Try 10 focused Series 28 questions on Net Capital, with explanations, then continue with the full Securities Prep practice test.
Series 28 Net Capital 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.
| Item | Detail |
|---|---|
| Exam | FINRA Series 28 |
| Official topic | Function 3 - Net Capital |
| Blueprint weighting | 33% |
| Questions on this page | 10 |
An introducing broker-dealer that clears on a fully disclosed basis is preparing its net capital computation. No additional facts about collateralization or aging are available. Based only on the exhibit, which interpretation is fully supported?
Exhibit:
GL 1010 Cash in bank $210,000
GL 1130 Clearing deposit $40,000
GL 1320 Prepaid insurance $8,500
GL 1410 Furniture and equipment, net $12,000
GL 1510 Receivable from affiliate $6,000
Best answer: C
Explanation: Prepaid expenses generally cannot be quickly turned into cash, so they are treated as non-allowable assets in net capital.
The only conclusion fully supported by the exhibit is that prepaid insurance is non-allowable. In net capital, assets that are not readily convertible into cash, such as prepaid expenses, do not count toward liquid resources available to the firm.
Net capital focuses on liquid resources that a broker-dealer could use promptly to meet obligations. A prepaid insurance balance is an advance payment for future coverage, not cash or a readily saleable asset, so it is treated as non-allowable. That is why the FINOP excludes it from allowable assets in the computation.
The other lines require more facts or different treatment. A clearing deposit is not automatically non-allowable just because it is with the clearing broker. An affiliate receivable cannot be assumed allowable merely because the exhibit does not show aging or collateral details. Furniture and equipment are fixed assets and are typically non-allowable, not subject to securities haircuts. The key takeaway is that illiquid or non-cash-use assets are excluded because they are not readily convertible into cash.
An introducing broker-dealer wants to count a lender’s advance as subordinated debt for net capital purposes. Which statement is most accurate?
Best answer: A
Explanation: Qualifying subordinated debt requires a satisfactory written agreement that is junior to general creditors and limits repayment under the net capital rules.
A subordinated liability counts for regulatory capital only when it is legally structured as true subordination. The key features are a satisfactory written agreement, junior status to general creditors, and repayment limits consistent with the net capital rules.
For net capital purposes, a liability does not receive subordinated treatment just because the firm labels it that way. The obligation must be supported by a satisfactory written subordination agreement that legally places the lender behind general creditors and restricts repayment or acceleration so capital is not withdrawn improperly. Those features are what make the amount reliable as regulatory capital support.
A secured borrowing does not qualify because collateral gives the lender priority inconsistent with true subordination. A loan from an affiliate is not automatically acceptable; related-party status does not replace the required agreement and conditions. Likewise, booking the item as long-term debt in the general ledger is only an accounting entry, not proof that the liability qualifies for subordinated capital treatment.
The deciding issue is legal and regulatory substance, not the lender’s identity or the bookkeeping label.
An introducing broker-dealer owns two wholly owned subsidiaries and is preparing its month-end net capital computation. Subsidiary A’s liabilities are formally guaranteed by the broker-dealer. Subsidiary B’s liabilities are not guaranteed, and the broker-dealer is not otherwise liable for them. Assume any required supporting documentation is in place. Which treatment best matches these facts?
Best answer: A
Explanation: The legal responsibility created by the guarantee is the key differentiator, so only the guaranteed subsidiary may be consolidated under the stated facts.
For net capital purposes, the decisive factor here is legal responsibility for the subsidiary’s liabilities, not simple ownership. A guaranteed subsidiary may be consolidated under the stated facts, while a non-guaranteed subsidiary ordinarily remains outside the broker-dealer’s computation.
In a net capital computation, consolidation is driven by whether the broker-dealer is legally exposed to the subsidiary’s obligations. Here, the broker-dealer has formally guaranteed Subsidiary A’s liabilities, so A can be brought into the computation under the stated assumptions. Subsidiary B is wholly owned too, but ownership alone does not create the same capital effect; without a guarantee or other liability, B ordinarily stays separate and the broker-dealer’s investment in it is evaluated separately.
The key comparison is:
The closest trap is treating all wholly owned entities the same, which ignores the legal-liability distinction that drives the capital analysis.
An introducing broker-dealer’s draft net capital workpapers show $132,000 of net capital against a $100,000 minimum. During review of daily operational exception reports, the FINOP identifies two omitted deductions: a $20,000 unsecured receivable and a $15,000 unresolved securities difference. Firm procedures require immediate escalation if a recalculation creates a net capital deficiency, and any deficiency discovered before filing must be reported to regulators the same business day. Which response best aligns with the FINOP’s responsibilities?
Best answer: C
Explanation: Both omitted items must be reflected promptly in the capital computation, and the recalculation creates a deficiency that must be escalated and reported under the stated procedures.
The FINOP should correct the current net capital workpapers as soon as omitted deductions are identified. Here, deducting both items reduces net capital below the firm’s minimum, so the issue must be escalated immediately and handled under the stated same-day notification requirement.
The key principle is that net capital workpapers must reflect all required deductions based on accurate, current books and records. Once the FINOP learns that an unsecured receivable and an unresolved securities difference were omitted, the proper remediation is to update the computation immediately rather than wait for a later close or filing.
Here, the draft computation shows $132,000 of net capital. After deducting $20,000 and $15,000, revised net capital is $97,000, which is $3,000 below the $100,000 minimum. That means the problem is not just a bookkeeping clean-up; it is a net capital deficiency that must be escalated and handled under the firm’s stated same-day notice requirement.
The closest distractors fail because neither later posting, offsetting unrelated deductions, nor reliance on the clearing firm fixes the introducing firm’s own capital computation responsibility.
An introducing broker-dealer that does not carry customer accounts is subject to a $50,000 minimum net capital requirement. The president wants to withdraw $30,000 today because the firm has $140,000 in its bank account. The FINOP’s draft net capital computation shows net worth of $92,000, with $22,000 of furniture, $10,000 of prepaid insurance, and a $15,000 unsecured receivable from an affiliate. What is the primary red flag?
Best answer: A
Explanation: After deducting nonallowable assets, regulatory net capital is only $45,000, below the $50,000 minimum, so management’s cash-based view conflicts with the computed result.
The key red flag is that management is treating bank cash as available regulatory capital. After deducting nonallowable assets, the firm has only $45,000 of net capital against a $50,000 minimum, so the withdrawal request conflicts with the actual regulatory computation.
The controlling concept is regulatory net capital, not cash on deposit or recent profitability. For an introducing broker-dealer, furniture, prepaid expenses, and an unsecured affiliate receivable are nonallowable assets for net capital purposes. Using the draft figures, the firm’s net capital is $92,000 minus $22,000 minus $10,000 minus $15,000, or $45,000. That is already below the stated $50,000 minimum before the proposed $30,000 withdrawal is made.
Because the computed regulatory result shows a deficiency, the primary FINOP concern is net capital compliance and stopping or escalating the withdrawal. Bank balance is not the same as available regulatory capital. Other operational issues may exist in general, but they are not the decision-critical risk in this fact pattern.
A fully disclosed introducing broker-dealer currently does not receive customer funds or securities and therefore uses a $5,000 minimum net capital baseline. Management wants branch offices to begin accepting customer checks made payable to the clearing firm and forwarding them the next business day. During the FINOP’s implementation review, what is the best next step?
Best answer: B
Explanation: Accepting customer checks at the branch can change the firm’s status, so the FINOP should reevaluate the minimum net capital requirement before the activity begins.
Minimum net capital depends on the firm’s actual business activity, not just its prior setup. If the introducing firm starts taking in customer checks, the FINOP should first determine whether that means the firm is now receiving customer funds and therefore needs a different baseline before the new process goes live.
For an introducing broker-dealer, a change in workflow can change the firm’s minimum net capital category. Here, the firm is moving from customers sending funds directly to the clearing firm to branch offices accepting customer checks first. That is the key trigger the FINOP must analyze before implementation.
The proper sequence is:
The FINOP should not wait until after the process starts, and the fact that the checks are payable to the clearing firm does not by itself preserve the old baseline.
At month-end, an introducing broker-dealer’s FINOP reviews three open items: a broker-dealer trade that has been unconfirmed for 3 business days, a securities difference that has remained unresolved for 9 business days, and an unsecured financing charge receivable that is 34 days old. The firm’s net capital procedures state that unresolved securities differences older than 7 business days and unsecured financing charges older than 30 days must be deducted from net capital, while a timely unconfirmed trade may remain an operations exception. If the FINOP leaves all three items only on the exception log, what is the most likely consequence?
Best answer: D
Explanation: The 9-day securities difference and 34-day unsecured financing charge have crossed the stated deduction thresholds, but the 3-day unconfirmed trade may still remain an operations exception.
Net capital treatment depends on the nature and age of the item, not just whether it appears on an exception report. Under the firm’s stated procedures, the aged securities difference and aged unsecured financing charge must be deducted, so leaving them only as exceptions would overstate net capital.
This tests the difference between an operations exception and a required net capital deduction. Some items can remain on an exception log while they are still within an allowed resolution period, but once an item meets the firm’s stated deduction trigger, it must affect net capital even if operations is still researching it.
Here, the 3-day unconfirmed trade is still within the period described in the stem, so it may remain an operations exception. The 9-day unresolved securities difference and the 34-day unsecured financing charge have both exceeded the stated limits, so they must be deducted from net capital. If the FINOP does not take those deductions, the firm’s net capital and related reporting would be overstated.
A regulatory deduction can be required before the firm records a formal write-off in the general ledger.
An introducing broker-dealer reports GAAP net worth of $480,000. The FINOP determines that the firm’s guarantee of an affiliate’s $70,000 bank loan must be reflected as a liability for adjusted net worth, while a nonbinding parent support letter for up to $50,000 does not qualify as capital or subordination. What adjusted net worth should the firm use?
Best answer: B
Explanation: Adjusted net worth starts with $480,000, subtracts the $70,000 guaranteed obligation, and does not add a nonbinding support letter.
Adjusted net worth is reduced by liabilities the firm must recognize, including a guaranteed affiliate loan when the guarantee must be reflected. A nonbinding support letter does not increase net worth unless it is actually funded or properly structured as allowable capital. The resulting adjusted net worth is $410,000.
The core issue is whether each item changes the firm’s recognized capital position. Here, the guarantee of the affiliate’s bank loan must be treated as a liability, so it reduces adjusted net worth dollar for dollar. The parent support letter does not help because it is only an unfunded promise; without an actual contribution or a satisfactory subordinated arrangement, it is not added to net worth.
That leaves adjusted net worth of $410,000. The common trap is to net the support promise against the guarantee, but the support letter is not recognized capital.
The FINOP of an introducing broker-dealer finds a debit balance in a suspense account that cannot be supported by documentation or reconciled to any valid receivable. Until the item is resolved, what is the best net capital treatment?
Best answer: B
Explanation: An unsupported debit asset should not be relied on for net capital and is treated as non-allowable until it is substantiated or cleared.
When an asset balance cannot be supported, the firm should not count it toward net capital. The prudent Series 28 treatment is to treat the balance as a non-allowable asset while the break is investigated and corrected.
The core concept is non-allowable assets. If a debit balance or receivable cannot be substantiated, it may overstate net worth and mask an operational or books-and-records problem. For net capital purposes, the firm should remove the unsupported asset from allowable assets by deducting it as non-allowable until documentation or reconciliation supports it.
This protects the accuracy of the net capital computation and forces prompt remediation of the underlying control deficiency. By contrast, changing the label of the balance, offsetting it, or treating it like a funding instrument does not cure the lack of support. The key takeaway is that unsupported assets are not counted in net capital simply because they appear on the general ledger.
An introducing broker-dealer that does not carry customer accounts or hold customer funds or securities changed business status, so its correct minimum net capital requirement is now $25,000. The March review and filed FOCUS used $5,000 instead. Reported net capital was $18,000, and the filing showed $13,000 excess net capital. Which statement is INCORRECT?
Best answer: D
Explanation: Positive net capital alone does not establish compliance; against the correct $25,000 minimum, $18,000 is a $7,000 deficiency.
The issue is not whether net capital was above zero, but whether it met the firm’s actual minimum requirement. Using $25,000 as the correct minimum, reported net capital of $18,000 means the firm was deficient by $7,000, so a conclusion of compliance would be wrong.
Minimum net capital compliance is measured against the firm’s applicable minimum requirement, not simply against zero. Here, staff used $5,000 when the firm’s actual required minimum was $25,000. That error overstated excess net capital and masked a real deficiency.
Using the correct minimum:
A FINOP reviewing this situation should recalculate compliance, assess whether the FOCUS filing is inaccurate, and determine whether any required notifications, corrections, or business restrictions were triggered. The closest trap is treating positive net capital as automatically compliant, which ignores the applicable minimum standard.
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