Series 28: Customer Protection and Cash

Series 28 Customer Protection and Cash questions help you isolate one part of the FINRA outline before returning to a mixed practice test. The questions below are original Securities Prep practice items aligned to this topic and are not copied from any exam sponsor.

Topic snapshot

Sample questions

Question 1

A fully disclosed introducing broker-dealer claims the Rule 15c3-3 exemption and promptly transmits all customer checks to its clearing firm. In a daily processing account reconciliation, the FINOP sees that three customer checks totaling $7,500 were recorded by the introducing firm as sent to the clearing firm, but only $5,000 appears as posted on the clearing report. Which responsibility best belongs to the introducing firm in this situation?

• A. Perform the possession or control determination for the affected customer property
• B. Hold future customer checks until the clearing firm fixes the posting error
• C. Compare its transmittal records to the clearing report, document the break, and pursue correction
• D. Recompute and fund the customer reserve bank account for the $2,500 difference

Best answer: C

Explanation: The introducing firm must reconcile its own records to the clearing firm’s activity and escalate unresolved differences for correction.

Even when a clearing firm carries the accounts, the introducing firm remains responsible for the accuracy of its own books and reconciliations. Here, the FINOP should identify the unmatched transmission, document it, and follow up with the clearing firm until it is corrected.

The key distinction is between custody/customer protection functions handled by the clearing firm and record-integrity/reconciliation functions that remain with the introducing firm. In a fully disclosed arrangement, the introducing firm does not hold customer funds or securities, and it may claim the Rule 15c3-3 exemption. But it still must keep accurate records of what it received and transmitted, compare those records to clearing reports, investigate breaks, retain support, and escalate exceptions.

In this case, the firm’s own check log shows $7,500 sent, while the clearing report reflects only $5,000 posted. That mismatch is an introducing-firm reconciliation problem first, even though the clearing firm must ultimately correct its posting if it made the error. The main takeaway is that outsourcing custody does not outsource the introducing firm’s duty to reconcile and evidence its records.

• Reserve funding is a clearing-firm customer protection function, not the exempt introducing firm’s response to this break.
• Possession or control relates to custody of customer property, which is not the introducing firm’s role here.
• Holding future checks conflicts with the prompt-transmission model because the introducing firm should not retain customer funds while waiting for a correction.

Question 2

An introducing broker-dealer is fully disclosed and does not hold customer funds or securities. Under its clearing agreement, the carrying firm issues margin calls and maintains the customer accounts. The introducing firm’s procedures require daily review of the carrying firm’s margin exception report and escalation of any unresolved call that is past due.

A daily report shows a customer’s maintenance call for $25,000 was due 5 business days ago and remains unmet. No approved extension or other documentation appears in the file. Which action best aligns with the introducing firm’s FINOP responsibilities?

• A. Escalate the aged deficiency, document the exception review, and confirm no additional credit is extended without proper approval
• B. Accept a customer check at the branch and forward it to the carrying firm the next day
• C. Remove the exception from follow-up after the registered representative says the customer will pay soon
• D. Leave the item to the carrying firm because only the carrying firm is responsible for margin calls

Best answer: A

Explanation: An unresolved past-due margin call with no documented approval requires escalation, documentation, and control over further credit exposure.

Even though the carrying firm issues and maintains the margin account, the introducing firm must monitor exception reports, preserve evidence of review, and escalate unresolved deficiencies. A past-due call with no approved extension should not be ignored or handled informally.

The key concept is introducing-firm oversight of margin deficiencies under a fully disclosed clearing arrangement. The carrying firm may hold the account and issue the call, but the introducing firm still has a FINOP responsibility to review exception reporting, maintain accurate records, and escalate unresolved items that could reflect improper maintenance of credit or weak controls.

Here, the call is already past due and the file shows no approved extension or other supporting documentation. The sound response is to document the review, escalate the aged deficiency to the appropriate principal and clearing contact, and ensure that additional credit is not continued informally outside firm procedures. Waiting, relying on verbal assurances, or taking customer funds at the branch would undermine compliant margin oversight and records integrity.

The closest distractor is the idea that margin is solely the carrying firm’s problem, but introducing firms still must monitor and escalate under their own procedures and clearing relationship.

• Sole carrying-firm duty is too narrow because the introducing firm must still review exceptions and escalate unresolved deficiencies.
• Taking a customer check is improper here because the introducing firm does not hold customer funds and should not solve the deficiency by branch custody.
• Relying on oral assurance fails because verbal promises do not satisfy documentation or exception-resolution controls.

Question 3

An introducing broker-dealer clears through another firm and does not hold customer funds or securities. The FINOP reviews the daily day-trading exception report for supervisory follow-up. One margin account is coded as a pattern day trader. The clearing firm uses day-trading buying power equal to 4 times the account’s start-of-day maintenance margin excess. The account’s start-of-day maintenance margin excess is $18,000, and the day’s round-trip purchases total $88,000. If any excess becomes a day-trading margin call, what amount should the FINOP flag for follow-up?

• A. $16,000
• B. $18,000
• C. $88,000
• D. $72,000

Best answer: A

Explanation: Day-trading buying power is $72,000, so the $88,000 activity exceeded it by $16,000, which is the amount to flag.

The FINOP should compare the day’s activity with the account’s permitted day-trading buying power. Here, 4 times the $18,000 maintenance excess equals $72,000, so the $88,000 of round-trip purchases creates a $16,000 excess that requires follow-up.

This tests day-trading exception monitoring in an introducing-firm setting. Even though the clearing firm carries the account and would typically issue the formal day-trading margin call, the introducing firm’s FINOP still reviews exception reports and flags items needing supervisory follow-up. The calculation is straightforward:

• Start-of-day maintenance margin excess: $18,000
• Day-trading buying power: \(4 \times 18{,}000 = 72{,}000\)
• Round-trip purchases: $88,000
• Excess subject to follow-up: \(88{,}000 - 72{,}000 = 16{,}000\)

The key point is to identify the amount of the excess, not the total activity or the permitted buying power.

• Using the excess alone misses that maintenance margin excess must first be multiplied by the stated 4-times factor.
• Using permitted buying power identifies the limit correctly but does not calculate the amount exceeded.
• Using total purchases ignores that only the portion above permitted buying power becomes the day-trading exception amount.

Question 4

An introducing broker-dealer that does not carry customer accounts reviews margin exception reports from its clearing firm. Which statement is most accurate?

• A. One customer’s margin excess may automatically cover another customer’s deficit.
• B. Using a clearing firm eliminates the introducing firm’s margin oversight duty.
• C. Regulation T governs initial credit, while maintenance rules govern ongoing equity.
• D. A maintenance deficiency can be cured only with new cash deposits.

Best answer: C

Explanation: Initial margin is a Regulation T concept, while maintenance requirements apply to the account’s continuing equity position.

Regulation T addresses the initial extension of credit in a margin account. Maintenance requirements apply after the position is established and focus on whether the account continues to have sufficient equity.

The key distinction is between initial margin and maintenance margin. Regulation T governs the initial extension of credit when a customer establishes or increases a margin position. After that, the account must continue to meet maintenance requirements under applicable FINRA, exchange, or house standards.

For a Series 28 introducing firm, the clearing firm may perform the carrying and operational margin calculations, but the introducing firm still must review exception information and maintain oversight consistent with its clearing arrangement and supervisory controls. Also, margin is not handled as a free pool across unrelated customer accounts, and curing a deficiency is not limited to one method in every case. The best statement is the one that correctly separates initial credit from ongoing equity monitoring.

• The claim that only new cash can cure a maintenance deficiency is too narrow; permitted liquidation can also restore required equity.
• The idea of using one customer’s excess to cover another customer’s deficit ignores account-by-account margin treatment.
• The claim that a clearing firm removes the introducing firm’s oversight role is incorrect; outsourced carrying functions still require monitoring.

Question 5

An introducing broker-dealer that does not carry customer accounts claims the Rule 15c3-3 exemption. Its draft net capital computation shows net capital of $62,000, including a $20,000 subordinated loan. The firm’s minimum net capital requirement is $50,000. During review, the FINOP discovers the subordination agreement was never executed by the lender, so the funding support is not properly documented. What is the primary regulatory red flag?

• A. Overstated net capital and a possible deficiency
• B. Late filing exposure on audited financials
• C. Loss of the Rule 15c3-3 exemption
• D. A documentation gap with no capital effect

Best answer: A

Explanation: If the undocumented subordinated loan cannot be included, net capital falls to $42,000, below the $50,000 minimum.

The key issue is that improperly documented capital support generally cannot be relied on in net capital. Here, removing the $20,000 subordinated loan drops net capital from $62,000 to $42,000, which is below the firm’s $50,000 minimum.

Subordinated funding can support a broker-dealer’s net capital only if it is properly executed and allowable under the applicable rules and approvals. In this scenario, the lender never executed the subordination agreement, so the FINOP should treat that funding as unreliable for regulatory capital purposes. Once the $20,000 is excluded, the firm’s net capital falls below its stated minimum requirement.

• Draft net capital reported: $62,000
• Unsupported subordinated funding: $20,000
• Adjusted net capital: $42,000
• Minimum required: $50,000

That makes the primary concern a net capital overstatement and potential deficiency, not merely a paperwork issue.

• Exemption status is not the main issue because Rule 15c3-3 exemption depends on the firm’s business model and transmission practices, not this funding document defect.
• Audit timing is secondary because the immediate regulatory impact is on current net capital compliance, not the annual filing calendar.
• Documentation only misses the core problem: the bad documentation directly affects whether the funding counts as allowable capital.

Question 6

An introducing broker-dealer that does not carry customer accounts projects a net capital deficiency on its next FOCUS filing unless it adds qualifying capital before month-end. The owner can provide $150,000 immediately, but only if the firm grants a collateral interest in Treasury securities. Assume the financing counts in net capital only if documented as an approved subordination arrangement, and no repayment or withdrawal is permitted without the required approval. What is the best FINOP decision?

• A. Postpone documentation until after the FOCUS filing.
• B. Execute an approved secured demand note before including the funds.
• C. Record a collateralized demand loan as a normal payable.
• D. Execute a standard subordinated loan and give collateral informally.

Best answer: B

Explanation: Because the lender requires collateral, the suitable qualifying capital method is a properly approved secured demand note, not ordinary debt or informal collateralization.

A secured demand note is the best fit when the lender insists on collateral but the firm needs the financing to qualify for net capital purposes. Under the stem, the arrangement cannot support net capital until it is properly documented and approved, and it cannot be freely withdrawn afterward.

The key issue is matching the funding form to the capital purpose. The firm needs qualifying capital before its next FOCUS filing, and the owner will lend only on a collateralized basis. That makes a properly documented secured demand note the suitable structure, because it is designed for subordinated capital treatment when collateral is required and the regulatory conditions are satisfied.

A regular payable or ordinary demand loan does not become net capital simply because cash was received. Likewise, an informal side promise to pledge collateral does not solve the documentation and approval requirement in the stem. The FINOP’s best decision is to use the capital form that fits both constraints: collateral for the lender and approved subordination treatment for the firm.

The closest trap is the ordinary subordinated loan with a separate collateral promise, because the collateral feature should be built into the proper approved structure, not handled informally.

• Informal collateral fails because the lender’s collateral protection must be reflected in the proper approved capital arrangement.
• Normal payable fails because ordinary debt does not provide qualifying subordinated capital for net capital purposes.
• Late documentation fails because the stem says the financing counts only after the required documentation and approval are effective.

Question 7

An introducing broker-dealer is preparing its month-end net capital schedule and wants to reflect planned funding.

Funding schedule
Cash contribution received from owners      $75,000
12-month note from sole owner               $100,000
Firm plans to count note as subordinated debt
Written subordination agreement             Not executed
FINRA approval/effective filing             Not obtained

Based on the exhibit, which action is fully supported?

• A. Exclude both items until the next annual audit is filed.
• B. Count both funding sources because the owner note has a 12-month term.
• C. Count the owner note now because the firm is only an introducing broker-dealer.
• D. Count only the cash contribution; exclude the owner note until the subordination is effective.

Best answer: D

Explanation: The cash contribution can increase equity, but the owner note cannot support net capital until a valid subordinated borrowing is properly in effect.

The exhibit supports recognizing the cash contribution, but not the owner note as capital. A borrowing does not become allowable for net capital just because it is from an owner or has a 12-month term; it must be properly documented and effective as subordinated debt.

This item tests the funding effect of subordinated borrowings on net capital. For an introducing broker-dealer, cash paid in by owners can increase net worth once received. By contrast, an owner note can be included for net capital purposes only if it is structured and effective as a subordinated borrowing; without the executed agreement and required effective filing or approval, it is not yet supportable as regulatory capital.

In the exhibit, the deciding facts are:

• cash contribution was received
• the note is only planned to be subordinated
• no subordination agreement is executed
• no FINRA approval/effective filing is in place

So the only conclusion supported by the record shown is to include the cash contribution and exclude the note from allowable capital treatment for now. The term of the note and the firm’s introducing status do not change that result.

• 12-month term is not enough; maturity alone does not make a note allowable subordinated capital.
• Introducing status does not waive subordinated borrowing requirements for net capital treatment.
• Annual audit timing is not the issue; received paid-in capital does not have to wait for the audit to affect net worth.

Question 8

An introducing broker-dealer clears all customer accounts on a fully disclosed basis and does not hold customer funds or securities. During a books-and-records review, the FINOP finds that a representative emailed a spreadsheet with customer names, account numbers, and Social Security numbers to a personal email account. What is the best next step?

• A. Send the spreadsheet to the clearing firm for instructions
• B. Start the firm’s privacy-incident process and document the escalation
• C. Delete the email and address it at the annual audit
• D. Amend the current FOCUS filing to disclose the event

Best answer: B

Explanation: Even without carrying assets, the firm must safeguard customer information, so the first step is to contain, escalate, and document the incident under firm procedures.

A fully disclosed introducing firm may not hold customer assets, but it still handles nonpublic customer information and must protect it. When improper transmission is discovered, the right first move is to activate the firm’s privacy and safeguarding procedures, contain the issue, and document escalation.

The key concept is that privacy and safeguarding duties attach to customer information, not just to custody of cash or securities. An introducing firm often collects, stores, and transmits account-opening and service records that contain nonpublic personal information. If the FINOP discovers an improper disclosure, the correct next step is to follow the firm’s incident-response process: restrict further access, preserve evidence, escalate internally under written procedures, and document the review so the firm can determine remediation and any required follow-up.

Relying on the clearing firm is not enough, because the introducing firm remains responsible for protecting the information in its own systems and communications. Deleting the evidence or treating the matter as a routine FOCUS issue skips the necessary control process.

• Clearing firm reliance fails because the introducing firm still must safeguard customer information it collects or transmits.
• Delete and wait fails because the firm should preserve evidence and document the incident immediately.
• FOCUS first fails because a privacy incident is handled through incident controls and escalation, not as the first step through a filing amendment.

Question 9

A fully disclosed introducing broker-dealer claims the Rule 15c3-3 exemption and does not hold customer funds or securities. Its FINOP is revising procedures for mutual-fund purchases, dividend reinvestment items, and occasional stock certificates received at a branch and promptly forwarded under the carrying arrangement. Which procedure statement is INCORRECT under these facts?

• A. Document receipt and prompt forwarding of certificates and related items.
• B. Open the firm’s own control-location account for customer certificates before forwarding.
• C. Distinguish the firm’s transmittal records from the carrying firm’s money and control-location records.
• D. Require customer checks to be payable to the proper third party, not the introducing firm.

Best answer: B

Explanation: A control-location account is a carrying-firm possession-and-control mechanism, not an account an exempt introducing firm should use to hold customer securities.

An exempt introducing firm should evidence receipt and prompt transmittal of customer checks or securities, but it should not establish its own control-location account to hold them. Money and control-location records are functions tied to the carrying firm’s custody and possession/control responsibilities.

The key distinction is between temporary receipt-and-forwarding records at an exempt introducing firm and custody-related records at the carrying firm. A fully disclosed introducing broker-dealer that does not hold customer funds or securities should have procedures showing that customer checks and certificates are logged, safeguarded briefly if necessary, and promptly transmitted to the carrying firm, fund sponsor, or transfer agent under the established processing flow. It should not create its own control-location account for customer securities, because that implies a custody or possession/control role that belongs with the carrying firm or other proper location.

A good control framework here is:

• record receipt
• verify proper payee or destination
• forward promptly
• retain evidence of transmittal

The closest trap is confusing a transmittal log with a control-location account; the former is appropriate, while the latter is not for this exempt introducing firm.

• Proper payee is acceptable because customer checks for mutual-fund or similar transactions should not be made payable to the exempt introducing firm.
• Transmittal evidence is acceptable because logging receipt and prompt forwarding supports books and records integrity.
• Custody confusion fails because opening a control-location account would treat the introducing firm like a custody location for customer securities.
• Role separation is acceptable because the introducing firm’s records differ from the carrying firm’s money and possession/control records.

Question 10

An introducing broker-dealer clears customer accounts on a fully disclosed basis. After a corporate reorganization becomes effective, the clearing firm’s exception report still shows the old security at its pre-reorganization market value in several customer margin accounts, even though the old position should have been exchanged and is no longer valid collateral. If the FINOP does not escalate the break promptly, what is the most likely consequence?

• A. The firm’s Rule 15c3-3 exemption is automatically lost
• B. The old security remains marginable until the next FOCUS filing
• C. Net capital is reduced by the full value of the affected customer positions
• D. Customer margin excesses and deficits may be misstated

Best answer: D

Explanation: If invalid collateral remains on margin reports after a reorganization, account equity can be overstated or understated, leading to improper calls or delayed corrective action.

Corporate actions and reorganizations can change what counts as valid margin collateral. If the old security is still being used in margin calculations after it should have been exchanged, customer equity and margin status can be wrong, creating an account-processing and control problem.

The key issue is margin-control accuracy after a corporate action. In an introducing firm, the clearing firm may perform the account carrying functions, but the introducing firm’s FINOP still needs to monitor exception reports and escalate processing breaks. Here, the old security should no longer be recognized as valid collateral after the reorganization, so leaving it on margin reports at the old value can distort account equity.

That creates the practical consequence of misstated margin excesses or deficits, which can lead to incorrect margin calls, missed calls, or delayed liquidation or restriction decisions. The main problem is not the firm’s customer protection exemption or an automatic net capital charge; it is inaccurate customer account processing tied to a reorganization event. The closest distractor confuses a customer-account processing error with a firm-level capital consequence.

• Customer protection mix-up fails because a margin processing break does not automatically void an introducing firm’s Rule 15c3-3 exemption.
• FOCUS timing confusion fails because marginability is determined by the security’s actual post-reorganization status, not by the next filing date.
• Capital vs. customer accounts fails because the issue is misstated customer collateral, not an automatic deduction equal to all affected customer positions.

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