupported write-off rather than a completed reconciliation.

Before posting, net capital is $1,200,000 minus the $84,000 nonallowable asset deduction and $216,000 of other deductions, or $900,000. Posting the entry reduces GAAP net worth to $1,116,000 but removes the suspense asset and its $84,000 deduction. Final net capital therefore remains $1,116,000 minus $216,000, or $900,000. Reducing net capital again would double count the same loss. Investigation and appropriate authorization remain necessary even though the ledger entry would clear the account.

• A decline to $816,000 double counts the loss because the unsupported asset was already fully deducted from net capital.
• Controller signoff and an internally balanced schedule do not convert the write-off into a reconciliation supported by independent records.
• The evidence does not establish a timing difference; that classification would require records identifying the underlying transaction and expected settlement.

Question 74

Topic: Operations and Records

A carrying broker-dealer’s trade-capture and books-and-records systems remained available during an outage at Alpha, its confirmation-processing provider. The member used an approved manual process to furnish all required confirmations during the outage.

The FINOP reviews the following business continuity record:

Mission-critical function: Generate and electronically deliver confirmations
Primary provider: Alpha
Documented alternate: Beta, target activation within 4 hours
Data change: Production confirmation-file mapping changed 6 months ago
Annual exercise: Member restored source data; neither provider participated
Beta evidence: Network login tested 10 months ago; no current-format file processed
Incident result: Beta rejected the current file; manual process used

Which post-incident testing step would provide the strongest evidence that the documented contingency can perform the member’s actual function?

• A. Process a current-format file through Beta, verify confirmation generation and controlled delivery, reconcile outputs to member records, and retain the results.
• B. Conduct a joint tabletop with Alpha and Beta, review contacts and escalation timing, verify role assignments, and retain the results.
• C. Review Alpha’s recovery report, compare outage performance with its service agreement, verify corrective-action closure, and retain the results.
• D. Restore current trade data from the member’s backup, compare database totals with production, verify user access, and retain the results.

Best answer: A

Explanation: An end-to-end test using the current format directly validates whether Beta can perform the outsourced mission-critical function.

FINRA Rule 4370 requires a member’s business continuity plan to address mission-critical systems and the impact of critical business constituents, including outsourced providers. Outsourcing a process does not transfer the member’s responsibility for continuing its regulatory and customer obligations.

The existing evidence establishes that the member can restore source data, access Beta’s network, and coordinate incident roles. It does not establish that Beta can accept the current file format and complete confirmation processing. The actual incident exposed that precise gap when Beta rejected the file. An end-to-end test should therefore use current-format data and verify acceptance, generation, controlled delivery, and reconciliation to the member’s records. Results should be documented and considered during the plan’s annual review and modification process.

• Restoring member data tests internal recovery but not the failed outsourced processing dependency.
• Reviewing Alpha’s remediation evaluates the primary provider but does not validate the documented alternate.
• A tabletop tests coordination and escalation but cannot prove that Beta can process the current data format.

Question 75

Topic: Financial Reporting

A broker-dealer is preparing its December 31, 2025 financial statements and FOCUS report. The controller omitted the annual employee bonus from the closing entries because the board certified the amount on January 12, 2026, and the firm paid it on February 15, 2026.

Bonus plan facts:

• The written plan establishes a bonus pool equal to 6% of annual pretax income before bonus expense.
• Pretax income before bonus expense was $3,000,000.
• Employees completed the required service, and all performance conditions were met by December 31.
• The board’s certification confirms the calculation; the board cannot revise or cancel the obligation after the conditions are met.

Before correction, GAAP equity and net capital are each $1,500,000. Ignore income taxes, and assume no other net capital adjustment is associated with the bonus.

Which correction should the financial and operations principal require?

• A. Accrue $180,000 of expense and compensation payable, reducing equity to $1,320,000 but leaving net capital at $1,500,000.
• B. Accrue $180,000 of expense and compensation payable, then deduct it again in computing net capital, reducing net capital to $1,140,000.
• C. Accrue $180,000 of expense and compensation payable, reducing both equity and net capital to $1,320,000.
• D. Disclose the $180,000 as a subsequent event, leaving both equity and net capital at $1,500,000.

Best answer: C

Explanation: The employees earned the $180,000 bonus by year-end, so the accrual reduces GAAP equity and the net-worth starting point for net capital.

The bonus equals 6% of $3,000,000, or $180,000. Under accrual accounting, compensation expense is recognized when employees have performed the required service and the obligation is established, not when the board later confirms the calculation or when cash is paid. Because all conditions were met by December 31 and the board lacked discretion to cancel or change the obligation, the broker-dealer must record a $180,000 expense and payable at year-end.

The expense reduces GAAP income and equity from $1,500,000 to $1,320,000. Net capital begins with GAAP net worth, subject to regulatory adjustments, so it also declines to $1,320,000. The payable is already reflected through the reduced net worth and is not deducted a second time.

• Subsequent-event disclosure alone is insufficient because the obligation existed at the reporting date.
• Deferring the net capital effect until payment incorrectly equates cash movement with expense recognition.
• Deducting the payable again after reducing GAAP equity counts the same obligation twice.

Questions 76-100

Question 76

Topic: Funding and Cash Management

On September 8, 2026, a member firm is using the permitted transitional legacy day-trading rules and has not adopted the new intraday-margin framework. A customer is already classified as a pattern day trader.

Account facts at the prior close:

• Equity: $24,200
• Maintenance margin requirement: $18,000
• Legacy day-trading buying power: four times maintenance margin excess
• Proposed next-day round trip: $20,000

How should the firm handle the proposed day trade?

• A. Approve the trade because $20,000 is within the account’s $24,800 legacy day-trading buying power.
• B. Apply the new intraday-exposure calculation and approve the trade if it produces no margin deficiency.
• C. Approve the trade because the $24,200 of equity exceeds the $18,000 maintenance margin requirement.
• D. Decline the trade until the customer adds at least $800 of qualifying equity to the account.

Best answer: D

Explanation: The legacy pattern-day-trader rules require at least $25,000 of account equity before further day trading.

The firm has explicitly remained under the legacy day-trading rules during the permitted transition. Under those rules, a pattern day trader must maintain at least $25,000 of equity before engaging in additional day trading.

The account has $24,200, so its deficiency is:

Its maintenance margin excess is $6,200, which would produce nominal legacy day-trading buying power of $24,800. That buying-power calculation does not override the separate $25,000 minimum-equity condition. Similarly, satisfying the ordinary maintenance requirement does not satisfy the pattern-day-trader minimum. Because the firm has not adopted the new intraday-margin framework, that framework cannot be substituted solely because its effective date has passed.

• The four-times-maintenance-excess calculation does not permit day trading while equity is below the legacy $25,000 minimum.
• Compliance with the ordinary maintenance requirement is separate from compliance with the pattern-day-trader equity condition.
• The new intraday framework does not govern a firm that is still operating under the permitted transitional legacy regime.

Question 77

Topic: Net Capital

On September 29, 2026, a financial and operations principal reviews the following Rule 15c3-1(d) record:

Applicable equity capital accounts and adjustments: $3,000,000
Agreement A principal: $2,000,000
Agreement B principal: $7,000,000
Balances continuously outstanding: July 1-September 29 (91 days)

• Both agreements are satisfactory subordination agreements.
• Agreement A is from a stockholder, originally runs from January 1, 2023, through December 31, 2026, and restricts accelerated maturity and capital withdrawals.
• Agreement B is from a corporate officer who owns no stock, originally has a five-year term, has more than 12 months remaining, and contains the same restrictions.
• The firm requested an extension from the Commission on September 25, but no extension has been granted.

Which conclusion best applies on September 29?

• A. Treat Agreement B as equity, calculate 16.7%, and continue monitoring because its five-year term and withdrawal restrictions are sufficient.
• B. Treat both agreements as debt, calculate 75%, and continue monitoring because the pending extension request suspends the duration condition.
• C. Treat Agreement A as equity, calculate 58.3%, and continue monitoring because its original term and acceleration restrictions are sufficient.
• D. Treat both agreements as debt, calculate 75%, and recognize that the 70% limit has been exceeded for more than 90 days.

Best answer: D

Explanation: Neither agreement qualifies as equity, so the debt-equity ratio is $9,000,000 / $12,000,000 = 75% for 91 days without an extension.

The regulatory debt numerator includes satisfactory subordinations that do not qualify as equity under Rule 15c3-1(d). Agreement A cannot currently qualify as equity because it has less than 12 months remaining, despite its qualifying original term, stockholder relationship, and restrictions. Agreement B cannot qualify because the lender is not a stockholder; corporate-officer status is insufficient.

The debt numerator is therefore $2,000,000 + $7,000,000 = $9,000,000. The debt-equity total is $3,000,000 + $2,000,000 + $7,000,000 = $12,000,000, producing a ratio of 75%. The ratio remained above 70% for 91 consecutive days, which exceeds the permitted 90-day period. A request does not provide relief unless the Commission grants an extension.

• Excluding the stockholder agreement overlooks its failure to retain at least 12 months before maturity.
• Filing an extension request does not suspend the duration condition without Commission approval.
• Excluding the officer’s agreement overlooks that the lender must be a partner or stockholder, not merely an officer.

Question 78

Topic: Net Capital

A carrying broker-dealer uses the basic net capital method. Its controller excluded every balance below from aggregate indebtedness. All balances are recognized liabilities, and no collateral or other exclusion applies except as stated.

The owner’s note is not subject to a satisfactory subordination agreement. How much from this record must the broker-dealer include in aggregate indebtedness?

• A. $690,000
• B. $840,000
• C. $1,040,000
• D. $240,000

Best answer: B

Explanation: Aggregate indebtedness includes the $600,000 free credits, $90,000 vendor payable, and $150,000 owner note, totaling $840,000.

Aggregate indebtedness starts with total money liabilities and specifically includes customer free credit balances, ordinary trade payables, and money borrowed. Reserve-computation treatment does not remove customer free credits from aggregate indebtedness. A short payment term does not exclude the vendor payable, and related-party status does not exclude the owner’s demand note because it lacks satisfactory subordination.

The included amount is $600,000 + $90,000 + $150,000 = $840,000. The $200,000 payable against securities failed to receive is excluded because it has been outstanding for only 10 days, within the applicable 30-day period.

• $240,000 improperly omits customer free credit balances from aggregate indebtedness.
• $690,000 improperly excludes the owner’s ordinary demand note solely because it is a related-party obligation.
• $1,040,000 improperly includes the failed-to-receive payable despite its qualifying 10-day age.

Question 79

Topic: Financial Reporting

A broker-dealer is preparing its standalone financial statements for June 30, 2026. Its parent paid the following amounts from the parent’s bank account, but the broker-dealer recorded no entries:

Additional records:

• The parent’s cash-management policy classifies payments made for subsidiaries as advances repayable on demand.
• No executed liability-assumption agreement, expense-sharing agreement, capital contribution, or novation exists.
• The parent paid the landlord and employees in full on June 30.

Which correcting entry should the financial and operations principal direct the broker-dealer to record?

• A. Record $150,000 of operating expense and a $150,000 payable to the original payees.
• B. Record $150,000 of operating expense and a $150,000 payable to the parent.
• C. Record $180,000 of operating expense and a $180,000 payable to the parent.
• D. Record $150,000 of operating expense and a $150,000 credit to additional paid-in capital.

Best answer: B

Explanation: The broker-dealer incurred the rent and payroll, while the parent’s repayable payments created a $150,000 intercompany liability.

A parent’s payment does not move a broker-dealer’s operating expenses to the parent when the broker-dealer remains the party that incurred the obligations. The lease and employment records establish $60,000 of rent and $90,000 of payroll expense, for a total of $150,000. The $30,000 corporate strategy charge is excluded because the work did not benefit the broker-dealer and no agreement imposed that charge on it.

The landlord and employees have already been paid, so they are no longer the creditors. Under the cash-management policy, the parent’s payments are advances repayable on demand. The corresponding credit is therefore a payable to the parent. Additional paid-in capital would require evidence that the parent made a nonrepayable capital contribution rather than an advance.

• Including the corporate strategy charge treats a parent-only cost as a broker-dealer obligation despite the supporting records.
• Crediting additional paid-in capital conflicts with the policy making on-behalf payments repayable advances.
• Recording payables to the original payees ignores that the parent already satisfied those obligations in full.

Question 80

Topic: Customer Protection

A carrying broker-dealer makes its possession-or-control determination on Wednesday. The market price remained $50 per share throughout the period.

Customer positions:

• Fully paid account: 4,000 shares of XYZ.
• Margin account: 5,000 shares of XYZ with a $100,000 debit balance.
• The margin account holds no other securities.

Control activity:

• Before Tuesday, 7,000 unencumbered XYZ shares were held at a control location.
• On Tuesday, the firm loaned 2,000 of those shares, leaving 5,000 at the control location.
• The loan remained outstanding through Wednesday.
• No other XYZ shares or control locations are available.

The firm has excess reserve-account funds and net capital above its required minimum, but those facts do not alter its possession-or-control requirement. Which determination and action are correct?

• A. Determine a 4,000-share deficit from customer positions and promptly recall or otherwise obtain 4,000 shares.
• B. Determine a 1,200-share deficit caused by the loan and promptly recall or otherwise obtain 1,200 shares.
• C. Determine no share deficit after the loan and leave the 2,000-share loan outstanding under the current allocations.
• D. Determine a 2,000-share deficit caused by the loan and promptly recall or otherwise obtain all 2,000 shares.

Best answer: B

Explanation: The customer requirement is 6,200 shares, so the 5,000 controlled shares leave a 1,200-share deficit that must be restored promptly.

The margin position is worth $250,000. Securities supporting 140% of the $100,000 debit balance are margin securities: $140,000 / $50 = 2,800 shares. The remaining 2,200 margin-account shares are excess margin securities.

The possession-or-control requirement is therefore 4,000 fully paid shares plus 2,200 excess margin shares, or 6,200 shares. After the loan, only 5,000 shares remain in control, producing a 1,200-share deficit. The deficit began when the securities were delivered under the loan and must be corrected by promptly recalling or otherwise obtaining at least 1,200 shares. Excess reserve funds do not replace missing customer securities. Net capital compliance also does not excuse the control deficit, although a deficit that remains unresolved may create separate net capital consequences.

• Counting only the fully paid position incorrectly excludes the 2,200 excess margin shares.
• Recalling the entire loan ignores the 800-share control surplus that existed before the loan.
• Treating all 5,000 margin shares as excess margin securities ignores the portion supporting 140% of the debit balance.

Question 81

Topic: Financial Reporting

A broker-dealer is preparing its June 30, 2026 FOCUS report and net capital workpapers. Its general ledger contains no entry for an arrangement involving an affiliate.

Record extract:

The broker-dealer irrevocably guarantees the affiliate’s bank borrowing through June 30, 2027. Aggregate payments under the guarantee are capped at $2,000,000.

• The affiliate is a 20%-owned investee. The entities are not under common control.
• Counsel confirms that the side letter is enforceable.
• The affiliate is current on the loan, and payment by the broker-dealer is not probable.
• The guarantee’s fair-value stand-ready obligation was $80,000 at issuance and remains $80,000 at quarter-end.
• No fee, collateral, or reimbursement right supports the guarantee.
• The accounting policy assigns any initial guarantee debit to current-period expense.
• Assume no separate tentative-net-capital adjustment beyond the effect of the proper GAAP entry.

Which treatment should the financial and operations principal use for June 30 reporting?

• A. Recognize an $80,000 liability and expense, disclose the $2,000,000 maximum exposure, and lower tentative net capital by $80,000.
• B. Recognize an $80,000 liability and expense, disclose the $2,000,000 maximum exposure, and leave tentative net capital unchanged until cash is paid.
• C. Recognize a $2,000,000 liability and expense, disclose the guarantee terms, and lower tentative net capital by the full contractual maximum.
• D. Maintain a zero liability, disclose the $2,000,000 maximum exposure, and leave tentative net capital unchanged while payment remains not probable.

Best answer: A

Explanation: The enforceable guarantee requires initial recognition at its $80,000 fair value, and the resulting expense reduces GAAP net worth and tentative net capital.

An enforceable guarantee generally creates a stand-ready obligation that is initially recognized at fair value, even when the borrower is current and payment by the guarantor is not probable. The $80,000 valuation therefore determines the recorded liability. Under the stated accounting policy, the offset is an expense, reducing GAAP net worth by $80,000.

The $2,000,000 contractual cap is the maximum potential exposure disclosed for the guarantee; it is not the liability’s fair-value measurement. Because tentative net capital begins with GAAP net worth and no separate adjustment applies here, the expense also reduces tentative net capital by $80,000. The side letter cannot be ignored merely because it was outside the ledger and no cash had moved.

• Disclosure alone does not satisfy the initial recognition requirement for the stand-ready obligation.
• Recording the contractual cap confuses maximum potential exposure with the guarantee’s measured fair value.
• Deferring the capital effect until payment ignores that the recognized expense already reduces GAAP net worth.

Question 82

Topic: Funding and Cash Management

A customer with no existing cash or securities in a margin account makes the following purchase. The firm has no house margin requirement above the regulatory minimum.

Ignoring subsequent market movement, how much must the customer deposit to satisfy the initial margin requirement?

• A. $48,000
• B. $36,000
• C. $24,000
• D. $12,000

Best answer: C

Explanation: The $48,000 purchase requires a 50% initial deposit of $24,000.

Regulation T generally requires 50% initial margin for a purchase of margin-eligible long equity. The purchase value is 600 shares x $80 = $48,000. Therefore, the initial margin requirement is $48,000 x 50% = $24,000. Because the account has no existing cash or securities available as equity, the customer must provide the entire $24,000 deposit.

The T+1 settlement date concerns completion of the securities transaction; it does not change the percentage used to calculate initial margin. Initial margin must also be distinguished from the 25% regulatory maintenance requirement that generally applies after the position has been established.

• $12,000 applies the 25% long-equity maintenance rate instead of the 50% initial rate.
• $36,000 incorrectly requires the customer to provide 75% of the purchase value.
• $48,000 represents full payment, as in an unfunded cash-account purchase, rather than a margin purchase.

Question 83

Topic: Operations and Records

A financial and operations principal receives an employee-trading surveillance exception. Firm procedures require review of transactions for possible misuse of material nonpublic information and permit a temporary employee-trading restriction during an investigation.

Confidential transaction record:

Which response by the principal is most appropriate?

• A. Open a front-running review, preserve customer-order, routing, preclearance, and employee-account records, and maintain a temporary restriction until order precedence is resolved.
• B. Open an information-barrier access review, preserve entitlement, assignment-approval, preclearance, and order records, and end the temporary restriction once the operational access is validated.
• C. Open a potential MNPI-misuse review, preserve file-access, account-control, preclearance, and order records, and maintain a temporary restriction on employee-directed trading in XYZ.
• D. Open a manipulation review, preserve related-account, communications, preclearance, and market-data records, and maintain a temporary restriction until coordinated trading is assessed.

Best answer: C

Explanation: The employee traded a controlled account after accessing material acquisition information and before its public release.

A signed acquisition at a substantial premium is material, and the information remained nonpublic until Thursday. The employee became aware of it through an operational assignment and then directed an options purchase in a controlled spouse’s account. Authorized need-to-know access does not exempt an operations employee from restrictions on trading while aware of MNPI.

The restricted-list interface failure is an information-barrier control weakness, but it does not eliminate the employee’s responsibility or the firm’s supervisory duty. The principal should treat the alert as potential misuse rather than immediately conclude that a violation occurred. Relevant evidence includes file-access timestamps, account authority, preclearance records, order details, and the public-announcement timeline. A temporary trading restriction preserves the firm’s position while compliance investigates under its supervisory procedures.

• Validating job-related access addresses entitlement, but it does not resolve whether the information was misused in a controlled account.
• Front-running concerns trading ahead of customer orders; the record instead identifies confidential issuer transaction information.
• Manipulation focuses on creating artificial price or market activity; the timing here points first to possible trading while aware of MNPI.

Question 84

Topic: Customer Protection

A carrying broker-dealer performs ordinary weekly customer reserve computations. Its latest computation established a required deposit of $10,000,000, and no subsequent computation has reduced that requirement.

Account facts:

• The reserve account is properly designated for the exclusive benefit of customers, and the required bank acknowledgment is in effect.
• The operating account is not designated or acknowledged as a reserve account.
• The Treasury securities remain qualified securities, and no reserve withdrawal occurred.

Under SEC Rule 15c3-3, what minimum action should the financial and operations principal take after the Wednesday review?

• A. Restrict $300,000 within the operating account and document it as reserve support promptly after the review.
• B. Transfer $500,000 from the operating account into the acknowledged special reserve account promptly after the review.
• C. Transfer $300,000 from the operating account into the acknowledged special reserve account promptly after the review.
• D. Transfer $300,000 into the acknowledged special reserve account after the next weekly reserve computation.

Best answer: C

Explanation: The reserve account is $300,000 short at current market value, so that amount must be deposited promptly into the properly designated account.

Qualified securities deposited in a customer reserve account are recognized at current market value. At the Wednesday review, recognized reserve assets equal $4,000,000 of cash plus $5,700,000 of Treasury securities, or $9,700,000. Compared with the unchanged $10,000,000 requirement, the deficiency is $300,000.

The original $200,000 excess absorbs part of the $500,000 market decline, so the firm need not replace the entire decline. Once the deficiency is identified, the firm must promptly restore the reserve account rather than wait for its next weekly computation. Cash in the ordinary operating account provides liquidity but does not count as a reserve asset until it is actually transferred into the properly designated account covered by the bank acknowledgment.

• Replacing the entire $500,000 market decline disregards the $200,000 excess present after funding.
• An internal restriction does not convert operating-account cash into a recognized reserve deposit.
• The weekly computation schedule does not permit an identified reserve deficiency to remain uncorrected until the next computation.

Question 85

Topic: Financial Reporting

A broker-dealer is preparing its annual report for the fiscal year ended June 30, 2026. Its financial statements will be audited separately.

Annual reporting record:

Jul. 1, 2025-Feb. 28, 2026: Fully disclosed introducing activity;
claimed exemption under Rule 15c3-3(k)(2)(ii).
Mar. 1, 2026: Began carrying customer accounts.
Mar. 1-Jun. 30, 2026: Held customer cash and securities and performed
reserve and possession-or-control procedures.
Jun. 30, 2026: Complied with applicable financial responsibility rules;
management identified no material weakness in internal control over compliance.
Accountant: Independent, PCAOB-registered, and did not prepare management's
records or assertions.

Which report pairing must accompany the audited financial statements?

• A. Management issues an exemption report, and the accountant performs a review and issues its review report.
• B. Management issues a compliance report, and the accountant performs an examination and issues its examination report.
• C. Management issues a compliance report, and the accountant performs a review and issues its review report.
• D. Management issues an exemption report, and the accountant performs an examination and issues its examination report.

Best answer: B

Explanation: Because the firm did not claim an exemption throughout the entire fiscal year, management must issue a compliance report subject to the accountant’s examination.

A broker-dealer may use an exemption report only when it claimed exemption from Rule 15c3-3 throughout the entire fiscal year. This firm ceased operating solely as an exempt introducer and began carrying customer assets on March 1. Its annual package therefore requires a compliance report, even though it was exempt during the first eight months.

Management is responsible for the compliance report and its assertions concerning compliance and internal control over compliance. The qualified independent public accountant performs an examination of that report and issues a corresponding examination report. By contrast, when a broker-dealer qualifies to issue an exemption report, the accountant performs a review rather than an examination. The accountant’s independence and registration satisfy the stated qualification issue but do not transfer responsibility for management’s assertions to the accountant.

• An exemption report with a review applies when exemption was claimed throughout the fiscal year, which the carrying activity prevents.
• A review provides the engagement associated with an exemption report, not a compliance report.
• Examining an exemption report does not cure the incorrect report classification arising from the carrying period.

Question 86

Topic: Operations and Records

In June 2026, a representative asks the firm’s financial and operations principal to approve a $275 wedding gift for the procurement director of a corporate customer.

Relationship and payment facts:

• The representative met the director through the customer account and has had no contact with the director outside account activities and firm events.
• The director invited the entire account coverage team to the wedding, which the representative plans to attend.
• The representative selected the item from the firm’s client-gift catalog, and the firm will charge it to its business-development budget.
• In April 2026, the firm gave the director a $50 business-related gift.

What should the principal conclude and do under FINRA Rule 3220?

• A. Classify it as business-related and approve the $275 item because that individual gift is below $300.
• B. Classify it as hosted entertainment and approve the $275 item outside the gift limit because the representative will attend.
• C. Classify it as business-related and approve no more than $250 of additional value for the recipient this year.
• D. Classify it as personal and approve the $275 item outside the recipient’s annual business-gift total.

Best answer: C

Explanation: The firm-funded gift arises from a business relationship, and the earlier $50 gift leaves $250 under the $300 annual limit.

FINRA Rule 3220 limits business-related gifts to $300 per person per year. A wedding gift may qualify as personal, but the occasion alone does not establish the exception. Relevant evidence includes the parties’ actual relationship, who selects and pays for the gift, and how the expense is treated.

Here, the relationship exists only through the customer account, the firm supplies the gift through its catalog, and the firm records the cost as a business-development expense. Those facts support business-related treatment. Relevant gifts from the firm and its associated persons must be aggregated. Because the director already received $50, only $250 remains available under the annual limit. Attending the wedding does not convert a tangible gift into hosted entertainment.

• The personal-gift treatment is unsupported because the relationship and funding evidence are business-related despite the wedding occasion.
• Testing the $275 item separately ignores the required aggregation with the earlier $50 gift.
• Attendance at the reception does not transform a separately purchased tangible item into hosted entertainment.

Question 87

Topic: Financial Reporting

An established carrying broker-dealer uses the basic net capital method.

Current position:

Management’s proposal:

• Sell its unique headquarters for $5.0 million and lease it back for eight years.
• Retain a fixed-price option to repurchase the same property for $5.2 million. No substantially identical property is readily available.
• Distribute $2.0 million of the proceeds to the parent.
• Treat the transaction as a sale, derecognize the building’s $3.0 million carrying amount, recognize a $2.0 million gain, and eliminate the existing $3.0 million net capital deduction for the building.

Management cites an educational “Ridge” example involving interchangeable property and a fair-value purchase option. That example is not a legal opinion or regulatory authorization.

Applicable requirements:

• The repurchase terms prevent sale accounting if they preclude transfer of control. The proceeds are then recorded as a financing liability included in AI, while the building remains a nonallowable asset.
• The basic-method minimum includes AI/15. After a withdrawal, net capital must remain at least 120% of the fixed-dollar minimum and AI cannot exceed 10 times net capital.
• A withdrawal exceeding 30% of excess net capital and $500,000 requires advance SEC notice. FINRA prior written approval is required for covered withdrawals exceeding 10% of excess net capital in 35 rolling calendar days. All other transaction-specific permissions and numerical safeguards are satisfied.

Which conclusion should the FINOP present?

• A. Account for the proceeds as financing, keep net capital at $5.0 million and AI at $35.0 million, cap the withdrawal at $1.5 million, and file SEC and FINRA notices after payment.
• B. Account for the proceeds as financing, keep net capital at $5.0 million and AI at $35.0 million, allow the $2.0 million withdrawal, and file the SEC advance notice and obtain FINRA prior written approval.
• C. Apply sale accounting, increase net capital to $10.0 million and leave AI at $30.0 million, allow the $2.0 million withdrawal, and obtain FINRA prior written approval.
• D. Account for the proceeds as financing, keep net capital at $5.0 million and AI at $35.0 million, cap the withdrawal at $1.5 million, and file the SEC advance notice and obtain FINRA prior written approval.

Best answer: D

Explanation: Financing treatment preserves the building deduction and increases AI; the 10:1 withdrawal constraint permits $1.5 million after the required notice and approval.

The fixed-price repurchase option for unique property prevents transfer of control, so the arrangement is financing rather than a sale. Cash and the financing liability each increase by $5 million. Net capital remains $5 million, AI becomes $35 million, and the building remains nonallowable.

The variable basic-method minimum is $35 million / 15 = approximately $2.33 million. For withdrawal safeguards, 120% of the $250,000 fixed-dollar minimum is $300,000; the separate AI test is binding here. AI/10 requires at least $3.5 million of post-withdrawal net capital, limiting the distribution to $1.5 million. The facts establish the other safeguards.

Excess net capital is approximately $2.67 million. The $1.5 million distribution exceeds 30% of that amount and $500,000, requiring SEC advance notice. FINRA Rule 4110(c)(2) separately requires prior written approval above 10% in 35 rolling calendar days. All applicable notices and approval must be completed; a different accounting example does not establish this transaction’s treatment.

• A $2 million dividend leaves $3 million net capital against $35 million AI, exceeding 10:1.
• Sale accounting is unavailable under the stated repurchase terms.
• Post-payment notices cannot satisfy the SEC advance-notice or FINRA prior-approval requirement.

Question 88

Topic: Net Capital

A financial and operations principal is reviewing a proprietary debt position for the February 28, 2027 net capital computation.

Inventory record:

Security: Readily marketable nonconvertible corporate bond
Terms: Fixed coupon; maturity February 15, 2028
Status: Not in default or traded flat
Credit review: Firm documented minimal credit risk under its creditworthiness policies
Position: 2,000 bonds at $1,000 face amount each
February 28 clean price: 98.50% of face
Accrued interest receivable: $22,000, recorded separately
January 31 maturity category: At least 1 year but less than 2 years
February draft: January category carried forward
Other adjustments: No offset, concentration, or special treatment

Haircut schedule excerpt:

The rates apply to the security’s clean market value; accrued interest is recorded separately. What is the corrected inventory haircut deduction for February 28, 2027?

• A. $39,400
• B. $98,500
• C. $59,100
• D. $39,840

Best answer: A

Explanation: The bond has less than one year remaining on February 28, so the deduction is 2% of its $1,970,000 clean market value, or $39,400.

The instrument meets the stated fixed-term, marketability and assessed-credit-risk conditions for the nonconvertible corporate-debt schedule. Its maturity category must be determined on the current reporting date rather than carried forward from the prior workpaper. On January 31, 2027, more than one year remained until February 15, 2028, making the 3% bracket appropriate. On February 28, less than one year remained, so the applicable rate became 2%.

Clean market value is 2,000 x $1,000 x 98.50% = $1,970,000. The separately recorded $22,000 of accrued interest is not added to that haircut base. Therefore, the corrected deduction is $1,970,000 x 2% = $39,400.

• $39,840 applies the current 2% rate but incorrectly adds accrued interest to clean market value.
• $59,100 uses clean market value but retains the prior reporting date’s 3% maturity bracket.
• $98,500 applies the 5% two-to-under-three-year band despite less than one year remaining.

Question 89

Topic: Operations and Records

An introducing member clears customer transactions on a fully disclosed basis. Before a confirmation is sent, the carrying member identifies conflicting trade data.

Carrying agreement:

The introducing member supplies complete and accurate trade data, including capacity, remuneration, and security terms, and supervises its sales activity. The carrying member prepares, reviews, and transmits confirmations in the introducing member’s name.

Transaction record:

• A retail customer purchased corporate bonds on a dollar-price basis for $50,500.
• The introducing member contemporaneously purchased the same bonds for its proprietary account at the established $50,000 prevailing market price.
• The transaction is subject to corporate-debt markup disclosure requirements.
• The bonds are callable at 101 beginning next year.
• The draft confirmation identifies an agency trade, a $500 commission, and non-callable bonds. All other fields are accurate.

Which action satisfies the firms’ responsibilities and the confirmation disclosure requirements?

• A. The introducing member records an agency trade, a $500 commission, and callable bonds; the carrying member prepares and transmits the confirmation.
• B. The introducing member records a principal trade, a $500 (1%) markup, and non-callable bonds; the carrying member prepares and transmits the confirmation.
• C. The introducing member records a principal trade, a $500 (1%) markup, and callable bonds; the carrying member prepares and transmits the confirmation.
• D. The carrying member records a principal trade, a $500 (1%) markup, and callable bonds; the introducing member prepares and transmits the confirmation.

Best answer: C

Explanation: The actual transaction is a principal trade requiring markup and call-feature disclosure, while the agreement assigns confirmation preparation and transmission to the carrying member.

A carrying agreement may allocate confirmation preparation and delivery, but it does not change the actual transaction or eliminate the introducing member’s assigned obligations. The introducing member must provide accurate trade data and supervise its sales activity; the carrying member must prepare and transmit the confirmation using accurate information.

Because the introducing member purchased the bonds for its proprietary account and resold them to the customer, it acted as principal rather than agent. The markup is $50,500 minus $50,000, or $500. Dividing $500 by the $50,000 prevailing market price produces 1%. The applicable corporate-debt rules therefore require disclosure of both the dollar and percentage markup. The confirmation must also reflect that the dollar-priced bonds are callable. The carrying member should not transmit the inaccurate draft.

• Reversing preparation and delivery responsibilities conflicts with the written carrying agreement.
• Agency capacity and commission treatment mischaracterize a sale from the member’s proprietary account.
• Describing the bonds as non-callable contradicts their actual terms and the required debt-security disclosure.

Question 90

Topic: Net Capital

A broker-dealer is preparing its net capital computation using the following verified cutoff records:

Net capital cutoff: September 30
Subtotal after all other net capital adjustments,
before treatment of the due-from-affiliate asset: $2,400,000

Amounts already included in the subtotal:
Guarantee payable to bank: $800,000 liability
Due from affiliate for reimbursement: $800,000 asset

Bank demand: Received September 29 and unpaid at cutoff
Counsel confirmation: Guarantee is enforceable against the member
Reimbursement claim: Enforceable but unsecured, with no setoff right
Cash received from affiliate by cutoff: $0

Which net capital treatment and resulting amount are correct?

• A. Report $2.4 million: offset the reimbursement receivable against the guarantee payable because both arose from the same default.
• B. Report $800,000: retain the guarantee payable, deduct the reimbursement receivable, and deduct the guarantee again as a contingent charge.
• C. Report $2.4 million: retain the guarantee payable and treat the written reimbursement receivable as an allowable asset.
• D. Report $1.6 million: retain the guarantee payable and deduct the unsecured reimbursement receivable as a nonallowable asset.

Best answer: D

Explanation: The liability is already recognized, while the separate unsecured reimbursement claim requires an $800,000 deduction from the $2.4 million subtotal.

The bank can enforce the guarantee directly against the broker-dealer. The affiliate’s reimbursement obligation is a separate asset and provides no right to offset the amount owed to the bank. Because the reimbursement claim is unsecured, it is a nonallowable asset for net capital purposes even though counsel considers it enforceable.

The $2.4 million subtotal already reflects both the recorded guarantee liability and the reimbursement receivable. Therefore, the required regulatory adjustment is:

The guarantee should not be deducted again because its liability is already included in the subtotal. Legal enforceability of a receivable does not by itself make that asset allowable for net capital purposes.

• A common default does not create a setoff right between an obligation to the bank and a claim against the affiliate.
• A written, enforceable reimbursement agreement remains nonallowable when the resulting receivable is unsecured.
• A separate contingent charge would double count the guarantee payable already reflected in the capital subtotal.

Question 91

Topic: Financial Reporting

At June 30, 2026, a broker-dealer reports a $480,000 current receivable for expenses allocated to an affiliate.

The financial and operations principal verifies the following:

• The expense allocations and receivable balance are supported by invoices and the written agreement.
• The unsecured balance is payable solely from the affiliate’s operating profits earned through December 31, 2026; any unpaid amount is then extinguished.
• Board-approved forecasts, corroborated by existing contracts, show an operating loss through December 31.
• No guaranty, collateral, offset right, or other repayment source exists.

Assume no tax effect or other adjustment related to this balance. Which pair of quarter-end adjustments is appropriate?

• A. Record a $0 GAAP allowance and a $480,000 net capital deduction.
• B. Record a $480,000 GAAP allowance and a $480,000 additional net capital deduction.
• C. Record a $0 GAAP allowance and a $0 additional net capital deduction.
• D. Record a $480,000 GAAP allowance and a $0 additional net capital deduction.

Best answer: D

Explanation: The evidence supports no expected collection, and the full GAAP allowance leaves no carrying value requiring a separate net capital deduction.

Supporting invoices establish the receivable’s existence and amount, but they do not establish collectibility. The affiliate can repay only from profits earned during the contractual period, reliable forecasts show no such profits, and no alternative repayment source exists. Accordingly, the expected collection is $0, requiring a $480,000 GAAP allowance.

Net capital begins with GAAP net worth and then applies regulatory adjustments. Because the allowance has already reduced both the receivable’s carrying value and GAAP net worth by $480,000, the remaining carrying value is $0. No additional deduction is made for this balance. Deducting the gross receivable again would count the same loss twice. If GAAP had left any carrying value, that remaining amount would require separate analysis under the stricter regulatory allowability standard.

• Deferring the loss to the net capital computation ignores the adverse collectibility evidence relevant to GAAP.
• Taking both a full allowance and a full additional deduction counts the same economic loss twice.
• Treating the balance as allowable relies on its ledger classification rather than its economic substance and conversion to cash.

Question 92

Topic: Financial Reporting

A FINRA member is a fully disclosed introducing broker-dealer, and FINRA is its designated examining authority. The firm markets itself as “non-custodial.”

Quarter ended September 30, 2026:

• The carrying firm maintains customer accounts, holds account assets, and sends statements.
• On September 18, a branch accepted a customer-owned stock certificate with a signed stock power. The branch recorded it on its securities-received blotter, stored it overnight, and delivered it to the carrying firm the next business day.
• Customer checks were payable directly to the carrying firm and forwarded promptly.

Filing calendar: October 12 is excluded as a holiday. All other Monday-Friday dates from October 1 through October 26 are business days.

Which filing treatment is correct?

• A. File quarterly Form Custody with FINRA through FINRA Gateway by Monday, October 26, and disclose receipt of customer securities for prompt transmission.
• B. File quarterly Form Custody with FINRA through FINRA Gateway by Monday, October 26, and report that customer securities were not received because they were promptly forwarded.
• C. File quarterly Form Custody with FINRA through FINRA Gateway by Friday, October 23, and disclose receipt of customer securities for prompt transmission.
• D. File quarterly Form Custody directly with the SEC through EDGAR by Monday, October 26, and disclose receipt of customer securities for prompt transmission.

Best answer: A

Explanation: The seventeenth business day is October 26, and the certificate records establish actual receipt of customer securities.

Form Custody is filed quarterly with the broker-dealer’s designated examining authority within 17 business days after each calendar quarter. Because FINRA is this firm’s designated examining authority, the firm submits the form electronically through FINRA Gateway rather than directly through EDGAR. Excluding the October 12 holiday, October 26 is the seventeenth business day after September 30.

Custody disclosures depend on actual operations, not marketing terminology. The introducing firm physically accepted a customer certificate, recorded it on its securities-received blotter, and stored it overnight. Those facts establish receipt of customer securities even though the firm transmitted the certificate promptly to its carrying firm.

• Prompt forwarding does not eliminate the introducing firm’s actual receipt and overnight possession of the certificate.
• Direct submission through EDGAR does not follow the required channel when FINRA is the designated examining authority.
• October 23 counts the excluded holiday as a business day and is therefore earlier than the seventeenth business day.

Question 93

Topic: Funding and Cash Management

A customer is designated as a pattern day trader. The firm has not adopted the new intraday-margin regime and is using the permitted legacy day-trading rules.

Account record at Monday’s close:

The account holds only margin-eligible common stock, has no outstanding margin calls, and the firm permits the maximum legacy multiplier. What is the account’s day-trading buying power for Tuesday?

• A. $0
• B. $24,000
• C. $12,000
• D. $6,000

Best answer: B

Explanation: The $6,000 prior-day maintenance excess is multiplied by four under the legacy day-trading rules.

Because the firm remains under the transitional legacy regime, day-trading buying power is calculated from maintenance excess at the previous business day’s close. Account equity is $120,000 minus $78,000, or $42,000. The house maintenance requirement is 30% of $120,000, or $36,000. Maintenance excess is therefore $42,000 minus $36,000, or $6,000. Applying the legacy four-times multiplier produces day-trading buying power of $24,000.

The $0 SMA balance may prevent additional ordinary overnight purchases, but SMA does not replace the prior-day maintenance-excess calculation for legacy day-trading buying power. The account also exceeds the legacy $25,000 minimum equity requirement for a pattern day trader.

• $0 incorrectly substitutes the SMA-based overnight purchasing capacity for legacy day-trading buying power.
• $6,000 stops at maintenance excess and omits the legacy four-times multiplier.
• $12,000 applies a two-times multiplier rather than the legacy day-trading multiplier.

Question 94

Topic: Customer Protection

A fully disclosed introducing broker receives a customer’s $40,000 check payable to its carrying broker, Harbor Securities. The introducer forwards the check that day without using the funds, satisfying its prompt-transmission procedure.

Trade and account facts:

• Harbor carries the account as a customer account under Rule 15c3-3.
• Harbor collects the check and credits the customer with 1,000 shares purchased for $40 per share in a regular-way trade.
• The customer has paid in full, but the seller fails to deliver the shares at settlement.
• Harbor’s stock record shows the customer long 1,000 shares and a related 1,000-share fail-to-receive, with no possession-or-control location.

Reserve facts at the computation cutoff:

• Eligible credits excluding this fail-to-receive: $300,000
• Eligible debits after the applicable reduction: $280,000
• Balance in the Special Reserve Bank Account: $50,000
• Use the $40,000 contract value for any applicable reserve treatment of the fail.

Which treatment should Harbor’s financial and operations principal apply?

• A. Treat the 1,000-share fail-to-receive as a satisfactory control location, add a $40,000 reserve credit, deposit $10,000, and monitor delivery.
• B. Record a 1,000-share possession-or-control deficit, make no reserve adjustment, retain $30,000 excess, and resolve the securities deficit through the fail process.
• C. Record a 1,000-share possession-or-control deficit, add a $40,000 reserve debit, show $50,000 excess, and resolve the securities deficit separately.
• D. Record a 1,000-share possession-or-control deficit, add a $40,000 reserve credit, deposit $10,000, and resolve the securities deficit separately.

Best answer: D

Explanation: The fail creates a separate possession-or-control deficit and raises the reserve requirement from $20,000 to $60,000 against $50,000 on deposit.

Prompt transmission of the check satisfies the introducing broker’s handling procedure, but it does not change Harbor’s customer-protection obligations as the carrying broker. Because the customer is fully paid and Harbor has no possession-or-control location for the shares, Harbor must identify and resolve a 1,000-share securities deficit.

The customer-related fail-to-receive is also a reserve-formula credit. Revised credits are $340,000, while adjusted debits remain $280,000. The required reserve is therefore $60,000. With $50,000 already deposited, Harbor has a $10,000 reserve deficiency.

These safeguards remain separate. Funding the reserve deficiency protects customer cash but does not place the missing shares in possession or control. Similarly, action to obtain the securities does not eliminate the reserve credit while the fail remains reportable in the computation.

• Timely transmission does not justify excluding the customer fail-to-receive from the carrying broker’s reserve formula.
• A fail-to-receive is not a satisfactory control location, even when its value is included in reserve credits.
• Treating the fail as a reserve debit reverses its formula classification and creates a false reserve excess.

Question 95

Topic: Financial Reporting

A broker-dealer’s affiliate seeks a loan from Ridge. The member proposes an unconditional guarantee of up to $3,000,000 of principal; no cash will be transferred when the guarantee is executed.

Relevant facts:

• The member has $8,000,000 of excess net capital before the transaction.
• Outside counsel has confirmed the member’s authority to execute the guarantee.
• The accountant concludes that GAAP requires a $300,000 guarantee liability at inception and disclosure of the $3,000,000 maximum exposure.
• No other net capital adjustment applies.

FINRA Rule 4150 requires prior written approval when a guarantee exceeds 25% of the member’s excess net capital.

Which treatment should the financial and operations principal recommend?

• A. Obtain FINRA approval using the $3,000,000 guarantee amount; at inception record a $3,000,000 liability, reduce net capital by $3,000,000, and disclose the $3,000,000 maximum exposure.
• B. Obtain FINRA approval using the $3,000,000 guarantee amount; at inception record the $300,000 liability, reduce net capital by $300,000, and disclose the $3,000,000 maximum exposure.
• C. Proceed without FINRA approval using the $300,000 liability amount; at inception record the $300,000 liability, reduce net capital by $300,000, and disclose the $3,000,000 maximum exposure.
• D. Submit prior written notice using the $3,000,000 guarantee amount; at inception record the $300,000 liability, reduce net capital by $300,000, and disclose the $3,000,000 maximum exposure.

Best answer: B

Explanation: The $3,000,000 guarantee exceeds the $2,000,000 approval threshold, while the recognized $300,000 liability reduces GAAP net worth and net capital.

Rule 4150 measures the approval threshold using the amount guaranteed, not the guarantee’s initially recognized accounting liability. The threshold is $8,000,000 x 25% = $2,000,000. Because the $3,000,000 guarantee exceeds that amount, the member must obtain FINRA’s written approval before executing it.

The lack of an immediate cash payment does not make the transaction an off-book event. Under the supplied GAAP conclusion, the member recognizes a $300,000 liability at inception. Because net capital begins with GAAP net worth, that liability reduces net capital by $300,000 when no separate adjustment applies. The financial statements also disclose the $3,000,000 maximum potential exposure. Counsel addresses authority and enforceability, while the financial and operations principal addresses the member’s approval, reporting, and capital consequences.

• Prior notice alone does not satisfy the stated requirement for written approval above the threshold.
• The approval test uses the $3,000,000 guaranteed obligation, not the $300,000 accounting liability.
• Recording the full principal as the inception liability conflicts with the supplied $300,000 GAAP measurement.

Question 96

Topic: Operations and Records

A FINRA member receives a Rule 8210 request for payroll and commission records during a regulatory examination. The firm will produce the requested records by the stated deadline.

Separately, a former associated person files a federal court complaint alleging:

• Unpaid commissions under the representative agreement
• Age discrimination in violation of the Age Discrimination in Employment Act

The parties have no pre-dispute or post-dispute agreement to arbitrate statutory employment discrimination claims, and the former representative opposes arbitration. Which position is correct under the FINRA Code of Arbitration Procedure for Industry Disputes?

• A. The ADEA claim is subject to FINRA arbitration, while the commission claim may remain in court as a contract dispute.
• B. The commission claim is subject to FINRA arbitration, while the ADEA claim is not compelled under the Code absent an agreement.
• C. Both claims are subject to FINRA arbitration because each arose from employment with a FINRA member.
• D. Neither claim is subject to FINRA arbitration because the statutory discrimination claim was joined in the same complaint.

Best answer: B

Explanation: Rule 13200 covers the employment-related commission dispute, but Rule 13201 excepts the statutory discrimination claim from mandatory arbitration absent an agreement.

FINRA Rule 13200 generally requires arbitration of business-related disputes between members and associated persons. A former representative’s claim for commissions earned under an employment agreement ordinarily falls within that requirement.

Rule 13201 provides different treatment for a claim alleging employment discrimination in violation of a statute. Such a claim is not required to be arbitrated under the Industry Code and may be arbitrated only when the parties have agreed to do so. Here, no applicable agreement exists, so FINRA membership and association alone do not compel arbitration of the ADEA claim.

The Rule 8210 production is a separate regulatory obligation. Producing records to FINRA neither determines the forum for the private claims nor converts the regulatory examination into arbitration discovery.

• Mandatory arbitration of both claims disregards the specific treatment of statutory employment discrimination claims.
• Joining the claims in one complaint does not extend the discrimination exception to the commission dispute.
• Reversing the treatment misclassifies both claims: contractual compensation is ordinarily arbitrable, while the ADEA claim is not compelled here.

Question 97

Topic: Operations and Records

A FINOP receives the following authenticated record request. No responsive record is privileged.

FINRA REQUEST - October 5, 2026
Authority: FINRA Rule 8210; issued by authorized FINRA staff
Scope: Native commission-adjustment logs, approvals, attachments, and metadata for July-September 2026
Production due: October 19, 2026, through FINRA's designated portal
Preservation: Preserve all responsive material immediately
Extensions: Effective only if granted in writing by the requesting staff

ADMINISTRATOR AGREEMENT
Data rights: All stored data belong to the member. On written direction, the administrator must preserve and export requested files.
Current storage: The administrator holds the only copies.

PRIVATE ARBITRATION
Claimant seeks overlapping records; no discovery order or confidentiality ruling has been entered.

Which response should the FINOP direct for the member?

• A. Direct the administrator to preserve and export the responsive records, verify completeness, and produce them first through arbitration discovery before responding through FINRA’s portal.
• B. Direct the administrator to preserve the responsive records, document their third-party custody, and ask FINRA staff to obtain them directly while the firm monitors the transfer.
• C. Direct the administrator to preserve and export the responsive records, verify completeness, and produce them through FINRA’s portal by October 19 while separately addressing arbitration discovery.
• D. Direct the administrator to preserve and export the responsive records, verify completeness, and provide FINRA an index and summary pending a formal subpoena for the files.

Best answer: C

Explanation: The records are within the member’s control, so the member must preserve and timely produce them despite the administrator’s physical custody and the separate arbitration.

FINRA Rule 8210 requires a member to provide requested books, records, and information to authorized FINRA staff. Physical possession is not decisive when records remain within the member’s custody or control. Here, the agreement establishes control because the data belong to the member and the administrator must export them at the member’s direction.

The member should immediately preserve the material, obtain the native files and associated metadata, verify that the production covers the stated scope, and submit it through the designated channel by the deadline. If compliance cannot be completed on time, the member must contact the requesting staff and obtain a written extension. A private arbitration does not stay or replace the regulatory obligation. Rule 8210 is itself sufficient authority for production; FINRA need not first subpoena the administrator.

• Giving arbitration discovery priority improperly treats the private proceeding as superseding the regulatory deadline.
• Referring FINRA to the administrator ignores the member’s contractual control over the records.
• Providing only an index and summary does not satisfy a request for the underlying native files, and no subpoena is required.

Question 98

Topic: Operations and Records

A carrying broker-dealer’s financial and operations principal receives a surveillance exception involving two LLC accounts for which the same associated person has written trading discretion.

Trading pattern:

• On four consecutive days, equal and opposite orders were entered within seconds and crossed internally at the same price.
• The trades were reversed later each day at approximately the original price.
• Both accounts ended each day with their opening positions, and their combined result consisted primarily of commissions and fees.
• The transactions represented 24% of the security’s reported consolidated volume.
• The accounts have different names, but their ultimate beneficial ownership and control records have not been compared.

Which classification and review plan should the principal adopt?

• A. Classify the pattern as potential marking-the-close manipulation; review execution timing, closing-price effects, valuation-sensitive positions, auction records, communications, and end-of-day order instructions.
• B. Classify the pattern as potential layering or spoofing; review displayed-order size, cancellation timing, opposite-side fills, order-book effects, communications, and order-entry identifiers.
• C. Classify the pattern as potential artificial-volume manipulation through wash or matched trades; review beneficial ownership, account control, audit-trail timing, trade reports, communications, and economic exposure.
• D. Classify the pattern as potential excessive trading for compensation; review turnover, cost-to-equity, account objectives, discretionary authority, commissions, communications, and transaction-frequency approvals.

Best answer: C

Explanation: The offsetting and reversed trades created substantial reported volume without an apparent economic purpose, making ownership, control, and order evidence central to the review.

Repeated equal-and-opposite executions, same-day reversals, unchanged ending positions, and substantial reported volume indicate possible wash or matched trading intended to create an artificial appearance of market activity. FINRA Rule 5210 requires published transaction reports to represent bona fide purchases and sales, while Exchange Act Section 9(a)(1) addresses wash sales and matched orders undertaken for a manipulative purpose.

Different account names do not establish independent beneficial ownership or economic interests. The principal should correlate ownership and control records with the order audit trail, execution timestamps, trade reports, order-entry identifiers, communications, and account-level gains, losses, and fees. This evidence helps determine whether the transactions had a legitimate economic purpose or were coordinated to inflate volume and whether supervisory or regulatory escalation is required.

• Marking the close generally requires evidence that trading targeted or influenced a closing price, which the pattern does not establish.
• Layering or spoofing ordinarily involves non-bona fide displayed orders, cancellations, and resulting executions, rather than completed offsetting crosses.
• Excessive trading focuses on account turnover, customer interests, and compensation; it does not adequately explain the coordinated artificial-volume pattern.

Question 99

Topic: Operations and Records

A broker-dealer is revising its monthly net capital review process after an internal inspection produced the following record.

Firm: Established 4 years; basic net capital method
Business: Fully disclosed introducer
Handling: Receives customer stock certificates and transmits them the next business day
Customer funds: No checks or other funds payable to the member
Aggregate indebtedness: $450,000
Reported net capital: $78,000
Fixed minimum used: $5,000
Required minimum reported: $30,000
Preparer: Series 99 Operations Professional
FINOP review: Viewed final summary and entered an electronic approval
Supporting review evidence: No reconciliations, tests, or review annotations retained

The firm’s written procedures require documented FINOP review before filing. Which revised workflow best satisfies the member’s supervisory responsibility while preserving permissible delegation?

• A. Retain analyst preparation; the FINOP approves each filing from the completed checklist, then quarterly reviews source reconciliations, key deductions and haircuts, and the greater of $50,000 or AI/15.
• B. Retain analyst preparation; before filing, the FINOP reviews source reconciliations, tests key deductions and haircuts, confirms the greater of $5,000 or AI/15, and documents conclusions.
• C. Retain analyst preparation; before filing, the FINOP reviews source reconciliations, tests key deductions and haircuts, confirms the greater of $50,000 or AI/15, and documents conclusions.
• D. Retain analyst preparation; before filing, an operations supervisor reviews source reconciliations, tests key deductions and haircuts, confirms the greater of $50,000 or AI/15, and certifies to the FINOP.

Best answer: C

Explanation: Preparation may be delegated, but the FINOP must meaningfully review the work before filing and apply the $50,000 activity-based minimum.

A qualified Operations Professional may prepare the computation, but delegation does not transfer the member’s responsibility for FINOP supervision, final preparation, and accuracy. Meaningful principal review should occur before filing and leave evidence showing what was reviewed, tested, and concluded. Viewing only the final summary and recording an approval is insufficient.

Because the established firm uses the basic method, its variable requirement is aggregate indebtedness divided by 15: $450,000 / 15 = $30,000. The firm receives customer securities for prompt transmission, so the applicable activity-based fixed minimum is $50,000 rather than the $5,000 minimum available to a qualifying introducer that does not receive customer funds or securities. The required minimum is therefore the greater amount, $50,000. Reported net capital of $78,000 exceeds that amount, but the FINOP must still correct the classification and maintain evidence of substantive review.

• The $5,000 minimum is unavailable because the firm actually receives customer securities.
• Detailed checking by an operations supervisor does not replace meaningful review by the FINOP.
• A quarterly retrospective review does not support the required principal approval before each filing.

Question 100

Topic: Financial Reporting

A broker-dealer uses trade-date accounting for proprietary securities and measures them at fair value through earnings. On Tuesday, June 30, 2026, it purchases 10,000 shares of a readily marketable stock for $20 per share in a regular-way transaction settling Wednesday, July 1.

June 30 facts:

• The stock’s closing quoted price is $21 per share.
• The securities subledger records the purchase on June 30.
• The cash ledger will record the $200,000 payment on July 1.
• Cash before settlement is $500,000.
• There are no transaction costs or other relevant activity.

Which balances should the financial and operations principal report at June 30 after reconciling the ledgers?

• A. Securities owned of $210,000, no settlement payable, cash of $300,000, and trading gain of $10,000
• B. Securities owned of $200,000, settlement payable of $200,000, cash of $500,000, and no trading gain
• C. Securities owned of $210,000, settlement payable of $200,000, cash of $500,000, and trading gain of $10,000
• D. No securities owned, no settlement payable, cash of $500,000, and no trading gain

Best answer: C

Explanation: Trade-date recognition creates the security and payable, while fair-value measurement produces a $10,000 gain and cash remains unchanged until settlement.

A regular-way proprietary purchase is recognized on the trade date even though cash moves on the settlement date. On June 30, the broker-dealer initially records securities owned and a settlement payable of $200,000. The closing fair value is 10,000 shares x $21, or $210,000. Therefore, the position produces a $10,000 unrealized trading gain in current earnings.

Cash remains $500,000 because settlement occurs July 1. On that date, the firm will reduce cash by $200,000 and extinguish the payable. It must not record another purchase, inventory increase, or trading gain at settlement because doing so would duplicate the transaction.

• Reducing cash on June 30 records the settlement movement one day too early and omits the related payable.
• Deferring the entire transaction until July 1 incorrectly applies settlement-date recognition.
• Reporting the position at its $200,000 cost omits the required $10,000 fair-value adjustment.

Questions 101-125

Question 101

Topic: Customer Protection

Two carrying broker-dealers have identical balances for their Rule 15c3-3 customer reserve computations. Firm Daily validly elected the 2% debit reduction available with daily computations. Firm Weekly is permitted to compute weekly and uses the ordinary 3% debit reduction.

Customer reserve data:

The concentration reduction is the final amount determined after applying the applicable concentration tests, and no other adjustments apply. Which comparison of the required customer reserve amounts is correct?

• A. Firm Daily requires $4.46 million, and Firm Weekly requires $3.64 million.
• B. Firm Daily requires $3.76 million, and Firm Weekly requires $4.64 million.
• C. Firm Daily requires $1.68 million, and Firm Weekly requires $2.52 million.
• D. Firm Daily requires $3.64 million, and Firm Weekly requires $4.46 million.

Best answer: D

Explanation: Eligible debits are $82 million before the respective 2% and 3% final debit reductions, producing reserve requirements of $3.64 million and $4.46 million.

First exclude the $2 million unsecured debit and apply the $6 million collateral concentration reduction. Formula-eligible debits before the final percentage reduction are therefore $90 million - $2 million - $6 million = $82 million.

Firm Daily applies its elected 2% reduction: $82 million x 98% = $80.36 million of adjusted debits. Its reserve requirement is $84 million - $80.36 million = $3.64 million.

Firm Weekly applies the ordinary 3% reduction: $82 million x 97% = $79.54 million of adjusted debits. Its reserve requirement is $84 million - $79.54 million = $4.46 million. Because a larger debit reduction produces fewer allowable debits, the 3% arrangement produces the larger reserve requirement despite identical underlying balances.

• Reversing the two results incorrectly treats the 2% election as producing the larger reserve requirement.
• Applying the concentration adjustment after the percentage reduction uses the wrong sequence; both restrictions precede the final debit reduction.
• Retaining the unsecured balance as an eligible debit overstates allowable debits and understates both reserve requirements.

Question 102

Topic: Net Capital

An established carrying broker-dealer uses the basic net capital method. Its applicable minimum dollar net capital requirement is $250,000, which exceeds its variable requirement.

Proposed distribution:

• Current net capital: $900,000
• Current excess net capital: $650,000
• Cash distribution: $600,000
• Post-distribution aggregate indebtedness: $2,400,000
• Applicable haircut deductions: $800,000
• The capital being withdrawn was contributed more than one year ago.
• No subordinated repayments or other withdrawals are scheduled.

The firm can timely satisfy the SEC advance-notice requirement and the separate FINRA notification requirements. FINRA has granted the required prior written approval for this distribution and has imposed no additional restriction.

Which conclusion regarding the proposed distribution is correct?

• A. Proceed with the $600,000 distribution while satisfying all required SEC and FINRA notices.
• B. Proceed with the distribution after SEC notice alone because aggregate indebtedness remains below 10:1.
• C. Reduce the distribution to $525,000 because a carrying member must retain $375,000.
• D. Reduce the distribution because post-withdrawal net capital must exceed $300,000.

Best answer: A

Explanation: Post-distribution net capital equals the $300,000 fixed-floor safeguard, and the other withdrawal tests are satisfied.

The post-withdrawal net capital is $900,000 - $600,000 = $300,000. The fixed-floor safeguard is 120% of $250,000, also $300,000. Rule 15c3-1(e) prohibits a withdrawal that would leave net capital less than this amount, so equality satisfies the test.

The remaining numerical safeguards also pass. Aggregate indebtedness would be $2,400,000 / $300,000 = 8:1, below the 10:1 withdrawal limit. Net capital would equal 37.5% of the $800,000 haircut deductions, exceeding the applicable 25% test.

Because the $600,000 withdrawal exceeds 30% of $650,000 in excess net capital and exceeds $500,000, SEC advance notice is required. Separate FINRA notification obligations also apply, including the condition arising when a carrying member falls below 150% of its minimum dollar requirement. These notices do not authorize an otherwise prohibited withdrawal, but the substantive withdrawal tests are satisfied here.

The stated prior written FINRA approval satisfies Rule 4110(c)(2); it is separate from both SEC notices and the Rule 4120 threshold notification.

• Requiring capital to exceed $300,000 incorrectly treats an inclusive minimum as a strict greater-than requirement.
• Satisfying the aggregate-indebtedness test does not eliminate the separate FINRA notification obligations.
• The $375,000 amount is a FINRA notification threshold, not the SEC’s post-withdrawal fixed floor.

Question 103

Topic: Operations and Records

Harbor Clearing, a carrying broker-dealer, purchased 1,000 shares from Cedar Securities for a fully paid customer account.

Trade and account facts:

• The trade occurred Monday, August 10, 2026, with regular-way settlement on Tuesday, August 11.
• Cedar did not deliver the shares on settlement date, leaving Harbor with a fail-to-receive.
• Harbor’s customer has no margin deficiency, and no other mandatory close-out rule applies.

Supplied buy-in procedure:

The buyer may execute a buy-in no sooner than the third business day following the date delivery was due. The seller must receive notice by noon, its local time, two business days before execution.

Cedar received Harbor’s notice at 11:30 a.m. on Wednesday, August 12. The notice specified a Friday, August 14 buy-in. There are no holidays, Cedar has not delivered the shares, and no extension has been granted.

Which action should Harbor’s principal approve?

• A. Execute the market buy-in on Friday for Cedar’s account and liability.
• B. Post the securities as received Friday and close Cedar’s fail-to-deliver balance.
• C. Sell the customer’s shares Friday and apply the proceeds against Cedar’s fail.
• D. Execute the market buy-in on Monday for Cedar’s account and liability.

Best answer: A

Explanation: Friday is the third business day after delivery was due, and Cedar received timely notice two business days before execution.

Delivery was due Tuesday. The business days following the due date are Wednesday, Thursday and Friday, making Friday the earliest permitted buy-in date. Cedar received the notice before noon on Wednesday, which satisfies the requirement for notice two business days before Friday execution.

The buy-in is a contractual remedy exercised by Harbor, as buyer, for Cedar’s account and liability as the failing seller. It does not depend on liquidating the fully paid customer’s position. Harbor also cannot eliminate the fail merely by recording the securities as received because the notice is not evidence of delivery. The accounting records must continue to reflect the unresolved fail until delivery or the buy-in transaction resolves it.

• Waiting until Monday is unnecessary because the Wednesday notice was timely for the earliest permitted Friday execution.
• Posting a receipt would misstate the records because Cedar has not delivered securities.
• Selling the fully paid customer’s position is not a substitute for enforcing Cedar’s delivery obligation.

Question 104

Topic: Net Capital

A broker-dealer is preparing its net capital computation as of August 31, 2026. Its draft computation includes neither an adjustment for the stock nor the guarantee described below.

Supporting records:

• Restricted stock:
  • Carrying value included in GAAP net worth: $400,000
  • Quoted value of unrestricted shares of the same class: $500,000
  • Acquisition date: January 15, 2026
  • Contractual resale lockup expires: January 14, 2027
  • Counsel confirms no waiver or permitted public resale at the cutoff.
  • No exception to the restricted-security deduction applies.
• Affiliate guarantee:
  • Maximum obligation: $60,000
  • The affiliate defaulted before the cutoff.
  • Counsel and the firm’s accountant conclude that full payment is probable, estimable and recognizable under GAAP at the cutoff.
  • The controller omitted the liability because payment had not yet occurred.

By how much should the financial and operations principal reduce the currently reported net capital?

• A. Reduce net capital by $400,000.
• B. Reduce net capital by $460,000.
• C. Reduce net capital by $135,000.
• D. Reduce net capital by $120,000.

Best answer: B

Explanation: The active lockup requires a $400,000 carrying-value deduction, and the omitted $60,000 GAAP liability produces a total $460,000 reduction.

The position remains contractually restricted on the August 31 cutoff date, even though the broker-dealer has held it for more than six months and unrestricted shares have a public quote. Because no exception applies, the restricted position does not qualify for the ordinary 15% readily marketable common-stock haircut. Its full $400,000 carrying value must be deducted.

The guarantee must also be recognized because the affiliate defaulted before the cutoff and reliable records establish a probable, estimable $60,000 obligation. Net capital begins with corrected GAAP net worth, so the omitted liability reduces net worth before regulatory deductions are applied.

The required reduction is:

A quote for unrestricted shares does not make the broker-dealer’s contractually restricted shares readily marketable.

• The $400,000 amount recognizes the restricted-stock deduction but omits the guarantee liability.
• The $135,000 amount combines the liability with a 15% haircut on the unrestricted-share quote, which does not govern the restricted position.
• The $120,000 amount combines the liability with a 15% haircut on carrying value, incorrectly treating the stock as readily marketable.

Question 105

Topic: Operations and Records

A carrying broker-dealer executed a customer’s purchase of 500 shares as agent on an exchange and charged the authorized $40 commission. The price, quantity, settlement date, and trade records are correct.

The customer received an electronic confirmation stating that the member acted as principal and showing no commission. Operations discovers the clerical error the next business day. The firm’s recordkeeping system can preserve and link multiple confirmation versions.

Which procedure should the financial and operations principal require?

• A. Deliver a supplemental notice identifying agency capacity and the $40 commission, link it to the original trade, and retain both communications without issuing a replacement confirmation.
• B. Deliver a corrected confirmation reflecting agency capacity and the $40 commission, reuse the original identifier, designate the corrected image as the sole official copy, and retain the approval.
• C. Enter a cancel-and-rebill record reflecting agency capacity and the $40 commission, link the resulting confirmations to the original trade, and retain the complete transaction sequence.
• D. Deliver a corrected confirmation reflecting agency capacity and the $40 commission, label it as corrected, link it to the original trade, and retain both versions.

Best answer: D

Explanation: This procedure corrects the customer disclosure while preserving a traceable record of both the original confirmation and its correction.

A customer confirmation must accurately disclose the member’s capacity and, for an agency transaction, the commission charged. Because the member acted as agent and charged $40, the customer must receive a corrected confirmation containing those facts.

The underlying execution was accurate, so the firm should not create a cancel-and-rebill transaction. Because the inaccurate confirmation was already delivered, it remains part of the transaction history and should not be overwritten or discarded. The firm should preserve the original and corrected versions, identify the later document as a correction, and link both to the same trade. This approach supports reconstruction of the transaction and its correction under the broker-dealer recordkeeping requirements.

• Treating the corrected image as the sole official copy removes the previously delivered confirmation from the preserved record.
• A supplemental notice limited to changed fields does not replace the inaccurate customer confirmation with a complete corrected confirmation.
• Cancel-and-rebill processing would record a transaction change even though the execution and trade terms remained valid.

Question 106

Topic: Net Capital

A broker-dealer is preparing its September 14, 2026 net capital computation.

• SEC registration became effective 15 months ago.
• The firm began commercial operations 9 months ago.
• It elected the basic method.
• Aggregate indebtedness is $4,800,000.
• Its activity-based fixed minimum is $250,000.
• Aggregate debit items before the reserve-formula debit reduction are $18,000,000.

What is the firm’s required minimum net capital?

• A. $360,000
• B. $540,000
• C. $320,000
• D. $600,000

Best answer: C

Explanation: Effective SEC registration was more than 12 months earlier, so $4,800,000 / 15 = $320,000 exceeds the $250,000 fixed minimum.

FINRA interpretation 15c3-1(a)(1)(i)/01 treats the effective date of SEC registration as the date business commenced for the first-year capital ratio. Delaying commercial operations does not restart that clock. The registration here is more than 12 months old.

Under the basic method, required capital is the greater of $250,000 and $4,800,000 / 15 = $320,000. Thus $320,000 controls. The 8:1 first-year limit is no longer applicable. Aggregate debit items determine the alternative-method variable minimum, not this basic-method requirement.

• $600,000 incorrectly starts the first-year clock at the later commercial launch.
• Applying a percentage of debit items substitutes a different capital method or a reserve adjustment.
• The fixed minimum cannot replace a higher applicable variable requirement.

Question 107

Topic: Funding and Cash Management

A carrying broker-dealer adopted FINRA’s new intraday-margin framework on July 1, 2026 and no longer applies the transitional legacy pattern-day-trader provisions.

On Monday, August 10, 2026, a customer’s margin account has the following results:

• Intraday activity: Required intraday margin is $22,000, and qualifying intraday margin excess is $14,000.
• Overnight position: The customer retains a $50,000 long equity purchase. The Regulation T initial-margin requirement is 50%, and $16,000 of margin equity is available for the purchase.
• Applicable procedures: An intraday-margin deficiency must be met within five business days after the deficiency date. The Regulation T payment period is T+3 from the trade date. The calls are calculated and monitored separately, no extensions apply, and every day from August 10 through August 17 is a business day except Saturday and Sunday.

Which calls should the firm record?

• A. Record a $9,000 intraday-margin call due August 17 and an $8,000 Regulation T call due August 13.
• B. Record an $8,000 intraday-margin call due August 17 and a $9,000 Regulation T call due August 13.
• C. Record an $8,000 intraday-margin call due August 13 and a $9,000 Regulation T call due August 17.
• D. Record a $25,000 legacy minimum-equity call due August 17 and a $9,000 Regulation T call due August 13.

Best answer: B

Explanation: The intraday deficiency is $22,000 minus $14,000, while the overnight call is 50% of $50,000 minus $16,000, with each using its stated deadline.

The adopted intraday-margin framework and Regulation T impose separate requirements. The intraday deficiency is:

Counting five business days after Monday, August 10 produces a due date of Monday, August 17.

The overnight long equity position remains subject to Regulation T even though it arose from an account with intraday activity. Its required initial margin is 50% of $50,000, or $25,000. After applying $16,000 of available margin equity, the Regulation T call is $9,000. The T+3 payment date for the Monday trade is Thursday, August 13.

Because the firm adopted the new framework, it does not impose the legacy $25,000 pattern-day-trader minimum. The new intraday obligation also does not replace or change the payment deadline for an overnight purchase.

• Assigning August 13 to the intraday call and August 17 to the Regulation T call reverses the two deadlines.
• Assigning $9,000 to intraday activity and $8,000 to the overnight position reverses the calculation bases.
• Applying a $25,000 minimum-equity call incorrectly imports the legacy pattern-day-trader requirement into the adopted framework.

Question 108

Topic: Operations and Records

A broker-dealer is reviewing its 2026 records for business-related benefits provided after March 30 to an employee of an institutional client.

• One associated person sent a gift basket costing $70.
• Another gave the employee two concert tickets and did not attend. Each ticket cost the firm $90 and had a face value of $105.
• A third sent a professional book costing $35.
• The third associated person later attended an ordinary business dinner with the employee. The employee’s allocated dinner cost was $90, and the event qualified as legitimate hosted entertainment.

Which conclusion should the financial and operations principal reach under FINRA Rule 3220?

• A. Record $285 in aggregated gifts and identify no annual excess.
• B. Record separate giver totals of $70, $210, and $35 and identify no annual excess.
• C. Record $315 in aggregated gifts and identify a $15 annual excess.
• D. Record $405 in aggregated gifts and identify a $105 annual excess.

Best answer: C

Explanation: The gifts total $315 because the unhosted tickets are valued at $210, while the hosted dinner is excluded.

FINRA Rule 3220 limits business-related gifts to $300 per recipient per year. Gifts from the member and its associated persons must be aggregated for the same recipient.

Because the associated person did not attend the concert, the tickets are gifts rather than hosted entertainment. Event tickets are valued at the higher of cost or face value, so the tickets are valued at \(2 \times \$105 = \$210\). Adding the $70 basket and $35 book produces total gifts of $315, which exceeds the annual limit by $15.

The $90 dinner is not included in the gift total because the associated person attended and the facts classify it as legitimate hosted entertainment.

• The $285 total incorrectly values the concert tickets at their lower purchase cost.
• The $405 total incorrectly includes legitimate hosted entertainment in the gift calculation.
• Separate giver totals ignore the requirement to aggregate gifts from the firm and its associated persons by recipient.

Question 109

Topic: Net Capital

A carrying broker-dealer has a valid election to use the alternative net capital method. Compliance confirmed that its applicable fixed minimum is $250,000 and that no higher activity-based minimum applies.

Month-end capital record:

Qualifying aggregate debit items:          $42,000,000
Aggregate indebtedness:                    $12,000,000
Net capital:                                  $900,000

Prepared schedule:
2% x aggregate indebtedness:                  $240,000
Fixed minimum:                                $250,000
Reported required minimum:                    $250,000
Reported excess net capital:                  $650,000

The qualifying aggregate debit amount reflects all applicable classification adjustments. Which correction accurately states the required minimum and excess net capital?

• A. Use qualifying aggregate debit items; required minimum $840,000 and excess net capital $60,000.
• B. Use aggregate indebtedness under the elected method; required minimum $250,000 and excess net capital $650,000.
• C. Use the basic-method aggregate indebtedness divisor; required minimum $800,000 and excess net capital $100,000.
• D. Use debit items after a 3% reserve reduction; required minimum $814,800 and excess net capital $85,200.

Best answer: A

Explanation: The alternative method requires 2% of $42,000,000, or $840,000, which exceeds the $250,000 floor.

A broker-dealer using the alternative method compares its applicable fixed minimum with 2% of qualifying aggregate debit items. Aggregate indebtedness is not the denominator under this method.

The variable requirement is 2% x $42,000,000 = $840,000. Because $840,000 exceeds the $250,000 fixed minimum, $840,000 controls. With net capital of $900,000, excess net capital is $900,000 - $840,000 = $60,000.

Aggregate indebtedness is used under the basic method, generally through the AI/15 or AI/8 test as applicable. The reserve formula’s ordinary debit reduction is also a separate calculation and should not be substituted into the alternative-method capital requirement when the record already provides qualifying aggregate debit items.

• Retaining the $250,000 result incorrectly applies the 2% factor to aggregate indebtedness.
• Using AI/15 applies the basic-method variable requirement despite the valid alternative-method election.
• Applying another 3% reduction improperly mixes the reserve adjustment with the stated capital denominator.

Question 110

Topic: Net Capital

An established broker-dealer uses the basic method under SEC Rule 15c3-1. Review its capital record.

Which result correctly states the firm’s minimum net capital requirement and its current excess or deficiency?

• A. A $250,000 requirement and a $182,000 deficiency
• B. A $112,500 requirement and a $44,500 deficiency
• C. A $50,000 requirement and an $18,000 excess
• D. A $60,000 requirement and an $8,000 excess

Best answer: D

Explanation: The $60,000 variable requirement exceeds the $50,000 activity-based floor, leaving $8,000 of excess net capital.

Because the firm is established and uses the basic method, its variable minimum is aggregate indebtedness divided by 15. The calculation is $900,000 / 15 = $60,000. Receiving customer securities solely for prompt transmission places this introducing firm in the $50,000 fixed-minimum category. The required net capital is the greater of the variable requirement and the applicable fixed floor, so the requirement is $60,000. Comparing current net capital with that requirement gives $68,000 - $60,000 = $8,000 of excess net capital. The 8:1 aggregate-indebtedness limit applies during a firm’s first 12 months, while the $250,000 minimum generally relates to different business activities or the alternative-method floor.

• The $50,000 result applies only the activity-based floor and omits the higher aggregate-indebtedness requirement.
• The $112,500 result uses the 8:1 first-year limit even though the firm has operated for five years.
• The $250,000 result imports a minimum associated with a different capital method or business model.

Question 111

Topic: Financial Reporting

A FINOP reviews the following filing record for a fully disclosed introducing broker that does not hold customer funds or securities.

Filing profile:

• FINRA is the firm’s designated examining authority.
• The firm files FOCUS Part IIA quarterly.
• The report is due 17 business days after quarter-end through FINRA Gateway.
• The reporting period ended Wednesday, September 30, 2026.

Preparation record:

The outside CPA used estimates for unsupported commission receivables and accrued expenses. The missing records will be available October 22.

The CPA’s engagement includes preparing and transmitting regulatory filings.

October 2026 counting schedule:

Countable weekdays: October 1-2, 5-9, 13-16, 19-23, 26-30
Excluded holiday:   October 12
Weekends:           Excluded

Which action best fulfills the member’s filing obligation?

• A. Complete the missing records, correct and review the Q3 Part IIA, and ensure filing through FINRA Gateway by October 26, with the member retaining responsibility.
• B. Complete the missing records, correct and review the Q3 Part IIA, and ensure filing through SEC EDGAR by October 26, with the member retaining responsibility.
• C. Complete the missing records, correct and review the Q3 Part IIA, and ensure filing through FINRA Gateway by October 27, with the member retaining responsibility.
• D. File the estimated Q3 Part IIA through FINRA Gateway by October 26, then correct it after receiving support, with the CPA responsible under the engagement.

Best answer: A

Explanation: October 26 is the 17th business day, and outsourcing preparation or transmission does not transfer the member’s responsibility for an accurate, timely FINRA Gateway filing.

The quarterly FOCUS Part IIA covers the period ended September 30. Counting eligible weekdays after quarter-end while excluding October 12 makes October 26 the 17th business day. Because FINRA is the firm’s designated examining authority, the required submission channel is FINRA Gateway, not SEC EDGAR.

A member may engage an outside accountant to prepare or transmit a regulatory filing, but the engagement does not transfer the member’s regulatory responsibility. The FINOP must ensure that material balances are supported, the report is accurate, and the filing is timely. Here, the missing records become available before the deadline, allowing the firm to replace the estimates and review the completed report before submission.

• Filing unsupported estimates treats the CPA engagement as transferring responsibility that remains with the member.
• SEC EDGAR is not the designated channel for this FINRA-member FOCUS filing.
• October 27 is late because October 26 is already the 17th countable business day.

Question 112

Topic: Operations and Records

An operations principal compares an authoritative execution ticket with a draft confirmation for a customer purchase.

Execution ticket:

Capacity: Agent
Security: 6% corporate bonds, $1,000 denomination
Quantity: 50 bonds ($50,000 face amount)
Price: 98.25% of par
Commission: $1.50 per bond
Accrued interest: 37 days, 30/360 basis

Draft customer confirmation:

Principal amount: $49,125.00
Accrued interest: $308.33
Commission: $1.50 per bond
Net amount due: $49,434.83

Which correction should the principal require before the confirmation is delivered?

• A. Keep the net amount at $49,434.83; include $1.50 commission and $308.33 accrued interest.
• B. Change the net amount to $49,502.94; include $75.00 commission and $302.94 accrued interest.
• C. Change the net amount to $49,433.33; include $308.33 accrued interest and exclude the commission.
• D. Change the net amount to $49,508.33; include $75.00 commission and $308.33 accrued interest.

Best answer: D

Explanation: The purchase cost is $49,125.00 principal plus $308.33 accrued interest plus $75.00 commission, producing $49,508.33.

Because the member acted as agent on a customer purchase, the commission and accrued interest are added to the principal amount. The bond price is a percentage of face amount, so principal is $50,000 x 0.9825 = $49,125.00. Accrued interest is based on face amount: $50,000 x 0.06 x 37 / 360 = $308.33. The commission is quoted per bond, so it equals 50 x $1.50 = $75.00. Therefore, the customer owes $49,125.00 + $308.33 + $75.00 = $49,508.33. The draft amount applied the $1.50 commission only once, understating the amount due by $73.50.

• Treating the commission as $1.50 total ignores its per-bond basis and understates the charge by $73.50.
• Applying the coupon rate to the purchase principal is incorrect because accrued interest is calculated from face amount.
• Excluding the commission omits remuneration charged on the agency execution ticket.

Question 113

Topic: Financial Reporting

A broker-dealer receives shared technology services through an affiliated service company. The services were fully consumed during the quarter.

Agreement and evidence:

• The written expense-sharing agreement allocates vendor costs according to each user’s transaction volume and requires settlement of overpayments.
• The service company paid a supported vendor invoice of $960,000, with no markup.
• Verified system logs show 180,000 broker-dealer transactions and 420,000 transactions for the other affiliated user.
• The broker-dealer paid the service company $300,000 during the quarter.
• The controller initially used headcount, allocating 40% of the cost and leaving an $84,000 payable after recording the payment.

For the quarter-end GAAP trial balance, before net capital adjustments, which expense and intercompany balance should the broker-dealer report after correction?

• A. Recognize $384,000 of technology expense and an $84,000 payable to the affiliate.
• B. Recognize $288,000 of technology expense and a $12,000 receivable from the affiliate.
• C. Recognize $300,000 of technology expense and no remaining intercompany balance.
• D. Recognize $288,000 of technology expense and an $84,000 payable to the affiliate.

Best answer: B

Explanation: Transaction records allocate 30% of the $960,000 cost, and the $300,000 payment exceeds the resulting $288,000 obligation by $12,000.

The recorded expense should reflect the allocation method in the written agreement as supported by verifiable transaction records. The broker-dealer generated 180,000 of 600,000 total transactions, so its allocation percentage is 30%. Its expense is therefore $960,000 x 30% = $288,000.

The broker-dealer paid $300,000, which is $12,000 more than its allocated obligation. Because the agreement requires overpayments to be settled, the excess is an intercompany receivable. The original $384,000 headcount allocation overstated expense by $96,000. The correction debits the existing $84,000 payable and a $12,000 affiliate receivable, while crediting technology expense by $96,000.

• The $384,000 expense and $84,000 payable retain the unsupported headcount allocation.
• The $288,000 expense with an $84,000 payable corrects the allocation but fails to adjust the intercompany balance for the payment.
• The $300,000 expense with no balance treats cash paid as expense rather than applying accrual accounting and the contractual allocation method.

Question 114

Topic: Customer Protection

A carrying broker-dealer maintains customer and PAB reserve computations. Its account file contains the following record:

Account title: Stonegate Advisers LLC - Institutional Professional Account
Legal and beneficial owner: Stonegate Advisers LLC
Regulatory status: SEC-registered investment adviser; not a broker-dealer,
municipal securities dealer, or government securities broker-dealer
Capacity: Investment of Stonegate's corporate surplus; no advisory-client assets
Relationship: Unaffiliated with the carrying broker-dealer
Custody: The carrying broker-dealer holds the funds and securities for Stonegate

Under SEC Rule 15c3-3, how should the carrying broker-dealer classify this account for reserve-account population purposes?

• A. Classify it as a customer account and include qualifying balances in the customer reserve computation.
• B. Classify it as an advisory-client omnibus account and allocate reserve treatment by underlying client status.
• C. Classify it as a noncustomer institutional account and omit its balances from both reserve computations.
• D. Classify it as a PAB account and include qualifying balances in the separate PAB reserve computation.

Best answer: A

Explanation: Stonegate is a customer because the broker-dealer holds assets for it and its investment-adviser status is not an exclusion from the customer definition.

Rule 15c3-3 classification depends on the account holder’s actual legal status and capacity, not labels such as professional or institutional. A customer generally includes a person for whom the broker-dealer holds funds or securities, subject to specified exclusions for broker-dealers and certain securities dealers.

Stonegate is an investment adviser, but it is not registered in any of the excluded dealer capacities. The account contains Stonegate’s own corporate assets, so Stonegate is the relevant beneficial owner. Its proprietary ownership of the assets does not make the account PAB, because PAB treatment concerns proprietary securities accounts of broker-dealers. The qualifying balances therefore belong in the customer reserve computation. If Stonegate instead held the account for advisory clients, the account capacity and underlying ownership facts could require different analysis.

• PAB treatment does not arise merely because the account belongs to a regulated financial professional; Stonegate is not a broker-dealer.
• An institutional account is not excluded from the customer definition solely because its owner is sophisticated or professionally regulated.
• An omnibus look-through is unsupported because the record states that Stonegate owns the assets and holds no advisory-client assets.

Question 115

Topic: Financial Reporting

A SIPC-member broker-dealer has a fiscal year ending February 28, 2026. No filing extension applies.

Assessment facts:

• Assessable net operating revenues: $6,400,000
• SIPC assessment rate for the fiscal year: 0.15%
• Amount timely paid with SIPC-6: $4,100

The firm sent audited financial statements to customers on April 20 and filed its annual audited report through the required regulatory channel on April 29. The controller believed those actions satisfied all year-end filing obligations. On April 30, the FINOP discovers that no SIPC-7 has been filed and no final SIPC assessment payment has been made.

Which action should the FINOP take?

• A. File SIPC-7 promptly and remit the $5,500 remaining annual assessment.
• B. File SIPC-7 promptly and remit the full $9,600 annual assessment.
• C. Make no separate SIPC filing and carry the $5,500 balance into the next SIPC-6 assessment.
• D. File SIPC-6 promptly and remit the $5,500 remaining annual assessment.

Best answer: A

Explanation: SIPC-7 was due April 29, and the $9,600 annual assessment is reduced by the $4,100 SIPC-6 payment.

SIPC assessment returns are separate from the annual audited regulatory filing and the delivery of audited financial statements to customers. SIPC-6 is the interim return, generally due 30 calendar days after the first half of the fiscal year. SIPC-7 is the annual return, due 60 calendar days after fiscal year-end.

For the February 28 year-end, the 60th calendar day was April 29. The annual assessment is $6,400,000 x 0.15% = $9,600. After crediting the $4,100 paid with SIPC-6, the remaining payment is $5,500. Because the annual audited filing did not satisfy the SIPC-7 obligation, the FINOP should arrange the separate return and payment promptly.

• Remitting $9,600 fails to credit the $4,100 interim assessment already paid.
• SIPC-6 applies to the first half of the fiscal year, not the annual reconciliation.
• Regulatory filing and customer delivery of audited statements do not replace the separate SIPC-7 filing.

Question 116

Topic: Operations and Records

A financial and operations principal reviews this record:

Associated person: Elena Rivera
Employer: Harbor Securities
Outside firm: Northstar Brokerage, a FINRA member
Outside account: Opened August 15, 2024; Rivera is the beneficial owner;
trading in listed stocks and ETFs is permitted
June 3, 2026: Rivera became associated with Harbor
June 20, 2026: Rivera notified Northstar in writing and requested Harbor's consent
June 22, 2026: Harbor gave written consent and requested duplicate confirmations
and monthly statements from Northstar
June 24, 2026: Northstar acknowledged Harbor's request

Which conclusion should the principal reach under FINRA Rule 3210?

• A. Treat the account as compliant because consent and notice were timely, but allow Northstar to await Rivera’s separate authorization before transmitting duplicates.
• B. Treat the consent as unnecessary because the account existed before Rivera’s association, and require Northstar to transmit the requested duplicates.
• C. Treat the consent as late because Harbor’s approval was required before June 3, and require Northstar to transmit duplicates dating from Rivera’s association.
• D. Treat the account as compliant because consent and notice were completed within 30 calendar days, and require Northstar to transmit the requested duplicates.

Best answer: D

Explanation: The preexisting account was addressed within 30 calendar days, and Harbor’s written request triggers Northstar’s duty to transmit duplicate account information.

FINRA Rule 3210 distinguishes a newly opened outside account from one that existed before the person became associated with a member. For a preexisting account, the associated person has 30 calendar days after becoming associated to obtain the employing member’s written consent and notify the executing member or financial institution in writing of the association. Rivera completed both steps within that period.

When the employing member makes a written request, the executing member must transmit duplicate confirmations and statements, or the requested transactional data. The transmission requirement is not automatic from the association date, but a separate authorization from the associated person is not required after the employing member has submitted its written request. The account’s preexisting status changes the compliance deadline; it does not eliminate the consent requirement.

• Prior approval before the association date is not required for an account that already existed; the 30-calendar-day procedure applies instead.
• A preexisting account remains subject to written employer consent when the associated person has a beneficial interest.
• Northstar cannot postpone transmission pending another authorization after receiving Harbor’s written request.

Question 117

Topic: Net Capital

An established broker-dealer’s capital monitoring record contains the following information:

Which regulatory response is required based on the Tuesday capital event?

• A. Provide no notice after documenting the same-day restoration of net capital.
• B. Provide notice only under SEC Rule 17a-11 within 24 hours.
• C. Provide notice only under FINRA Rule 4120 within 24 hours.
• D. Provide notice under both SEC Rule 17a-11 and FINRA Rule 4120 within 24 hours.

Best answer: D

Explanation: The $295,000 level was below both 120% and 150% of the binding $250,000 minimum, and restoration did not eliminate either notice obligation.

Under the basic method, the variable requirement is aggregate indebtedness divided by 15, or $2,000,000 / 15 = $133,333. The binding minimum is therefore the greater fixed-dollar requirement of $250,000.

The SEC Rule 17a-11 early-warning level is 120% of the required minimum: $250,000 x 120% = $300,000. Net capital of $295,000 was below that level. Because the firm is a carrying and clearing member, FINRA Rule 4120 also applies at 150% of the minimum dollar requirement: $250,000 x 150% = $375,000. The same capital level was below this threshold as well.

The firm remained above its actual $250,000 minimum, so the record does not show a minimum-capital deficiency. Restoring capital later that day does not erase the earlier reportable conditions.

• SEC notice alone omits the separate FINRA warning triggered for a carrying and clearing member below $375,000.
• FINRA notice alone omits the SEC warning triggered when capital fell below $300,000.
• Same-day restoration does not eliminate notice obligations arising when the thresholds were crossed.

Question 118

Topic: Net Capital

A broker-dealer’s regulatory debt-equity ratio has exceeded 70% for 100 consecutive days, and no SEC extension applies.

Capital record:

All four subordinations are satisfactory, and each contains the required restrictions on accelerated maturity and capital withdrawal. There are no other debt-equity components. The firm separately complies with its aggregate-indebtedness and minimum-net-capital tests.

Any new cash contribution will be recognized dollar for dollar as permanent equity, with no change to subordinated principal. What is the minimum contribution needed to reduce the regulatory debt-equity ratio to 70%?

• A. Contribute $0.
• B. Contribute $1,857,143.
• C. Contribute $700,000.
• D. Contribute $1,000,000.

Best answer: D

Explanation: A $1,000,000 contribution increases the debt-equity total to $12,000,000, making the $8,400,000 debt numerator exactly 70%.

The numerator includes satisfactory subordinated principal other than agreements qualifying as equity under Rule 15c3-1(d). Subordination A qualifies as equity because the lender is a stockholder, its original term is at least three years, at least 12 months remain, and the required restrictions apply. Subordination B fails the three-year original-term test. Subordination C is from an unaffiliated lender, and Subordination D does not qualify merely because its lender is an officer.

Debt is therefore $2,400,000 + $3,000,000 + $3,000,000 = $8,400,000. Existing equity is $1,600,000 + $400,000 + $600,000 = $2,600,000, producing a total of $11,000,000. The required equation is 8,400,000 / (11,000,000 + contribution) = 0.70. The contribution is $1,000,000. Aggregate indebtedness and minimum net capital are separate calculations.

• No contribution incorrectly treats compliance with other capital tests, or all satisfactory subordinations, as satisfying the debt-equity limit.
• $700,000 is the debt excess over 70% of the current total, but an equity contribution enlarges the denominator rather than reducing debt.
• $1,857,143 results from treating Subordination A as debt even though it meets the stockholder, term, remaining-maturity, and restriction conditions.

Question 119

Topic: Customer Protection

A carrying broker-dealer computes its customer reserve requirement weekly. Its properly designated special reserve bank account has the required bank acknowledgment.

Required computation:

• Friday’s computation required $20.0 million in the reserve account.
• Eligible reserve assets were $19.0 million, creating a $1.0 million required deposit.
• The bank opened Tuesday at 9:00 a.m., and a $3.0 million cash deposit settled in the reserve account at 9:30 a.m.

Wednesday withdrawal review:

• A permitted interim computation made as of Tuesday’s close shows a $20.5 million reserve requirement.
• Eligible assets in the designated reserve account total $22.0 million.
• A $1.0 million corporate note is held in a general custody account at the same bank.
• The firm’s ordinary operating bank account contains $4.0 million.
• No account movements have occurred since Tuesday’s close.

What is the maximum withdrawal supported by the interim computation?

• A. Authorize a maximum withdrawal of $2.0 million.
• B. Authorize a maximum withdrawal of $1.5 million.
• C. Authorize a maximum withdrawal of $2.5 million.
• D. Authorize a maximum withdrawal of $5.5 million.

Best answer: B

Explanation: The withdrawal is limited to the $1.5 million excess of eligible designated reserve assets over the current $20.5 million requirement.

The Friday computation produced a $1.0 million deficiency, but the $3.0 million cash deposit settled in the designated reserve account before Tuesday’s 10:00 a.m. deadline. The permitted Tuesday-close interim computation then controls the proposed Wednesday withdrawal.

Only eligible assets held in the properly designated and acknowledged reserve account count. Therefore:

Withdrawing $1.5 million leaves exactly $20.5 million in eligible reserve assets. The corporate note in general custody and cash in the ordinary operating account do not increase the amount available for withdrawal, even though both may provide economic liquidity.

• The $2.0 million amount incorrectly continues using Friday’s $20.0 million requirement instead of the current interim computation.
• The $2.5 million amount improperly includes the corporate note held outside the designated reserve account.
• The $5.5 million amount improperly treats ordinary operating-account cash as reserve assets.

Question 120

Topic: Financial Reporting

A carrying broker-dealer has active accounts for customers entitled to annual financial disclosure. The firm has elected direct delivery of financial statements rather than an alternative notice procedure.

Compliance record:

Fiscal year-end: June 30, 2026
Annual audited report accepted by regulator: August 27, 2026
SIPC-7 and balance submitted: August 28, 2026
Customer request for annual financial information: September 8, 2026
Customer financial statements furnished to date: None

The annual report contains an audited statement of financial condition, related notes, an independent accountant’s report, and supplemental schedules.

Which action states the minimum financial-statement presentation the principal must arrange and the latest permitted completion date?

• A. Use the complete audited annual report, including supplemental schedules, as the minimum package and furnish it to covered customers by October 13, 2026.
• B. Use the audited statement of financial condition, related notes, and accountant’s report as the minimum package and furnish it to covered customers by December 10, 2026.
• C. Use the audited statement of financial condition, related notes, and accountant’s report as the minimum package and furnish it to covered customers by October 13, 2026.
• D. Use the audited statement of financial condition, related notes, and accountant’s report as the minimum package and furnish it only to the requesting customer by October 13, 2026.

Best answer: C

Explanation: The direct annual customer package is due within 105 days after June 30 and may consist of the audited statement of financial condition, related notes, and accountant’s report.

Annual customer disclosure is separate from filing the audited annual report with regulators and submitting the SIPC assessment. Under direct furnishing, the minimum annual package consists of the audited statement of financial condition, its related notes, and the independent accountant’s report. Supplemental schedules from the regulatory report are not required in that minimum package.

The 105-day customer deadline runs from the June 30 financial-statement date, not from the August 27 regulatory acceptance date. The calculation is 31 days in July, 31 in August, 30 in September, and 13 in October, totaling 105 days. The latest completion date is therefore October 13, 2026. The individual request does not limit the annual furnishing obligation to that customer alone.

• Requiring the complete annual report confuses the regulatory filing package with the minimum customer presentation.
• December 10 incorrectly measures 105 days from regulatory acceptance rather than from the financial-statement date.
• Limiting delivery to the requester overlooks the annual obligation to all covered customers.

Question 121

Topic: Operations and Records

A carrying broker-dealer is preparing its March 16, 2026 securities-difference aging report.

Difference record:

• March 2: The stock record showed 1,200 shares of CUSIP 123456AB7 at Custodian A, but the custodian confirmed only 1,000 shares. Difference D-184 was opened for 200 shares at $40 per share.
• March 6: Research found no receipt, delivery, journal entry, or other evidence resolving the shortage.
• March 9: A system conversion closed D-184 and opened D-231 for the same 200 shares under a transfer-agent suspense location. No supporting confirmation was obtained.
• March 16: The shortage remained unresolved, and the security’s market price was $43 per share.

The firm counts the first business day after discovery as day 1. A Monday-through-Friday calendar applies, with no holidays during the period.

Which entry should the financial and operations principal approve for March 16?

• A. Carry D-231 as a 200-share short difference, 5 business days old, at $8,600.
• B. Carry D-231 as a 200-share short difference, 10 business days old, at $8,600.
• C. Carry D-231 as a 200-share short difference, 10 business days old, at $8,000.
• D. Carry D-231 as a 200-share short difference, 5 business days old, at $8,000.

Best answer: B

Explanation: The unchanged shortage remains aged from March 2, and its current value is 200 x $43, or $8,600.

Difference aging follows the underlying unresolved security discrepancy, not its administrative identifier. On March 2, the stock record exceeded the verified custodian position by 200 shares. Changing the identifier and location code on March 9 did not resolve the shortage because no receipt, delivery, journal entry, or confirmation supported the missing shares.

Counting March 3 as day 1 produces 10 business days through March 16. The price change also does not create a new discrepancy or reset its age. It updates the report-date valuation:

Preserving the original discovery date prevents relabeling from delaying regulatory treatment of an aged short difference.

• The five-day, current-value treatment improperly restarts aging when the new identifier was created.
• The ten-day, original-value treatment preserves aging but fails to update the shortage to current market value.
• The five-day, original-value treatment both resets the aging date and retains a stale valuation.

Question 122

Topic: Net Capital

An established carrying broker-dealer uses the basic method. Assume the record contains all applicable net capital adjustments and notice conditions.

The common stock is readily marketable, with no offset or concentration treatment applicable. Which conclusion should the FINOP reach?

• A. Final net capital is $726,000 against a $560,000 minimum; no SEC warning exists, but FINRA Rule 4120 notification is required.
• B. Final net capital is $720,000 against a $560,000 minimum; no SEC warning exists, but FINRA Rule 4120 notification is required.
• C. Final net capital is $726,000 against a $250,000 minimum; no SEC warning exists, but FINRA Rule 4120 notification is required.
• D. Final net capital is $726,000 against a $560,000 minimum; both an SEC warning and FINRA Rule 4120 notification are required.

Best answer: A

Explanation: The firm exceeds its controlling minimum and SEC warning levels, but its 11.57:1 aggregate-indebtedness ratio triggers FINRA Rule 4120.

First recognize the $40,000 market loss, reducing the stock to $360,000. The 15% haircut is then $54,000. Final net capital is $1,100,000 - $250,000 - $40,000 - $54,000 - $30,000 = $726,000.

Under the basic method, the variable minimum is $8,400,000 / 15 = $560,000, which controls over the $250,000 fixed floor. The firm therefore has sufficient net capital.

The aggregate-indebtedness ratio is $8,400,000 / $726,000 = 11.57:1. It does not exceed the SEC warning threshold of 12:1, and $726,000 exceeds 120% of the $560,000 requirement, or $672,000. However, a carrying firm triggers FINRA Rule 4120 when its ratio exceeds 10:1, requiring prompt notification within 24 hours.

• Requiring an SEC warning incorrectly applies FINRA’s 10:1 threshold instead of the SEC’s 12:1 threshold.
• Using the $250,000 floor ignores the larger basic-method requirement of aggregate indebtedness divided by 15.
• Calculating $720,000 applies the 15% haircut to the stale $400,000 carrying value rather than the $360,000 current market value.

Question 123

Topic: Operations and Records

A carrying broker-dealer is reconciling a proprietary common-stock position at the business-day close. There are no unsettled trades, stock loans, fails, or corporate actions affecting the security. The financial ledger is in balance.

Which reconciliation action should the financial and operations principal direct?

• A. Reduce proprietary inventory by $5,000 and record the valuation loss, leaving quantity, ownership, and location records unchanged.
• B. Record a $5,000 receivable from DTC and retain inventory at $253,000, leaving quantity and customer classifications unchanged.
• C. Increase the position-ledger price by $0.50 and its market value by $5,000, leaving quantity, ownership, and location records unchanged.
• D. Reclassify $5,000 from proprietary inventory to a customer payable, leaving total assets and securities quantities unchanged.

Best answer: A

Explanation: Independent quantity, ownership, location, and price records establish that only the financial ledger valuation is overstated by $5,000.

The reconciliation must separately establish quantity, ownership, location, classification, and valuation. The position ledger and DTC statement independently confirm that the firm owns 10,000 shares held at DTC, while the customer and PAB records show no competing claim. Therefore, no position, location, or ownership correction is supported.

The independent closing price establishes a current value of $248,000: 10,000 shares x $24.80. Because the financial ledger reports $253,000, proprietary inventory is overstated by $5,000. The firm should reduce inventory and recognize the valuation loss before using the balance for financial reporting or net capital purposes. A balanced financial ledger proves only that debits equal credits; it does not prove that an account uses the correct price or classification.

• Raising the position-ledger price would substitute the unsupported financial-ledger valuation for the independent closing price.
• A DTC receivable is unsupported because DTC confirms the full quantity and provides no conflicting valuation.
• A customer payable is unsupported because the independent ownership and customer records establish a proprietary position.

Question 124

Topic: Operations and Records

A carrying broker-dealer has 80 associated persons. Its two emergency contacts on file with FINRA have been registered principals and members of senior management.

Current facts:

• The primary emergency contact left the firm today, and the person’s system access was disabled.
• The remaining emergency contact continues to meet the eligibility requirements.
• The departed contact owned the escalation assignments for the reserve bank, clearing firm, and electronic-records vendor.
• Firm policy requires a documented tabletop test within 10 business days after changing a recovery contact or dependency assignment.
• The next annual business continuity review is scheduled in 10 months.

Which action should the financial and operations principal recommend?

• A. Designate the nonregistered recovery manager, promptly update FINRA’s electronic contact record, reassign the call tree and vendor escalations, and complete the documented tabletop test within 10 business days.
• B. Designate another senior-management registered principal, promptly update FINRA’s electronic contact record, reassign the call tree and vendor escalations, and complete the documented tabletop test at the next annual review.
• C. Designate another senior-management registered principal, reassign the call tree and vendor escalations, complete the documented tabletop test within 10 business days, and update FINRA during the annual confirmation.
• D. Designate another senior-management registered principal, promptly update FINRA’s electronic contact record, reassign the call tree and vendor escalations, and complete the documented tabletop test within 10 business days.

Best answer: D

Explanation: This response promptly restores an eligible emergency contact and validates the changed recovery assignments within the firm’s required testing period.

FINRA Rule 4370 requires a member to maintain two emergency contacts and promptly update the prescribed contact information after a material change. For a firm with multiple associated persons, the emergency contacts must be registered principals and members of senior management. The annual review cycle does not permit an obsolete contact to remain on file.

Because the departed principal also owned critical escalation assignments, changing FINRA’s record alone would not restore operational readiness. The firm should assign an eligible replacement, revise the internal call tree and vendor responsibilities, and test the changed procedures. Completing and documenting the tabletop exercise within the firm’s 10-business-day deadline demonstrates that current personnel can reach the reserve bank, clearing firm, and records vendor during a disruption.

• Waiting for the annual confirmation fails the obligation to update FINRA promptly after the contact change.
• A nonregistered recovery manager does not satisfy the contact eligibility requirements for this multi-person firm.
• Delaying testing until the annual review violates the stated 10-business-day policy and leaves the revised escalation process unvalidated.

Question 125

Topic: Financial Reporting

A carrying broker-dealer is preparing its annual audited report.

Annual-report record:

Fiscal year-end: Friday, July 31, 2026
60th calendar day: Tuesday, September 29, 2026
Current date: Wednesday, September 23, 2026
Valuation committee meeting: Monday, September 28, 2026
Accountant: Independent and PCAOB registered

A material proprietary-position valuation remains unresolved. Management has not determined the accounting treatment or recorded an adjustment. The accountant states that it needs two full business days after receiving management’s recorded conclusion and supporting evidence to complete its procedures and report.

FINRA, the firm’s designated examining authority, provides the following instruction:

An extension request must be received at least three business days before the original due date. The filing date changes only upon written approval.

Which action should the financial and operations principal recommend?

• A. Submit the extension request by September 24, continue management’s valuation decision and recording, allow the accountant to complete its procedures, and treat the request as extending the filing date.
• B. Submit the extension request by September 24, continue management’s valuation decision and recording, allow the accountant to complete its procedures, and use a later filing date only if approved.
• C. File management-prepared statements by September 29, disclose the unresolved valuation in a footnote, provide the representation letter, and submit the accountant’s report after its procedures are complete.
• D. Have the accountant determine and record the valuation by September 29, obtain management’s approval after filing, and amend the audited statements if later evidence changes the amount.

Best answer: B

Explanation: The request is timely, management retains responsibility for the adjustment, and the filing deadline changes only upon written approval.

The annual audited report is due 60 calendar days after the fiscal year-end, making September 29 the original deadline. Because the accountant cannot finish until after that date, the firm should request an extension by the stated September 24 cutoff. A pending request does not change the deadline; written approval is required.

Management remains responsible for selecting the accounting treatment, recording any adjustment, and supporting its assertions. The independent, PCAOB-registered accountant evaluates those assertions and performs sufficient procedures before issuing its report. A management representation letter or footnote disclosure cannot replace the required audit work. Likewise, the accountant cannot assume management’s responsibility by making and recording the valuation decision.

• Treating a pending request as effective incorrectly assumes an automatic extension.
• Filing management-prepared statements does not satisfy the requirement for a completed annual audited report.
• Assigning the valuation decision to the accountant improperly transfers management’s financial-reporting responsibility.

Questions 126-145

Question 126

Topic: Financial Reporting

A carrying broker-dealer is preparing its month-end FOCUS report. Its preliminary balance sheet was produced from this balanced general ledger trial balance:

Supported cash and receivables      $2,400,000 debit
Supported equipment                    300,000 debit
Suspense                                120,000 debit
Accounts payable and accruals           900,000 credit
Other supported liabilities             400,000 credit
Ownership equity                       1,520,000 credit
Total                                $2,820,000 each

Reconciliation evidence:

• The $900,000 payable balance includes journal J-417: debit suspense $120,000 and credit accounts payable $120,000.
• Vendor invoices support $70,000 of occupancy services and $50,000 of communications services received during the reporting period and remaining unpaid.
• The preliminary income statement excludes both expenses, and ownership equity includes preliminary current-period net income.
• No amount represents a prepayment, receivable, or future economic benefit. Ignore income tax effects.

Which corrected FOCUS balance-sheet totals should the financial and operations principal use?

• A. Total assets $2,820,000; total liabilities $1,300,000; ownership equity $1,520,000.
• B. Total assets $2,700,000; total liabilities $1,180,000; ownership equity $1,520,000.
• C. Total assets $2,820,000; total liabilities $1,420,000; ownership equity $1,400,000.
• D. Total assets $2,700,000; total liabilities $1,300,000; ownership equity $1,400,000.

Best answer: D

Explanation: Removing the unsupported asset and recognizing $120,000 of current expenses reduces assets and equity while leaving the supported payable unchanged.

A mathematically balanced trial balance is not necessarily supported for regulatory reporting. The invoices establish both current-period expenses and an unpaid liability. Therefore, the suspense debit cannot remain as an asset and should be reclassified to occupancy and communications expense.

Removing suspense reduces total assets by $120,000: $2,820,000 - $120,000 = $2,700,000. Recognizing the expenses reduces current-period income and ownership equity by the same amount: $1,520,000 - $120,000 = $1,400,000. The $1,300,000 of total liabilities remains unchanged because the accounts payable credit is supported. The corrected balance sheet reconciles as $2,700,000 of assets equal to $1,300,000 of liabilities plus $1,400,000 of equity.

• Retaining the $120,000 suspense asset leaves both assets and current-period income overstated.
• Reversing the payable disregards valid unpaid invoices and fails to recognize the related expenses.
• Recording another payable accrual double-counts the liability while leaving the unsupported suspense asset in place.

Question 127

Topic: Operations and Records

A broker-dealer uses the Rule 17a-4 audit-trail alternative for electronic records. A supervised customer email must be preserved through August 4, 2029. On August 18, 2026, the financial and operations principal tests reconstruction of the deleted message.

Retrieval package:

09:14 - Email and proposal_v1.pdf captured; attachment hash H1 recorded.
09:22 - User replaced proposal_v1.pdf with proposal_v2.pdf; hash H2 recorded.
10:03 - Email deleted from the live mailbox; deletion event recorded.
Current archive - Email body, proposal_v2.pdf, H1, H2, and event log available.
Missing content - proposal_v1.pdf cannot be rendered or exported from the archive.

The system passes indexing, prompt retrieval, readable export, and regulator-access tests. A validated backup outside the designated recordkeeping system can recover proposal_v1.pdf.

Which remediation is necessary before the firm may rely on the audit-trail alternative for this record?

• A. Retain proposal_v2.pdf, while preserving hash H1 and the existing time-stamped change and deletion history.
• B. Copy proposal_v2.pdf and the existing audit log to WORM media, while retaining the searchable regulator export.
• C. Recover and retain both attachments, while replacing the time-stamped modification history with validated hashes H1 and H2.
• D. Recover and retain proposal_v1.pdf, while preserving proposal_v2.pdf and the existing time-stamped change and deletion history.

Best answer: D

Explanation: The audit-trail alternative must permit recreation of the original record and preserve its subsequent modifications and deletion history.

Rule 17a-4 permits an electronic recordkeeping system to use either compliant WORM storage or the audit-trail alternative. Under the audit-trail alternative, the system must preserve enough information to recreate the original record when it has been modified or deleted and must maintain a complete time-stamped history of those events.

The archive retains the current attachment and records that an earlier attachment existed, but a hash does not contain the attachment’s underlying content. Therefore, the archive cannot presently recreate the original email package. The recoverable backup should be used to restore and retain proposal_v1.pdf. The firm must also preserve proposal_v2.pdf and the existing modification and deletion history. The demonstrated indexing, retrieval, readable export, and regulator access address separate requirements but do not cure the missing original attachment.

• Retaining the current attachment and its predecessor’s hash does not permit recreation of the predecessor’s content.
• Keeping both attachments does not justify removing the time-stamped history showing how and when the record changed.
• Moving an incomplete package to WORM media prevents further alteration but does not restore the missing original attachment.

Question 128

Topic: Customer Protection

A carrying broker-dealer’s stock record shows that customers own 14,000 shares of ABC common stock, all classified as fully paid or excess margin securities. The general ledger and location schedule agree with that quantity.

The bank’s custody agreement acknowledges that customers retain beneficial ownership of the pledged shares. What conclusion should the financial and operations principal reach under SEC Rule 15c3-3?

• A. Record no deficit because the 14,000 customer-owned shares reconcile between the stock record and the combined location balances.
• B. Record a 4,000-share deficit and promptly obtain that quantity in firm possession or an unencumbered control location.
• C. Record a 6,000-share deficit because only the unencumbered DTC position qualifies toward the possession-or-control requirement.
• D. Record a 2,000-share deficit because street-name certificates in the firm vault qualify only after registration in the customers’ names.

Best answer: B

Explanation: Only the 8,000 DTC shares and 2,000 vault shares qualify, leaving a 4,000-share possession-or-control deficit.

Rule 15c3-3 requires a carrying broker-dealer to maintain physical possession or control of customers’ fully paid and excess margin securities. The 8,000 unencumbered DTC shares qualify as being in a control location, and the 2,000 certificates in the firm’s exclusively controlled vault qualify as physical possession. The 4,000 shares pledged for the firm’s loan do not qualify because the bank has a lien and may liquidate them upon default. The bank’s acknowledgment of customer beneficial ownership does not remove that encumbrance. Therefore, qualifying possession or control totals 10,000 shares against a 14,000-share requirement, producing a 4,000-share deficit. Agreement of the stock record, ledger and total location quantity establishes ownership reconciliation, not possession-or-control compliance.

• The no-deficit conclusion confuses customer ownership records with the separate possession-or-control requirement.
• The 2,000-share result improperly excludes certificates physically held in the firm’s exclusively controlled vault.
• The 6,000-share result overlooks that qualifying physical possession is an alternative to holding securities at a control location.

Question 129

Topic: Net Capital

A FINOP reviews 16 consecutive business days for an established carrying member using the basic net capital method. The variable requirement of aggregate indebtedness divided by 15 is binding each day. The firm has no regulatory relief or written permission to expand while restricted.

Applicable conditions:

• FINRA notice is required promptly, within 24 hours, when a carrying member’s AI ratio exceeds 10:1.
• Business expansion is prohibited when that condition continues for more than 15 consecutive business days.
• Business reduction is required when an AI ratio exceeding 12:1 continues for more than 15 consecutive business days.
• SEC early-warning reporting applies when the AI ratio exceeds 12:1 or net capital falls below 120% of the applicable minimum.

Which regulatory assessment is correct at the close of Day 16?

The member and FINRA have known the condition throughout all 16 business days.

• A. A prompt FINRA notice applies, no SEC warning applies, and the firm must stop expanding but need not reduce its existing business.
• B. A prompt FINRA notice applies, no SEC warning applies, and the firm may expand through Day 16 but must stop if the condition remains on Day 17.
• C. Both a prompt FINRA notice and an SEC warning apply, and the firm must stop expanding but need not reduce its existing business.
• D. A prompt FINRA notice applies, no SEC warning applies, and the firm must begin reducing its existing business rather than merely stop expanding.

Best answer: A

Explanation: The 10.40:1 ratio triggered FINRA notice on Day 1 and the no-expansion restriction after 16 consecutive days, while neither SEC warning nor business-reduction thresholds were met.

The FINRA notice threshold and the business restrictions are separate. An AI ratio above 10:1 requires prompt FINRA notice beginning on Day 1. The condition has also been known for at least five consecutive business days. Because the ratio remains above 10:1 for more than 15 consecutive business days, the no-expansion restriction applies at the close of Day 16.

The SEC capital warning is not triggered. Because the binding minimum is AI divided by 15, actual net capital equals \(15/10.40 = 144.23\%\) of the applicable minimum, which exceeds 120%. The AI ratio also remains below 12:1. That same 12:1 threshold defeats the business-reduction conclusion. The firm therefore must stop expanding absent written FINRA permission, but it is not required to reduce its existing business based on these facts.

• Business reduction incorrectly applies the 12:1 threshold to a ratio of only 10.40:1.
• SEC reporting incorrectly treats the FINRA 10:1 notification threshold as an SEC warning condition.
• Waiting until Day 17 miscounts the persistence period; Day 16 is already more than 15 consecutive business days.

Question 130

Topic: Net Capital

A broker-dealer’s financial and operations principal reviews these unchanged capital balances:

• GAAP equity capital and applicable adjustments: $1,000,000
• Satisfactory subordinated loan from a bank: $6,000,000
• Satisfactory subordinated loan from a stockholder: $1,000,000
  • Four-year original term with 18 months remaining
  • Bars accelerated maturity and capital withdrawal except as permitted by the net capital rule

The stockholder loan qualifies as equity under Rule 15c3-1(d). The balances remained outstanding continuously from April 1 through June 30, 2026, a period of 91 calendar days. The Commission has not granted an extension.

Which assessment should the principal make as of June 30?

• A. Calculate 87.5%; monitor through June 29, then regard June 30 as the first date the duration limit is exceeded.
• B. Calculate 75%; regard April 1 as the first date the limit is exceeded, then use the 90-day period as a remediation deadline.
• C. Calculate 75%; monitor through June 30, then regard July 1 as the first date the duration limit is exceeded.
• D. Calculate 75%; monitor through June 29, then regard June 30 as the first date the duration limit is exceeded.

Best answer: D

Explanation: The debt numerator is $6,000,000, the debt-equity total is $8,000,000, and June 30 is the 91st continuous day above 70%.

Rule 15c3-1(d) uses outstanding principal from satisfactory subordinations that do not qualify as equity as the numerator. The denominator includes satisfactory subordinations and applicable equity capital accounts and adjustments. Therefore, the stockholder loan remains in the denominator but is excluded from the debt numerator:

A ratio above 70% is not an immediate violation on the first day. The restriction applies when the ratio remains above 70% for a period exceeding 90 days, unless the Commission grants an extension. April 1 through June 29 constitutes 90 days, so monitoring is appropriate during that period. June 30 is day 91, when the duration condition is exceeded.

• Treating April 1 as the violation date incorrectly applies 70% as an immediate ceiling.
• Waiting until July 1 overlooks that June 30 is already the 91st continuous day.
• Using 87.5% incorrectly includes the equity-qualifying stockholder subordination in the debt numerator.

Question 131

Topic: Financial Reporting

A fully disclosed introducing broker-dealer closes its books on December 31, 2026. On that date, it executes customer trades that generate $80,000 of commissions under its clearing agreement.

Relevant facts:

• The commissions become fixed and earned when the trades are executed, with no remaining performance obligation.
• The clearing broker confirms the amount on December 31.
• The trades settle on January 4, 2027, and the clearing broker remits the cash on January 5.
• The receivable is collectible and qualifies under the net capital rule as a commission receivable from another broker-dealer outstanding for 30 days or less.

Which treatment is appropriate on December 31?

• A. Defer both commission revenue and the receivable until settlement; report no related asset or income at year-end.
• B. Recognize $80,000 of commission revenue and a receivable; deduct the receivable as nonallowable until collected.
• C. Recognize $80,000 of commission revenue and a receivable; treat the qualifying receivable as an allowable asset.
• D. Record an $80,000 receivable and deferred commission income; recognize the revenue when the trades settle.

Best answer: C

Explanation: The commission was earned at execution, and the confirmed broker-dealer receivable qualifies as an allowable asset.

Accrual accounting recognizes commission revenue when the broker-dealer has earned it, not when the related trade settles or cash is collected. Because the commissions became fixed upon execution on December 31, the year-end entry is a debit to commissions receivable and a credit to commission revenue for $80,000.

The regulatory net capital computation begins with GAAP net worth and then applies required adjustments. A valid, collectible commission receivable from another broker-dealer that has been outstanding for 30 days or less is not deducted as a nonallowable asset. Therefore, the receivable remains allowable at December 31. The January cash receipt merely converts the receivable into cash; it does not create additional commission revenue in January.

• Deducting the receivable until collection ignores the stated regulatory treatment for the qualifying broker-dealer receivable.
• Waiting until settlement applies settlement-date recognition even though the commission was fixed and earned upon execution.
• Using deferred income understates year-end revenue and equity because no performance obligation remained after execution.

Question 132

Topic: Net Capital

A broker-dealer plans to obtain a new $600,000 borrowing under a satisfactory subordination agreement. The unaffiliated lender’s agreement will remain outstanding for 18 months and does not qualify as equity under Rule 15c3-1(d).

The firm’s current regulatory capital schedule shows:

Assume no other balances change and no Commission extension is available. Which assessment of the proposed borrowing is correct under the regulatory debt-equity test?

• A. The resulting ratio is 80.0%, so the borrowing would place the firm above the 70% boundary.
• B. The resulting ratio is 60.0%, so the borrowing would keep the firm below the 70% boundary.
• C. The resulting ratio is 200.0%, so the borrowing would place the firm above the 70% boundary.
• D. The resulting ratio is 66.7%, so the borrowing would keep the firm below the 70% boundary.

Best answer: D

Explanation: The borrowing increases regulatory debt to $2.4 million and the debt-equity total to $3.6 million, producing a 66.7% ratio.

Because the proposed satisfactory subordination does not qualify as equity, its $600,000 principal is classified as regulatory debt. The debt numerator becomes $1,800,000 + $600,000 = $2,400,000. The same principal is also included in the debt-equity total:

The agreement will remain outstanding for more than 90 days, so the result is compared with the 70% boundary. The firm remains below that boundary. Aggregate indebtedness divided by net capital is a separate capital test and does not determine this regulatory debt-equity ratio.

• The 80.0% result adds the borrowing to debt but incorrectly omits it from the debt-equity total.
• The 200.0% result divides regulatory debt by equity alone instead of by debt plus applicable equity.
• The 60.0% result is the pre-borrowing ratio and fails to include the proposed principal.

Question 133

Topic: Operations and Records

At 10:42 a.m. ET, a broker-dealer executes an OTC purchase of 20,000 shares of an exchange-listed stock for an institutional COD customer and reports the trade to a FINRA facility. The execution price is $24.80; the contemporaneous market is approximately $20.10.

At 10:54 a.m., the customer challenges the price and instructs its third-party custodian to reject delivery. The contra-party declines a voluntary cancellation at 10:58 a.m. The financial and operations principal reviews these instructions:

A reported transaction remains binding unless all affected parties agree to cancel it or FINRA nullifies or modifies it through clearly erroneous review. Custodian rejection creates a settlement exception but does not cancel the transaction.

• A review request for a trade executed after 10:00 a.m. must be filed electronically within 30 minutes after execution.
• Trade and custody records must retain the original terms until an authorized decision occurs.
• The current time is 11:02 a.m.

Which action should the principal direct?

• A. Continue seeking bilateral cancellation through 11:12 a.m., retain the original trade records, and request FINRA review after the contra-party responds to the renewed proposal.
• B. File a clearly erroneous review request by 11:12 a.m., retain the original trade records, and communicate the pending status to the customer, contra-party, and custodian.
• C. File a trade-report correction by 11:12 a.m. using the market price, revise the custody records, and allow the contra-party to dispute the corrected terms.
• D. Transfer the customer purchase to the firm’s error account by 11:12 a.m., retain the interdealer position, and instruct the custodian to reject delivery.

Best answer: B

Explanation: The timely FINRA review preserves the challenge while the original transaction remains recorded until FINRA issues a decision.

A COD custodian controls receipt and delivery but does not have authority to rescind an executed transaction. The custodian’s rejection therefore creates a settlement exception rather than a cancellation. Because the contra-party has declined bilateral cancellation, the broker-dealer must use FINRA’s clearly erroneous transaction procedure to seek authorized relief.

The trade occurred at 10:42 a.m., so the stated 30-minute filing period expires at 11:12 a.m. The principal should ensure that the electronic request is filed before that deadline. Until FINRA nullifies or modifies the transaction, the books, trade report, and custody records should continue to show the original terms. If FINRA grants relief, the firm can then coordinate the resulting corrections across its trade, cash, securities, and third-party custody records.

• A trade-report correction cannot be used to impose a new price when the reported terms accurately reflect the disputed execution.
• Moving the customer leg to an error account does not cancel the contractual transaction or resolve the corresponding settlement obligation.
• Continuing bilateral negotiations does not preserve the right to review after the 11:12 a.m. filing deadline expires.

Question 134

Topic: Net Capital

A FINRA member carries customer accounts and computes net capital under the alternative method.

Monday close:

• Qualifying aggregate debit items: $80,000,000
• Net capital: $3,600,000
• The condition had not existed on prior business days.

On Tuesday morning, a receivable collection increases net capital to $4,200,000. The collection does not change Monday’s closing balances. The firm has no planned capital withdrawal.

Which regulatory conclusion should the financial and operations principal reach?

• A. Treat Monday’s close as a FINRA-only warning event, notify FINRA within 24 hours, and omit SEC notification because capital remained above 120% of the minimum requirement.
• B. Treat Tuesday’s restoration as curing the reporting event, document the temporary shortfall, and send no notifications because current net capital exceeds the warning level and minimum.
• C. Treat Monday’s close as a minimum-capital deficiency, send the applicable notifications within 24 hours, and curtail carrying activity until net capital exceeds 5% of debit items.
• D. Treat Monday’s close as an early-warning event, make the applicable SEC and FINRA notifications promptly and within 24 hours, and recognize that no minimum-capital deficiency occurred.

Best answer: D

Explanation: Monday’s net capital was 4.5% of debit items, below the 5% warning threshold but above the 2% minimum.

Under the alternative method, minimum required net capital is the greater of $250,000 or 2% of qualifying aggregate debit items. Here, 2% of $80,000,000 is $1,600,000, so the firm’s $3,600,000 satisfies its minimum requirement.

The separate early-warning threshold is 5% of aggregate debit items, or $4,000,000. Because Monday’s net capital was only $3,600,000, the firm entered an early-warning condition under SEC Rule 17a-11 and FINRA Rule 4120. The subsequent collection does not erase the reportable event. A one-day warning condition does not itself establish a minimum-capital deficiency or automatic business curtailment. Capital-withdrawal notice requirements also are not triggered merely because net capital falls below the 5% warning level.

• Restoration above 5% does not eliminate the notification obligation created by Monday’s closing condition.
• The 5% figure is an early-warning threshold, not the alternative method’s 2% minimum-capital requirement.
• The alternative-method 5% test is an independent SEC warning condition as well as a FINRA notification condition for this carrying member.

Question 135

Topic: Operations and Records

A carrying broker-dealer, Firm C, is the buyer in an interdealer transaction.

• Tuesday, July 7: Firm C buys 1,000 XYZ shares from Firm S at $40 per share.
• Wednesday, July 8: Firm S fails to deliver on the regular-way settlement date.
• Thursday, July 9: XYZ closes at $44. Firm C sends Firm S a valid $4,000 mark-to-market demand.
• Friday, July 10: Firm S pays the $4,000 by the demand’s 1:00 p.m. deadline.
• Firm C has not sent a Rule 11810 buy-in notice.
• The customer for whom Firm C purchased XYZ has a separate $4,000 maintenance margin call.

Which instruction should Firm C’s financial and operations principal give for the payment and open fail?

• A. Apply the $4,000 to the purchase price, keep the 1,000-share fail open with $36,000 due upon delivery, and administer the buy-in and customer margin call separately.
• B. Credit the $4,000 to the customer margin call, keep the 1,000-share fail open at the $40,000 contract amount, and administer any later buy-in separately.
• C. Record the $4,000 as a deposit securing the price increase, keep the 1,000-share fail open at the $40,000 contract amount, and administer the buy-in and customer margin call separately.
• D. Reprice the purchase to $44,000, keep the 1,000-share fail open at current market value, and administer the buy-in and customer margin call separately.

Best answer: C

Explanation: The mark deposit protects Firm C against the $4,000 price increase but does not settle, reprice, or terminate the original delivery obligation.

Firm C’s market exposure is the current value minus the contract value: 1,000 shares x ($44 - $40) = $4,000. The seller’s mark-to-market deposit secures that exposure while the fail remains open under the original $40,000 contract. It is not a partial payment of the purchase price and does not create a new contract at $44.

The deposit also does not terminate Firm S’s obligation to deliver the shares. If Firm C chooses contractual delivery enforcement, it must follow the separate Rule 11810 buy-in notice and timing requirements. Likewise, the interdealer deposit cannot be treated as the customer’s payment of a maintenance margin call. Customer margin collection and possible liquidation are administered independently from the fail and the mark request.

• Reducing the amount due to $36,000 incorrectly treats collateral as partial settlement of the purchase price.
• Repricing the purchase incorrectly substitutes current market value for the original contract terms.
• Crediting the customer account confuses an interdealer mark deposit with a customer margin payment.

Question 136

Topic: Operations and Records

A broker-dealer’s operations principal is resolving a failed customer purchase.

Corporate-action and trade record:

Declaration date: August 20, 2026
Event: 3-for-2 stock split
Record date: September 14, 2026
Payable date: September 25, 2026
Ex-date: September 28, 2026
Convention: Trades through September 25 carry the split entitlement
Customer purchase: 800 shares at $60 per share on September 24
Contract settlement: Regular-way T+1 on September 25
Fail status: Seller will deliver on September 29
Resolution: One share delivery; no separate due-bill or cash item

Which instruction should the operations principal use to settle the failed trade?

• A. Deliver 800 post-split shares against $48,000 total consideration.
• B. Deliver 1,200 post-split shares against $32,000 total consideration.
• C. Deliver 1,200 post-split shares against $48,000 total consideration.
• D. Deliver 800 post-split shares against $32,000 total consideration.

Best answer: C

Explanation: The pre-ex-date trade carries the 3-for-2 entitlement, so 800 shares become 1,200 while the $48,000 contract consideration remains unchanged.

The September 24 purchase occurred before the September 28 ex-date and therefore carried the split entitlement under the stated convention. The failed settlement does not eliminate that entitlement.

The adjusted quantity is calculated as:

The original contract consideration remains:

After the split, the economic cost is $40 per share because $48,000 divided by 1,200 shares equals $40. This per-share adjustment does not reduce the customer’s total contractual payment or create an economic profit. Because the fail is resolved after the split through one share delivery, the seller must deliver 1,200 post-split shares against $48,000.

• Retaining 800 shares ignores the split entitlement attached to the pre-ex-date purchase.
• Reducing consideration to $32,000 incorrectly treats the split-adjusted unit price as a reduction in total contract value.
• Using both 800 shares and $32,000 omits the additional shares and improperly changes the original consideration.

Question 137

Topic: Customer Protection

A carrying broker-dealer reviews its customer stock record after entering a bank financing agreement. All values are current as of the review.

Custody and lien facts:

• The bank’s collateral account holds 800 of A’s shares.
• The firm’s DTC account holds 200 of A’s shares and all 300 of B’s shares. DTC would be a satisfactory control location if the positions were free of liens.
• The financing agreement grants the bank an enforceable lien over securities in both accounts. DTC has acknowledged the bank’s control, and no customer positions are excluded.
• No other possession-or-control deficits or hypothecation restrictions apply.

What is the minimum corrective action that restores compliance while preserving the firm’s maximum lawful financing capacity?

• A. Obtain lien releases for all $30,000 of B’s stock and $40,000 of A’s stock, leaving at most $60,000 of A’s stock pledged.
• B. Obtain a lien release for all $30,000 of B’s stock, leaving all $100,000 of A’s stock pledged under the written consent.
• C. Obtain lien releases for all $30,000 of B’s stock and $16,000 of A’s stock, leaving at most $84,000 of A’s stock pledged.
• D. Transfer $30,000 of B’s stock and $16,000 of A’s stock to a segregated DTC subaccount while retaining the bank’s lien on those positions.

Best answer: C

Explanation: B’s stock is fully paid, while A must retain $16,000 in unencumbered control because 140% of A’s $60,000 debit is $84,000.

Customer ownership is established by the stock record, but regulatory control depends on the securities’ actual custody and encumbrance. Customer B has no debit, so all $30,000 of B’s stock is fully paid and must be free of the bank’s lien.

For Customer A, securities supporting up to 140% of the debit may be pledged with the required consent. The pledge limit is 140% x $60,000 = $84,000. Therefore, $100,000 - $84,000 = $16,000 of A’s stock is excess margin securities that must be in possession or control free of liens.

The bank must release $46,000 in total: $30,000 belonging to B and $16,000 belonging to A. Physical placement at DTC does not establish control while the bank’s acknowledged lien remains attached.

• Limiting A’s pledge to the $60,000 debit applies a 100% measure rather than the permitted 140% relationship and releases more collateral than necessary.
• A’s written consent does not permit the firm to pledge the $16,000 classified as excess margin securities.
• Moving securities to another DTC subaccount does not create regulatory control if the bank’s lien continues to encumber them.

Question 138

Topic: Net Capital

An established broker-dealer has operated for six years and uses the basic method under SEC Rule 15c3-1. It introduces customer accounts on a fully disclosed basis and receives customer securities solely for prompt transmission. Its activity-based fixed minimum is $50,000.

At month-end, the firm reports:

• Aggregate indebtedness: $900,000
• Final net capital after all required deductions and haircuts: $68,000

What is the firm’s required minimum net capital and current capital position?

• A. Required minimum net capital is $112,500, producing a $44,500 net capital deficiency.
• B. Required minimum net capital is $60,000, leaving $8,000 of excess net capital.
• C. Required minimum net capital is $250,000, producing a $182,000 net capital deficiency.
• D. Required minimum net capital is $50,000, leaving $18,000 of excess net capital.

Best answer: B

Explanation: The basic-method variable requirement is $900,000 / 15 = $60,000, which exceeds the $50,000 fixed minimum.

Under the basic method, an established broker-dealer must maintain net capital equal to the greater of its activity-based fixed minimum or one-fifteenth of aggregate indebtedness. The variable requirement is $900,000 / 15 = $60,000. Because $60,000 exceeds the firm’s $50,000 fixed floor, required minimum net capital is $60,000. Final net capital of $68,000 therefore leaves $8,000 of excess net capital. The resulting aggregate indebtedness ratio is approximately 13.24:1, which is below the 15:1 maximum. The 8:1 limit applies during a firm’s first 12 months, while the $250,000 floor belongs to the alternative method and certain other business models.

• Using only the $50,000 activity-based floor ignores the higher variable requirement based on aggregate indebtedness.
• Dividing aggregate indebtedness by 8 incorrectly applies the first-year limit to a six-year-old firm.
• Applying a $250,000 floor incorrectly substitutes an alternative-method requirement for the elected basic method.

Question 139

Topic: Net Capital

A carrying broker-dealer is evaluating its regulatory debt-equity ratio under SEC Rule 15c3-1(d).

Capital balances:

• Equity capital accounts and applicable adjustments: $300,000
• Other satisfactory subordinated debt: $300,000
• Approved satisfactory subordinated loan from a stockholder: $900,000

The stockholder loan had a four-year original term and has 18 months remaining. The agreement permits accelerated maturity after a specified payment default but provides no other withdrawal right. The balances have remained unchanged for 45 consecutive days, and the firm has not obtained a Commission extension.

What conclusion should the financial and operations principal reach?

• A. Treat the stockholder loan as equity; the ratio is 20%, and the more-than-90-day limit does not apply.
• B. Treat the stockholder loan as debt; the ratio is 80%, but the more-than-90-day limit has not yet been violated.
• C. Treat the stockholder loan as debt; the ratio is 80%, and exceeding 70% creates an immediate violation.
• D. Exclude the stockholder loan from the total; the ratio is 50%, and the more-than-90-day limit does not apply.

Best answer: B

Explanation: The acceleration provision prevents equity treatment, while the 80% ratio has existed for only 45 days.

A satisfactory stockholder subordination may receive equity treatment under Rule 15c3-1(d) only if it satisfies the relationship, original-term, remaining-term, acceleration, and withdrawal conditions. Although the four-year original term and 18 months remaining satisfy the term requirements, the accelerated-maturity provision defeats equity treatment. The $900,000 therefore remains subordinated debt.

The debt numerator is $900,000 plus $300,000, or $1,200,000. The debt-equity total is $1,200,000 plus $300,000 of equity, or $1,500,000. The ratio is $1,200,000 / $1,500,000 = 80%.

Rule 15c3-1(d) limits this debt to 70% of the debt-equity total for a period exceeding 90 days, absent a Commission extension. Because the ratio has been above 70% for only 45 days, remediation and monitoring are warranted, but the duration condition has not yet been violated.

• Equity treatment incorrectly relies on the stockholder relationship and term requirements while disregarding the acceleration provision.
• An immediate-violation conclusion ignores the rule’s more-than-90-day duration condition.
• Exclusion from the total incorrectly treats failure of equity qualification as failure of the loan’s approved satisfactory-subordination status.

Question 140

Topic: Net Capital

A carrying broker-dealer has proprietary crude-oil futures positions. Its tentative net capital is $2,100,000 after all other adjustments and recognition of a $60,000 trading loss on these contracts.

Positions:

• Long 50 December contracts
• Short 30 December contracts
• Each contract represents 1,000 barrels
• Settlement price is $70 per barrel

Applicable commodity schedule:

• Identical commodity contracts with the same delivery month offset contract-for-contract.
• Deduct 10% of the contract market value remaining after permitted offsets.
• Do not deduct a recognized trading loss a second time.

What final net capital should the broker-dealer report?

• A. $1,900,000
• B. $1,540,000
• C. $1,960,000
• D. $1,890,000

Best answer: C

Explanation: The 20 net long contracts create a $1,400,000 exposure and a $140,000 deduction from tentative net capital.

The proprietary commodity positions are governed by the supplied commodity schedule. Offset the 30 short contracts against 30 of the 50 long contracts, leaving 20 net long contracts. The remaining contract market value is 20 x 1,000 x $70, or $1,400,000. Applying the 10% adjustment produces a $140,000 deduction. Final net capital is therefore $2,100,000 less $140,000, or $1,960,000. The $60,000 trading loss has already reduced tentative net capital, so deducting it again would double count the loss. An ordinary securities haircut does not replace the specified commodity adjustment.

• $1,900,000 deducts the recognized $60,000 trading loss a second time.
• $1,540,000 applies the adjustment to both gross positions instead of using the permitted offset.
• $1,890,000 applies a 15% securities haircut to the net exposure rather than the supplied commodity schedule.

Question 141

Topic: Net Capital

An established fully disclosed introducing broker-dealer uses the basic net capital method. It does not carry customer accounts or hold customer securities.

Customers occasionally submit checks payable to the introducing broker-dealer. The firm deposits each check into its operating account and wires an equivalent amount to its carrying firm on the next business day. It does not operate under a qualifying Rule 15c3-3(k)(2)(i) arrangement.

The firm’s aggregate indebtedness is $1,800,000, and no other activity-based minimum applies. What is the firm’s minimum net capital requirement?

• A. $250,000
• B. $120,000
• C. $50,000
• D. $5,000

Best answer: A

Explanation: Receipt and deposit of customer funds payable to the firm trigger the $250,000 fixed minimum, which exceeds the $120,000 variable requirement.

The applicable capital category depends on the firm’s actual handling of customer assets, not its description as an introducing broker-dealer or the speed of forwarding. Checks payable to the firm and deposited into its operating account constitute receipt of customer funds. Because the firm lacks a qualifying Rule 15c3-3(k)(2)(i) arrangement, the applicable fixed minimum is $250,000.

Under the basic method, the variable requirement for an established firm is aggregate indebtedness divided by 15:

The required minimum is the greater of the applicable fixed minimum and the variable requirement. Comparing $250,000 with $120,000 produces a minimum net capital requirement of $250,000.

• The $5,000 category generally requires a qualifying introducer not to receive customer funds or securities.
• The $50,000 category does not cover customer funds made payable to and deposited by the member.
• The $120,000 amount is the basic-method variable requirement, but it does not exceed the applicable fixed minimum.

Question 142

Topic: Operations and Records

A carrying broker-dealer must process the following corporate action and matched customer trade. All listed dates are business days.

Validated records:

CORPORATE ACTION NOTICE
Event: Partial liquidating cash distribution
Rate: $5.00 per share
Record date: Wednesday, June 18
Payment date: Friday, June 20
Ex-date: Monday, June 23
Convention: Trades through June 20 carry the payment by due bill
Shares canceled: None

TRADE RECORD
June 20: Customer A sold 1,000 shares to Customer B
Regular-way settlement: June 23
Cash received for A's record-date position: $5,000

Which posting correctly reflects the entitlement, event classification, and resulting share position?

• A. Credit Customer B $5,000 through due-bill processing, classify the cash as a liquidating payment, and retain B’s 1,000-share position.
• B. Credit Customer B $5,000 through due-bill processing, classify the cash as an ordinary dividend, and retain B’s 1,000-share position.
• C. Credit Customer A $5,000 based on record-date ownership, classify the cash as a liquidating payment, and retain B’s 1,000-share position.
• D. Credit Customer B $5,000 through due-bill processing, classify the cash as a liquidating payment, and close B’s 1,000-share position.

Best answer: A

Explanation: The trade occurred before the ex-date, the notice classifies the cash as a liquidation payment, and no shares are canceled.

For a distribution using a due-bill convention, the ex-date determines whether a trade carries the distribution. Customer B purchased the shares on June 20, before the June 23 ex-date, so B receives the $5,000 entitlement even though Customer A was the record-date holder and the issuer’s cash initially arrived against A’s position. Due-bill processing transfers that economic entitlement to B.

The corporate-action notice expressly identifies the cash as a partial liquidating distribution, so it should not be recorded as ordinary dividend income. The notice also states that no shares are canceled. Accordingly, the corporate action does not remove B’s 1,000 shares after the June 23 settlement. The trade record, corporate-action notice, ex-date, and due-bill terms together support the posting.

• Record-date ownership explains the initial receipt but does not override the due-bill entitlement attached to a trade before the ex-date.
• Ordinary-dividend classification conflicts with the validated notice identifying a liquidating cash distribution.
• Closing the share position would be appropriate only if the corporate action canceled or surrendered shares; this notice does not.

Question 143

Topic: Net Capital

A corporate broker-dealer has the following verified regulatory capital record. Amounts for subordinated agreements are outstanding principal balances.

There are no other relevant equity adjustments or satisfactory subordination agreements. What is the firm’s regulatory subordinated debt-to-debt-equity-total percentage?

• A. 49.0%
• B. 61.2%
• C. 96.0%
• D. 250.0%

Best answer: A

Explanation: Non-equity subordinated debt is $2,400,000, and the debt-equity total is $4,900,000, producing 49.0%.

The debt numerator includes the $2,400,000 principal of agreement A because it is satisfactory subordination that does not qualify as equity. Agreement B is excluded from the debt numerator because it qualifies as equity under Rule 15c3-1(d).

Eligible equity accounts equal $1,500,000 + $500,000 - $100,000 = $1,900,000. The regulatory debt-equity total includes both satisfactory subordinations and eligible equity accounts: $2,400,000 + $600,000 + $1,900,000 = $4,900,000. Therefore, the ratio is $2,400,000 / $4,900,000 = 49.0% after rounding. Aggregate indebtedness and net capital are used for a separate basic-method calculation and do not enter this regulatory debt-equity ratio.

• 61.2% incorrectly includes the $600,000 equity-qualifying agreement in the debt numerator.
• 96.0% divides non-equity subordinated debt by equity alone, omitting subordinated debt from the debt-equity total.
• 250.0% is aggregate indebtedness divided by net capital, which is a separate basic-method ratio.

Question 144

Topic: Net Capital

A carrying broker-dealer is preparing its month-end net capital workpaper. Before the adjustments below, GAAP net worth is $2,000,000 and unrestricted firm cash is $1,100,000.

• Proprietary common stock is carried at $400,000 but has a closing market value of $360,000. It is readily marketable, subject to a 15% haircut, and has no applicable offsets or concentration charge.
• An unsecured $120,000 employee receivable is included in assets and is nonallowable for net capital purposes.
• The customer reserve requirement increases from $700,000 to $950,000. The firm completes a $250,000 transfer from unrestricted cash to its properly designated Special Reserve Bank Account.
• The reserve deposit remains a firm asset, has no bank lien, and creates no new liability because the related customer credits are already recorded.
• No other adjustments apply.

What should the FINOP report as final net capital and unrestricted firm cash immediately after completing the workpaper and reserve transfer?

• A. Final net capital of $1,786,000 and unrestricted firm cash of $1,100,000.
• B. Final net capital of $1,786,000 and unrestricted firm cash of $850,000.
• C. Final net capital of $1,536,000 and unrestricted firm cash of $850,000.
• D. Final net capital of $1,780,000 and unrestricted firm cash of $850,000.

Best answer: B

Explanation: The market loss, nonallowable receivable, and haircut reduce net capital, while the reserve transfer reduces unrestricted cash but not equity.

First recognize the $40,000 market loss, reducing adjusted net worth to $1,960,000. Deducting the $120,000 nonallowable employee receivable produces tentative net capital of $1,840,000. The haircut is applied to the updated $360,000 market value: 15% x $360,000 = $54,000. Final net capital is therefore $1,840,000 - $54,000 = $1,786,000.

The $250,000 reserve deposit is an asset reclassification rather than an expense, distribution, or new liability. Because the properly designated cash remains a firm asset, the transfer does not create another net capital deduction. It does, however, restrict cash previously available for general obligations. Unrestricted firm cash declines to $1,100,000 - $250,000 = $850,000.

• Deducting the $250,000 reserve transfer from capital incorrectly treats an asset reclassification as an expense or distribution.
• Leaving unrestricted cash at $1,100,000 ignores that the transferred funds are restricted for customer protection.
• Applying the 15% haircut to the stale $400,000 carrying value produces $60,000 instead of the required $54,000 haircut.

Question 145

Topic: Operations and Records

On Monday, an institutional customer buys 1,000 shares at $50 per share, plus a $75 commission, for regular-way settlement on Tuesday. The trade will settle COD through the customer’s bank custodian.

Standing instructions:

• The customer must instruct the bank with the security, quantity, settlement date, broker’s DTC participant number, and full net settlement amount.
• The firm must send corresponding trade details to the customer and bank.
• The bank must acknowledge a matched DVP instruction before the securities are released.
• Free delivery and separate payment are not authorized.

The firm’s confirmation and DTC instruction show $50,075. The customer’s bank instruction shows $50,000, and the bank reports unmatched - net money difference.

What should the financial and operations principal direct the firm to do?

• A. Have the customer amend the bank instruction to $50,075 and obtain the bank’s matched DVP acknowledgment before release.
• B. Obtain the bank’s acknowledgment of the custody account and use free delivery, followed by a separate $50,075 cash transfer.
• C. Amend the firm’s delivery instruction to $50,000 and obtain the bank’s matched DVP acknowledgment, then collect the commission separately.
• D. Obtain the customer’s written confirmation of available funds and release the $50,075 DVP delivery while the bank record remains unmatched.

Best answer: A

Explanation: The customer’s custodian instruction must reflect the full net amount and match the firm’s DVP settlement record.

A COD transaction settled DVP requires the broker’s and custodian’s records to agree on the security, quantity, settlement date, participant information, and full net settlement amount. The $75 commission is part of the amount due, so the correct net amount is $50,075. Because the customer’s bank instruction shows only $50,000, the transaction remains unmatched. The customer must correct its instruction to the custodian, and the firm must obtain the bank’s matched acknowledgment before releasing the securities for T+1 settlement. Evidence that funds are available or that the custody account exists does not establish an operational match. Changing the broker’s amount or separating the securities and cash movements would also depart from the confirmed trade and the standing DVP instructions.

• Reducing the delivery amount excludes the commission from the confirmed net settlement and improperly separates its collection.
• A customer funds confirmation does not correct the custodian’s unmatched settlement instruction.
• Free delivery followed by a wire abandons the required DVP structure and contradicts the standing instructions.

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