FINRA Series 28 Practice Test & Mock Exam

Series 28 is the Introducing Broker-Dealer Financial and Operations Principal Qualification Examination. It is narrower than Series 27 because it focuses on firms that do not carry customer accounts or hold customer funds or securities. If you are searching for Series 28 sample questions, a practice test, mock exam, or simulator, this is the main Securities Prep page to start on web and continue on iOS or Android with the same account. This page includes 24 sample questions with detailed explanations so you can validate the introducing-firm FINOP style before opening the full simulator.

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What this Series 28 practice page gives you

• a direct route into the Securities Prep simulator for Series 28
• 24 blueprint-aligned sample questions focused on introducing-firm FINOP decisions
• topic guidance for financial reporting, books and records, net capital, and customer-protection exemption logic
• a clear free-preview path before you subscribe
• the same subscription across web and mobile

Series 28 exam snapshot

• Provider: FINRA
• Exam: Introducing Broker-Dealer Financial and Operations Principal Qualification Examination
• Practice reference: 95 practice questions in 120 minutes
• Registration context: FINOP route for introducing firms that do not carry customer assets

Topic weighting for Series 28 practice

What Series 28 is really testing

Series 28 is a control-and-classification exam. The candidate has to know what belongs to the introducing firm, what belongs to the clearing firm, how records and filings stay defensible, and how a smaller firm’s capital and cash-management decisions affect regulatory compliance.

How Series 28 differs from similar routes

How to use the Series 28 simulator efficiently

1. Start with net capital and books-and-records drills because those are the cleanest scoring areas.
2. Review every miss until you can explain whether the duty belongs to the introducing firm, the clearing firm, or both.
3. Move into mixed sets once you can switch between FOCUS logic, customer-protection exemption, and operational exceptions without hesitation.
4. Finish with timed runs so the 120-minute pace feels controlled.

Free preview vs premium

• Free preview: 24 public sample questions on this page plus the web app entry so you can validate the question style and explanation depth.
• Premium: the full Series 28 practice bank, focused drills, mixed sets, timed mock exams, detailed explanations, and progress tracking across web and mobile.

Free samples and full bank

• Live now: this exact practice route is available in Securities Prep on web, iOS, and Android.
• On-page sample set: this page includes 24 public sample questions from the current practice coverage.
• Full app: open the Securities Prep web app or mobile app for broader timed coverage.

Good next pages after Series 28

• Series 27 if you are comparing the introducing-firm FINOP path against the carrying-firm route
• Series 99 if you want the operations-professional workflow page beside the FINOP path
• Series 14 if the real target is compliance-officer control rather than FINOP responsibility
• FINRA if you want the full principal, FINOP, and operations route map first

Free review resources

Use these free SecuritiesMastery.com resources for concept review, then return to this page when you are ready to practice in Securities Prep.

• Series 28 Cheat Sheet
• Series 28 Study Guide

Focused sample questions

Use these focused Series 28 sample-question pages when you want to isolate one official topic area before returning to the mixed simulator.

• Financial Reporting
• Operations and Records
• Net Capital
• Customer Protection and Cash
• Free Series 28 Full-Length Practice Exam

24 Series 28 sample questions with detailed explanations

These 24 questions are selected from the live FINRA Series 28 practice coverage and span the main blueprint areas shown above. Use them to test readiness here, then continue into the full Securities Prep simulator for broader timed coverage.

Question 1

Topic: Function 2 - Operations, General Securities Industry Regulations, and Preservation of Books and Records

A fully disclosed introducing broker-dealer does not hold customer funds or securities. During an internal review, the FINOP finds that several customer account title changes and third-party disbursement instructions sent to the clearing firm were processed, but the introducing firm kept no customer authorization records and no evidence of supervisory approval. What is the most likely consequence of this condition?

• A. A books-and-records deficiency that impairs verification of authorized customer assets
• B. Automatic loss of the firm’s Rule 15c3-3 exemption
• C. An immediate net capital charge at the clearing firm for each affected account
• D. No meaningful issue, because the clearing firm maintains the official account records

Best answer: A

Explanation: For an introducing firm, missing customer authorizations and approval evidence create a records-control problem even when the clearing firm carries the accounts. Examiners may be unable to confirm that account changes or disbursement instructions affecting customer assets were properly authorized, which makes the firm less examination-ready and can lead to expanded testing. The core issue is record integrity. An introducing broker-dealer may rely on a clearing firm for custody and many operational functions, but it still must make and preserve required customer-account records and evidence of approvals for material account changes. If title changes or third-party disbursement instructions were processed without retained authorizations, examiners cannot readily verify that the assets reflected at the clearing firm belong in the correct accounts or that the instructions were properly approved.

That is most likely treated as a books-and-records deficiency with examination-readiness consequences, such as deeper document requests, expanded sample testing, or a requirement to reconstruct support. It does not automatically mean the firm has lost its customer protection exemption, and it does not automatically create a net capital charge simply because the documentation is incomplete.

Question 2

Topic: Function 1 - Financial Reporting

An introducing broker-dealer books monthly rent and technology charges from its parent company. The percentages used to allocate the costs change from month to month, and the firm has no written agreement, invoices, or allocation worksheets. At quarter-end, what is the most likely consequence for the firm’s financial reporting?

• A. Only related-party disclosure is affected; the booked amounts themselves are not a reporting risk.
• B. The charges are presumed proper because the entities are under common control.
• C. Auditors or regulators may require adjustments because the affiliate amounts are not adequately supported.
• D. Responsibility for support shifts to the clearing firm before the next filing.

Best answer: C

Explanation: Affiliate transactions need support and a consistent allocation basis. Without an agreement, source documents, or a documented method, the recorded expenses and any related affiliate balances may be challenged and may need adjustment in the firm’s financial statements or FOCUS reporting. The core issue is books-and-records reliability for affiliated transactions. When a broker-dealer records parent-company charges using changing allocation percentages and keeps no agreement, invoices, or allocation worksheets, the FINOP cannot demonstrate that the expenses and any related due-to or due-from balances are fairly stated. That creates a reporting risk because auditors and regulators may view the amounts as unsupported, leading to proposed adjusting entries, reclassification, added disclosure scrutiny, or control findings.

A sound process usually includes documented terms, a consistent allocation methodology, and support tying the entry to underlying costs. Common ownership does not by itself validate the entries, and the clearing firm does not take over the introducing firm’s responsibility for affiliate accounting. The key consequence is unreliable reported amounts, not merely a disclosure-only issue.

Question 3

Topic: Function 4 - Customer Protection, Funding and Cash Management

A fully disclosed introducing broker-dealer claims the Rule 15c3-3 exemption because it does not hold customer funds or securities. Its clearing firm sends a daily report showing several margin accounts with unresolved Reg SHO close-out or borrow exceptions and aged Rule 15c3-3(m) sell-order-completion items. The exceptions have increased customer margin debits, but the introducing firm has no evidence of branch follow-up or escalation. What is the primary control concern for the FINOP?

• A. Missing escalation of aged delivery exceptions affecting margin debits
• B. Automatic loss of the Rule 15c3-3 exemption
• C. Privacy-rule breach from internal exception-report sharing
• D. Immediate net capital deduction for all affected debits

Best answer: A

Explanation: The main issue is a margin-control breakdown at the introducing firm. Even though the clearing firm performs carrying functions, the introducing firm must review exception reports, evidence follow-up, and escalate unresolved close-out or sell-order-completion items when they affect customer debits. For a fully disclosed introducing firm, the primary FINOP concern is oversight and documentation, not performing the carrying firm’s mechanics. When Reg SHO close-out or borrow exceptions and Rule 15c3-3(m) sell-order-completion items remain unresolved and customer margin debits rise, the firm needs evidence that someone reviewed the exceptions, followed up with the branch or clearing firm, and escalated aged items under firm procedures. That is the most important red flag because unresolved delivery problems can affect margin calls, debit balances, and liquidation decisions.

The fact pattern does not say the firm lost its customer-protection exemption or incurred an automatic net capital deduction. The immediate problem is the absence of a control trail showing timely introducing-firm follow-up on exceptions with customer-impact consequences.

Question 4

Topic: Function 3 - Net Capital

A fully disclosed introducing broker-dealer currently does not receive customer funds or securities and uses that status in setting its minimum net capital baseline. Which proposed change should the FINOP treat as most likely to change that baseline?

• A. Move FOCUS report preparation to an outside service provider
• B. Execute a subordinated loan agreement to add excess net capital
• C. Accept customer checks and stock certificates for forwarding to the clearing broker
• D. Enhance electronic retention of blotters and ledgers

Best answer: C

Explanation: Minimum net capital for an introducing broker-dealer depends in part on its business model, including whether it receives customer funds or securities. If the firm begins taking possession of checks or certificates, the FINOP must reassess the firm’s category and baseline requirement. The key concept is that a firm’s minimum net capital baseline is tied to how it operates, not just to how much capital it currently has. A fully disclosed introducing firm that does not receive customer funds or securities is in a different regulatory posture from a firm that does take possession of customer checks or certificates, even if those items are then forwarded to the clearing broker.

A subordinated loan affects available capital, but it does not by itself change the firm’s business model classification. Outsourcing FOCUS preparation is a reporting-process decision, and stronger records retention is a books-and-records control improvement. Neither changes the firm’s introducing status in the way customer possession does.

The main takeaway is to separate changes in capital amount from changes in the firm’s minimum capital category.

Question 5

Topic: Function 2 - Operations, General Securities Industry Regulations, and Preservation of Books and Records

An introducing broker-dealer is updating its business continuity plan. Which arrangement best preserves access to required books and records and emergency contact information if the main office becomes unavailable?

• A. Backup files kept on a server in the same office suite
• B. Original paper records stored at the main office with duplicate keys
• C. A reliance on the clearing firm to maintain all firm records and employee contacts
• D. Current off-site electronic records with authorized remote access and updated contact lists

Best answer: D

Explanation: The best arrangement is the one that still works when the primary office is inaccessible. Off-site electronic record storage with authorized remote access, plus current emergency contact information, directly supports business continuity and records retrieval obligations. For business continuity purposes, the key issue is continued access when the main office, systems, or staff location is disrupted. An introducing broker-dealer should be able to retrieve required books and records from an alternate location and reach the right internal and external contacts promptly. That is why off-site electronic storage with controlled remote access and maintained emergency contact lists is the strongest choice.

A setup that depends on the same physical office remaining available does not meaningfully protect continuity. Likewise, the introducing firm cannot assume its clearing firm maintains every record or emergency contact item the introducing firm itself must preserve and access. The takeaway is that continuity planning should emphasize off-site availability, retrieval capability, and current contact data.

Question 6

Topic: Function 1 - Financial Reporting

An introducing broker-dealer’s FOCUS Report is due today. The FINOP submits it electronically at 4:20 p.m., but the system rejects the filing because a required attachment is unreadable. A second attempt at 5:10 p.m. is also rejected, and the report is still unaccepted at the deadline. Which action is NOT appropriate?

• A. Escalate the unresolved exception and promptly notify the firm’s DEA
• B. Treat the report as timely because the first transmission was before the deadline
• C. Continue correcting the filing and resubmit as soon as possible
• D. Preserve the rejection messages and document both submission attempts

Best answer: B

Explanation: The key control is accepted filing status, not merely an attempt to transmit before the deadline. When a FOCUS filing is rejected and remains unresolved at the deadline, the FINOP should document the exception, escalate it, notify the appropriate regulator, and resubmit promptly. For FOCUS filing controls, an electronic filing is not effectively complete if the system rejects it and the report remains unaccepted. In this scenario, the firm has an unresolved filing exception at the deadline, so the proper response is to preserve evidence of the rejection, escalate the issue internally, notify the designated examining authority as appropriate, and continue working to obtain acceptance as quickly as possible.

The inaccurate action is treating the filing as timely just because the first transmission occurred before the deadline. A failed transmission attempt does not satisfy the control objective of an accepted regulatory filing. The key takeaway is that FINOP controls should focus on acceptance, documentation, escalation, and prompt correction of the exception.

Question 7

Topic: Function 4 - Customer Protection, Funding and Cash Management

An introducing broker-dealer clears all margin accounts through its carrying firm. In a daily exception report, the FINOP sees that 78% of total customer margin debits come from four accounts, and those accounts are largely collateralized by the same thinly traded stock. The accounts are current today, but the stock has had large recent price swings. What is the primary red flag?

• A. A sharp price break could create concentrated liquidation deficits requiring prompt review and escalation.
• B. The concentration by itself voids the firm’s Rule 15c3-3 exemption.
• C. The report mainly indicates a books-and-records preservation failure.
• D. The concentration primarily shows that the firm needs subordinated debt financing.

Best answer: A

Explanation: The key concern is concentration risk in margin debits. When a few accounts make up most debits and depend on the same volatile collateral, a fast market move can turn a routine margin situation into liquidation losses or unsecured deficits that require immediate attention. Concentration of margin debits is a credit and liquidation-risk issue. Here, most of the debit exposure is tied to only four accounts and to one thinly traded stock, so one adverse price move could affect all of them at once. That makes the exposure more dangerous than a diversified margin book, even though the accounts are currently current.

For an introducing firm, the carrying broker may handle the actual margin lending and liquidation, but the FINOP should still treat this pattern as a heightened review and escalation item. The control concern is the possibility of rapid collateral deterioration, forced liquidations, and resulting unsecured debit balances or losses concentrated in a small portion of the firm’s business.

The important takeaway is that concentration itself is the red flag; it does not automatically mean a customer protection, records, or funding problem.

Question 8

Topic: Function 3 - Net Capital

An introducing broker-dealer is preparing its monthly FOCUS Report. Before finalizing tentative net worth, the FINOP finds that the ledger includes a $40,000 unrealized gain on a proprietary investment, a $10,000 deferred tax liability recorded solely because of that gain, and no accrual for a $18,000 legal settlement that outside counsel says is probable and reasonably estimable. What is the best next step?

• A. Remove the gain now, but leave the deferred tax liability and settlement until the year-end audit.
• B. File the FOCUS from the current ledger, then amend later if the settlement is paid.
• C. Accrue the settlement after filing and keep the tax liability as an offset to the gain.
• D. Adjust the books and net capital schedule now: remove the gain, remove the related deferred tax liability, and accrue the settlement.

Best answer: D

Explanation: The FINOP should correct the books and regulatory computation before the FOCUS figures are finalized. Here, the unrealized gain is removed from net worth, the deferred tax liability tied only to that excluded gain is also removed, and the probable, estimable settlement must be accrued now. In the FOCUS preparation sequence, the right step is to fix the underlying net worth items before filing, not after. An unrealized gain that is not includable in regulatory net worth must be backed out. If a deferred tax liability exists only because of that excluded gain, it should also be removed so the regulatory adjustment reflects the true net effect. By contrast, a probable and reasonably estimable legal settlement is a real liability and should be accrued before tentative net worth is finalized.

• Remove unrealized gain: \(-\$40,000\)
• Remove related deferred tax liability: \(+\$10,000\)
• Accrue settlement: \(-\$18,000\)

That produces a net decrease of $48,000 to tentative net worth. The closest trap is delaying the entry until after filing, but the computation must be based on corrected books.

Question 9

Topic: Function 2 - Operations, General Securities Industry Regulations, and Preservation of Books and Records

An introducing broker-dealer uses a third-party records vendor under its business continuity plan. During a disruption, the firm expects to create 2,200 required electronic records per business day for 3 business days. Its records policy requires alternate storage for 120% of expected volume and retrieval within 24 hours. Which vendor arrangement is adequate?

• A. 6,600-file capacity; retrieval in 12 hours
• B. 8,000-file capacity; retrieval in 24 hours
• C. 7,500-file capacity; retrieval in 24 hours
• D. 7,920-file capacity; retrieval in 48 hours

Best answer: B

Explanation: Adequacy depends on both storage capacity and retrieval time. The firm needs to preserve 2,200 records for 3 days, then add the 20% policy buffer: 6,600 records becomes 7,920. Only the arrangement with 8,000-file capacity and 24-hour retrieval satisfies both requirements. The core issue is whether the alternate vendor arrangement can preserve all required records created during the outage and still make them retrievable within the firm’s stated standard. First calculate expected disruption volume, then apply the policy buffer.

So an adequate arrangement must provide at least 7,920 files of capacity and retrieval within 24 hours. The 8,000-file arrangement clears both tests. The closest distractor is the 7,920-file arrangement, which meets capacity exactly but fails because retrieval takes 48 hours.

Question 10

Topic: Function 1 - Financial Reporting

A fully disclosed introducing broker-dealer that claims the Rule 15c3-3 exemption is preparing its month-end FOCUS report. The firm does not hold customer funds or securities. On the last business day, it received a customer check payable to the clearing broker and forwarded it the same day; the trial balance also shows a required $60,000 clearing deposit and an $18,000 commission receivable from the clearing broker. What is the best reporting decision?

• A. Report only the commission receivable as a firm asset and omit the clearing deposit.
• B. Report the clearing deposit and commission receivable as firm assets, but not the customer check.
• C. Report all three balances as firm assets until the clearing broker posts them.
• D. Report the customer check and clearing deposit as firm assets, but not the commission receivable.

Best answer: B

Explanation: The key is to separate the introducing firm’s own balances from customer-related items merely passing through to the carrying firm. The clearing deposit and commission receivable are firm assets, while the customer check payable to the clearing broker and transmitted the same day is not the introducing firm’s asset. For FOCUS classification, the introducing firm should report balances that belong to the firm itself, even if they arise from the clearing relationship. A required clearing deposit is the firm’s asset, and a commission receivable from the clearing broker is also a firm asset because it represents revenue due to the broker-dealer. By contrast, a customer check payable to the carrying firm that was promptly forwarded is customer-related property in transit, not an asset of the introducing firm. The fact that the introducing firm briefly handled the check does not change ownership, and the fact that the clearing firm carries the accounts does not make the firm’s own deposit or receivable disappear from regulatory reporting. The best decision is the one that reports firm balances and excludes the customer item.

Question 11

Topic: Function 4 - Customer Protection, Funding and Cash Management

A fully disclosed introducing broker-dealer does not hold customer funds or securities. Under the firm’s written procedures, a withdrawal restriction remains in place while a margin call is unmet and may be lifted only after the carrying firm confirms the call has been satisfied. A daily exception report shows one customer account still has an open maintenance call; the customer has sold securities today, but the sale has not settled, and the customer says a wire will be sent tomorrow. The customer asks to withdraw cash today. Which action is INCORRECT under these facts?

• A. Refrain from disbursing funds directly because the firm is introducing only.
• B. Document the exception and escalate any release request to the carrying firm.
• C. Remove the restriction now because the sale and promised wire should cover the call.
• D. Keep the restriction until the carrying firm confirms the call is satisfied.

Best answer: C

Explanation: The restriction should remain because the account still has an open margin call and the firm’s procedures require carrying-firm confirmation before release. Anticipated proceeds and a promised wire are not the same as a satisfied call. This item turns on withdrawal restrictions in an introduced account. The firm’s own procedures say the restriction stays in place until the carrying firm confirms that the open maintenance call has been satisfied. Here, the call is still open, the securities sale has not yet settled, and the promised wire has not been received. Those facts do not support releasing cash today.

For a fully disclosed introducing broker-dealer, the operational role is to review the exception, follow the written procedures, and coordinate with the carrying firm that maintains the account controls. The closest distractors are appropriate because they reflect monitoring, documentation, and escalation. The flawed action is treating expected or promised funds as if they had already cured the call.

Question 12

Topic: Function 3 - Net Capital

An introducing broker-dealer that does not carry customer accounts is finalizing its monthly net capital computation. The FINOP notes a $12,000 deferred tax asset from loss carryforwards, a $9,000 accrued legal liability with no invoice, memo, contract, or other support, and a proposed $100,000 subordinated loan that allows the lender to demand repayment on 10 days’ notice. Which statement is INCORRECT?

• A. The FINOP should document the liability review before changing the books or computation.
• B. The unsupported legal accrual may be added back immediately to improve net capital.
• C. The proposed subordinated loan should be excluded while the demand feature remains.
• D. The deferred tax asset should be deducted as a non-allowable asset.

Best answer: B

Explanation: The inaccurate statement is the one treating the unsupported accrual as an automatic add-back. A deferred tax asset is non-allowable, and a subordinated loan with a lender demand feature is not valid regulatory capital; an unsupported liability requires investigation and documentation before any change is made. Net capital adjustments must be based on supported records and valid capital instruments. A deferred tax asset is generally treated as non-allowable because it is not a liquid asset available to meet firm obligations. A subordinated borrowing can support net capital only if the agreement meets regulatory subordination requirements; a lender demand or early-withdrawal feature makes it defective for that purpose.

For the unsupported accrued liability, the FINOP cannot simply add it back to improve capital just because backup is missing. The proper step is to investigate the basis for the accrual, obtain support if it exists, and correct the books only if the liability is not valid. The key takeaway is that missing documentation is a control problem to resolve, not automatic permission to increase net capital.

Question 13

Topic: Function 2 - Operations, General Securities Industry Regulations, and Preservation of Books and Records

A FINRA examiner asks an introducing broker-dealer for all records supporting its AML review of two customer accounts for April. The clearing firm’s transaction report shows 14 outgoing transfers, but the introducing firm’s AML case file documents review of 11 transfers, and a spreadsheet used for the draft response reflects a different date range. Before replying, which action is NOT appropriate?

• A. Identify which records came from the clearing firm and which came from the firm
• B. Preserve the spreadsheet, emails, and case notes used in the response
• C. Reconcile the count and date range to one supported population
• D. Submit the 11 reviewed transfers now and research the unmatched items later

Best answer: D

Explanation: The firm should first resolve record differences and ensure the response is complete, consistent, and reproducible. Sending a partial response based on 11 transfers when another source shows 14 leaves the submission unsupported and risks giving regulators inaccurate information. When a regulator requests supporting records, the firm must be able to show that its response is based on a complete, consistent, and retrievable record set. Here, the transaction count and date range do not match across the clearing report, AML case file, and draft spreadsheet. That means the firm should reconcile the population first, preserve the source materials used to compile the response, and clearly distinguish clearing-firm records from the introducing firm’s own supervisory and AML records.

An introducing broker-dealer may rely on clearing-firm data for some activity, but it still needs a response package that it can explain and reproduce from its books, files, and retained supporting materials. Submitting only the 11 reviewed transfers and promising to research the rest later is the least appropriate action because it provides an incomplete response before the discrepancy is resolved.

Question 14

Topic: Function 1 - Financial Reporting

An introducing broker-dealer that clears on a fully disclosed basis has year-end stockholders’ equity of $900,000. The firm’s financial statement policy requires note disclosure for any unaccrued contingency, guarantee, commitment, or other off-balance-sheet exposure whose maximum net exposure exceeds 10% of equity. Counsel and management concluded that none of the following items requires an accrual.

Which item should the FINOP ensure is disclosed in the notes rather than only tracked internally?

• Guarantee of affiliate office lease: remaining payments $118,000; affiliate reimbursement agreement $35,000

• Technology conversion contract: noncancelable commitment $82,000

• Trading error claim: estimated maximum exposure $74,000; expected insurance recovery $8,000

• Bank letter of credit supporting landlord deposit: face amount $130,000; firm cash collateral $30,000

• A. The technology conversion commitment

• B. The affiliate office lease guarantee

• C. The trading error claim

• D. The bank letter of credit

Best answer: D

Explanation: Use the policy threshold given in the stem. Ten percent of $900,000 is $90,000, and only the bank letter of credit has a net unaccrued exposure above that level after considering the firm’s cash collateral. This item tests when an off-balance-sheet item moves from internal monitoring to financial statement note disclosure under a stated materiality policy. Because the stem says no accrual is required for any item, the FINOP’s job is to compare each item’s net exposure with the firm’s disclosure threshold.

• Threshold: 10% of $900,000 = $90,000
• Lease guarantee: $118,000 - $35,000 = $83,000
• Technology commitment: $82,000
• Trading error claim: $74,000 - $8,000 = $66,000
• Letter of credit: $130,000 - $30,000 = $100,000

Only the letter of credit exceeds $90,000, so it should be disclosed in the notes. The closest distractor is the lease guarantee, but its net exposure remains below the stated threshold.

Question 15

Topic: Function 4 - Customer Protection, Funding and Cash Management

An introducing broker-dealer clears all customer transactions through a carrying firm and claims the Rule 15c3-3 introducing-firm exemption. After the firm begins arranging reverse repurchase transactions for several institutional customers, the carrying firm sends a daily margin exception report showing large debit concentrations and aged calls tied to that activity. Which statement by the FINOP is INCORRECT?

• A. Persistent deficiencies may require heightened review or liquidation discussions with the carrying firm.
• B. The introducing firm should monitor the exception report and escalate unusual debit concentrations.
• C. The carrying agreement should clearly allocate margin-processing responsibilities.
• D. Because the carrying firm issues margin calls, this activity is outside the introducing firm’s oversight.

Best answer: D

Explanation: Reverse repurchase activity can create or enlarge customer debit balances, so it remains relevant to margin oversight even at an introducing firm. The carrying firm may perform the mechanics, but the introducing firm’s FINOP still has monitoring, escalation, and control responsibilities. In an introducing-firm structure, the carrying firm often performs margin calculations, issues calls, and handles custody mechanics. But that does not remove the introducing firm’s responsibility to oversee the financial and operational impact of customer financing activity, including reverse repurchase transactions that create concentrated debits or aged deficiencies. The FINOP should review exception reporting, confirm that responsibilities are clearly assigned in the carrying agreement, and escalate unusual or persistent exposures to appropriate supervisory personnel.

The key point is that introducing status and a Rule 15c3-3 exemption do not mean the firm can ignore margin risk indicators. The inaccurate statement is the one claiming the activity falls outside the introducing firm’s oversight simply because the carrying firm sends the calls.

Question 16

Topic: Function 3 - Net Capital

A fully disclosed introducing broker-dealer does not carry customer accounts or hold customer funds or securities. It plans to begin introducing institutional customers for listed options activity and to fund the expansion with a parent-company subordinated loan. Which statement is INCORRECT for the firm’s FINOP?

• A. Because the clearing firm carries the accounts, no capital-impact review is needed.
• B. The FINOP should assess whether the new activity affects minimum net capital.
• C. The subordinated loan supports net capital only if properly documented and approved.
• D. The FINOP should consider whether the change affects regulatory filings or disclosures.

Best answer: A

Explanation: An introducing firm’s FINOP cannot treat a new product line or new financing as a routine operations matter just because a clearing firm carries the accounts. The firm remains responsible for evaluating its own net capital implications, the validity of subordinated financing, and any related filing or disclosure impact. The key concept is that changes in business activity or financing structure can create net capital implications for an introducing broker-dealer even when customer accounts are carried elsewhere. A fully disclosed arrangement shifts carrying functions to the clearing firm, but it does not transfer the introducing firm’s responsibility for its own capital compliance. Here, adding listed options introductions increases business complexity and requires a capital-impact review, while a parent-company subordinated loan can count only if it satisfies the required subordination conditions. The FINOP also should evaluate whether the change triggers updated disclosures or regulatory reporting considerations. The inaccurate statement is the one treating the expansion as purely an operations matter because the clearing firm carries the accounts.

Question 17

Topic: Function 2 - Operations, General Securities Industry Regulations, and Preservation of Books and Records

During a monthly review at an introducing broker-dealer that clears on a fully disclosed basis, the FINOP finds that a registered representative used a personal email account for fee-related customer messages and accepted entertainment above firm policy. The branch manager also failed to retain evidence of required exception-report reviews under the firm’s WSPs. Which response is NOT appropriate?

• A. Escalate promptly to compliance and the supervisory principal, and preserve the related records.
• B. Expand testing in that office and recommend stronger supervisory and evidence-retention controls.
• C. Assess whether customer communications or charges require correction, clearing-firm follow-up, or regulatory notice.
• D. Treat the matter as an internal bookkeeping issue and wait for the annual audit if no customer complained.

Best answer: D

Explanation: When conduct issues and supervisory-control weaknesses appear together, the FINOP should escalate promptly, preserve records, and assess customer and regulatory impact. Waiting for an annual audit because no complaint has surfaced is not an acceptable response. This scenario involves two linked problems: possible conduct violations and a breakdown in supervisory controls. For an introducing broker-dealer FINOP, the proper path is to escalate promptly to the appropriate compliance and supervisory personnel, preserve relevant books and records, and determine whether the issue affected customer communications, fees, or reporting obligations. The absence of a customer complaint does not reduce the need to escalate, because weak supervision can allow a broader pattern to continue and can undermine the firm’s records integrity.

Appropriate next steps include targeted follow-up testing, documenting the control failure, and considering whether the clearing relationship, customer corrections, or regulatory notice is implicated by the facts. The key takeaway is that a combined conduct-and-control issue is not just an accounting cleanup item; it requires immediate supervisory and compliance attention.

Question 18

Topic: Function 1 - Financial Reporting

An introducing broker-dealer shares office space and personnel with its parent company. The parent pays the common expenses and bills the broker-dealer one monthly lump-sum “administrative charge.” During year-end financial statement preparation, the FINOP finds no written allocation method, no support for the month-end payable to the parent, and no related-party note describing the arrangement. Which action best aligns with sound financial reporting standards?

• A. Prepare support for the allocation, record any affiliate balance accurately, and add clear related-party disclosure
• B. Keep the lump-sum expense entry if total annual expenses appear reasonable
• C. Wait for the auditor to request details before documenting the arrangement
• D. Record the charge in miscellaneous expense and omit a related-party note

Best answer: A

Explanation: Related-party transactions must be understandable from the firm’s books and financial statements, not just explained orally later. The best action is to document the allocation basis, record any payable or receivable to the affiliate correctly, and disclose the nature and effect of the arrangement clearly. The core issue is transparency of a related-party arrangement. When a parent allocates shared expenses to an introducing broker-dealer, the FINOP should make sure the firm’s records show how the charge was determined, what balance is owed or due at period-end, and how the arrangement affects the financial statements. A vague lump-sum entry is not enough if regulators or auditors cannot tell the nature, terms, and financial impact of the affiliate transaction.

Good practice is to:

• retain support for the allocation method,
• record the correct affiliate payable or receivable, and
• include a clear related-party disclosure describing the relationship and amounts involved.

That approach supports accurate books and records and gives reviewers a clear basis to evaluate the firm’s reported expenses and liabilities.

Question 19

Topic: Function 4 - Customer Protection, Funding and Cash Management

A fully disclosed introducing broker-dealer wants added funding to support operations and maintain net capital while expenses rise. The owner proposes a cash advance under a formal subordination agreement that the firm plans to submit for required regulatory approval before using it in net capital. Which statement is INCORRECT?

• A. It is intended to stand behind general creditors in liquidation.
• B. It may help the firm continue operations without an immediate equity contribution.
• C. It can be treated as ordinary short-term debt and counted in net capital before approval.
• D. It can support regulatory capital if the subordination is properly documented and approved.

Best answer: C

Explanation: Subordinated financing can bolster an introducing firm’s regulatory capital and operational flexibility, but only if it is structured under the required subordination framework. A pending or informal advance cannot simply be counted as net capital like ordinary borrowing. The core concept is that subordinations are a regulated funding source designed to support a broker-dealer’s net capital and ongoing business operations. For that support to count, the financing must be documented as a valid subordination and satisfy the required approval conditions before the firm relies on it in net capital. Its purpose is to provide capital that is available to absorb business risk, which is why the lender’s claim is subordinated to general creditors.

For the facts given, the accurate implications are:

• the funding can strengthen regulatory capital once properly approved
• it can help the firm keep operating during a period of higher expenses
• it is structurally junior to general creditors

The inaccurate statement is the one treating the advance as ordinary short-term debt that can be counted immediately while approval is still pending.

Question 20

Topic: Function 3 - Net Capital

An introducing broker-dealer that does not hold customer funds or securities computes net capital at $11,000 after deducting a $7,000 unsecured receivable from an affiliate and $9,000 of prepaid insurance. The firm’s minimum net capital requirement is $5,000. Management wants to pay an $8,000 distribution today and argues that the affiliate receivable should be treated as available capital because it is due next week.

Which statement is INCORRECT?

• A. Because the receivable is due soon, management may count it now and proceed.
• B. Expected collection next week does not make the receivable allowable today.
• C. Use the current $11,000 net capital figure for the withdrawal decision.
• D. Projected cash should not justify a distribution below the minimum requirement.

Best answer: A

Explanation: Regulatory capital decisions must be based on the firm’s current computed net capital, not on management’s expectation that cash will arrive soon. Here, net capital is already $11,000 after required deductions, so an $8,000 distribution would leave only $3,000, below the $5,000 minimum. The key concept is that net capital is a present regulatory measure based on allowable assets and required deductions as of now. In this scenario, the unsecured affiliate receivable and prepaid insurance have already been deducted, leaving computed net capital of $11,000. A proposed $8,000 distribution would reduce net capital to $3,000, which is below the firm’s $5,000 minimum requirement.

Expected collection next week does not change today’s regulatory result. Management cannot treat a non-allowable asset as available capital merely because payment is anticipated soon. The FINOP should base the withdrawal decision on the computed regulatory figure and reject reasoning that relies on projected cash instead of current allowable capital.

The closest trap is confusing likely liquidity with allowable net capital.

Question 21

Topic: Function 2 - Operations, General Securities Industry Regulations, and Preservation of Books and Records

At an introducing broker-dealer, the FINOP reviews the end-of-day reconciliation to the clearing firm. Which total dollar amount represents operational breaks that require escalation or corrective action today?

Exhibit:

1. Equity purchase executed today:           $140,000
   Not on the settled-items report; settles tomorrow.

2. Equity sale due to settle today:           $82,000
   Rejected by the clearing firm because the account number was wrong.

3. Corporate bond sale executed today:        $36,000
   Not on the settled-items report; settles tomorrow.

4. Cash journal posted twice internally:      $23,000
   No matching entry appears on the clearing cash report.

• A. $281,000
• B. $176,000
• C. $105,000
• D. $82,000

Best answer: C

Explanation: Routine settlement timing differences do not require escalation just because they are absent from a settled-items report before settlement date. The items that require action are the trade rejected for bad account information and the duplicate internal cash journal, which total $105,000. The key distinction is whether the difference is expected because of normal settlement timing or whether it reflects an error, rejection, or unmatched entry. Trades executed today that settle tomorrow can legitimately be missing from a settled-items report at day end, so those amounts are routine timing differences. By contrast, a trade that was supposed to settle today but was rejected for incorrect account information is an operational break, and a cash journal posted twice internally with no clearing-firm match is also a break.

So the FINOP should escalate only these items:

• Rejected sale due today: $82,000
• Duplicate cash journal: $23,000

The total break amount is $105,000. The main trap is counting normal unsettled trades as exceptions requiring corrective action.

Question 22

Topic: Function 1 - Financial Reporting

An introducing broker-dealer is preparing its monthly FOCUS report. During review, the FINOP compares the trial balance to the firm’s mapping worksheet and finds the following:

GL 1135 Clearing deposit mapped to Other assets
GL 1410 Furniture and equipment mapped to Fixed assets
GL 1465 Software subscription prepay not on worksheet
GL 2110 Accrued expenses mapped to Accrued liabilities

The preparer says the omitted prepaid account is small and was manually added to the draft FOCUS under Other assets, so the worksheet was not updated. Which statement is INCORRECT?

• A. Each GL account should be mapped or explicitly excluded.
• B. Manual inclusion is fine if the draft still ties out.
• C. Classification changes should be documented for consistency.
• D. Mapping additions should show preparer and reviewer evidence.

Best answer: B

Explanation: FOCUS line mapping must be complete, documented, and internally consistent. A draft that numerically ties out is not enough if a general ledger account was handled outside the mapping worksheet without documented support and review. The key control is not just whether the draft FOCUS totals agree to the trial balance, but whether the mapping process is complete and evidenced. Here, one GL account was omitted from the worksheet and added manually to the draft report. That breaks the audit trail because the mapping record no longer fully shows how trial balance accounts flow to FOCUS lines.

A sound mapping process should:

• include every GL account or show an intentional exclusion
• document new mappings or reclassifications
• retain evidence of preparation and review
• apply classifications consistently from period to period unless a documented reason supports a change

The tempting alternative is to accept the manual addition because the numbers still tie, but tie-out alone does not prove the mapping is complete or well controlled.

Question 23

Topic: Function 4 - Customer Protection, Funding and Cash Management

An introducing broker-dealer claims the Rule 15c3-3 exemption and currently has net capital of $62,000. Its required minimum net capital is $50,000. Management wants to make a $20,000 owners’ withdrawal this week. Assume a compliant secured demand note or approved subordination increases net capital dollar-for-dollar, while an ordinary unsecured loan does not. Which funding arrangement appears suitable if the firm wants to complete the withdrawal and remain in compliance?

• A. A $8,000 vendor payment deferral
• B. A $7,000 approved secured demand note
• C. A $8,000 approved subordination agreement
• D. A $8,000 unsecured bank loan

Best answer: C

Explanation: The planned withdrawal reduces net capital from $62,000 to $42,000, which is $8,000 below the $50,000 minimum. A qualifying subordinated funding source in at least that amount is suitable, so the approved subordination agreement fits the need. This question tests both amount and classification. First compute the effect of the owners’ withdrawal: current net capital of $62,000 minus $20,000 leaves $42,000. The firm must stay at or above its $50,000 minimum, so it needs $8,000 more in qualifying capital support.

Under the facts given, only a compliant secured demand note or an approved subordination can increase net capital for this purpose. Ordinary unsecured borrowing and simply delaying a payment do not create qualifying subordinated capital. Therefore, the suitable choice is the funding arrangement that both qualifies and covers the full $8,000 shortfall.

The $7,000 secured demand note is the closest alternative, but it still leaves the firm $1,000 under its minimum.

Question 24

Topic: Function 3 - Net Capital

An introducing broker-dealer’s month-end net capital memo states: deduct any unsecured receivable aged more than 30 calendar days in full, and deduct any unresolved short securities difference older than 7 business days at current market value. No deduction is taken for items still within those limits.

Exhibit: Exception report

Expense advance to RR (unsecured)      $6,800   Age 36 days
Short securities difference
  Cost                                 $3,900
  Current market value                 $4,200   Age 9 business days
Clearing fee receivable from clearer   $3,100   Age 4 days

What total deduction should the FINOP take in net capital?

• A. $6,800
• B. $11,000
• C. $14,100
• D. $10,700

Best answer: B

Explanation: Only the exceptions that exceed the limits in the memo are deducted. Here, that is the $6,800 unsecured receivable aged 36 days plus the unresolved short securities difference at its $4,200 market value, totaling $11,000. This item tests whether the FINOP can read an exception report and apply the stated net capital deduction rules. Start by identifying which exceptions are old enough to require a charge: the unsecured receivable is over 30 days old, and the short securities difference is over 7 business days old. The clearing fee receivable is only 4 days old, so it stays out of the deduction.

• Deduct the unsecured receivable in full: $6,800
• Deduct the short securities difference at current market value: $4,200
• Exclude the 4-day clearing receivable: $0

The total deduction is $11,000. The closest trap is using the short difference’s cost instead of its required market value.

In this section

• Series 28: Financial Reporting
  Try 10 focused Series 28 questions on Financial Reporting, with explanations, then continue with the full Securities Prep practice test.
• Series 28: Operations and Records
  Try 10 focused Series 28 questions on Operations and Records, with explanations, then continue with the full Securities Prep practice test.
• Series 28: Net Capital
  Try 10 focused Series 28 questions on Net Capital, with explanations, then continue with the full Securities Prep practice test.
• Series 28: Customer Protection and Cash
  Try 10 focused Series 28 questions on Customer Protection and Cash, with explanations, then continue with the full Securities Prep practice test.
• Free Series 28 Full-Length Practice Exam: 95 Questions
  Try 95 free Series 28 practice questions across the official topic areas, with answers and explanations, then continue with the full Securities Prep question bank.