Quick Review Overview

This Quick Review is for candidates preparing for FINRA’s Series 28 — Introducing Broker-Dealer Financial and Operations Principal Qualification Examination. The goal is fast, exam-focused review before moving into topic drills, mock exams, and detailed explanations.

The Series 28 candidate should think like a financial and operations principal at an introducing broker-dealer: protect the firm’s minimum capital, maintain accurate books and records, file required reports, understand customer protection boundaries, and recognize when a transaction or balance sheet item creates a regulatory capital issue.

Use this page as an independent companion practice aid. It is not affiliated with FINRA or any regulator. Always use current FINRA and SEC materials as the controlling source for rule language and current requirements.

High-Yield Series 28 Mindset

Core Financial Responsibility Framework

The Series 28 heavily tests whether you can classify items correctly and follow the calculation sequence.

Net Capital Core Formula

[ \text{Net Capital}

\text{Net Worth} + \text{Qualified Subordinated Liabilities}

\text{Nonallowable Assets}

\text{Haircuts and Other Charges} ]

Aggregate Indebtedness Ratio

[ \text{AI Ratio}

\frac{\text{Aggregate Indebtedness}}{\text{Net Capital}} ]

Required Net Capital Under the Aggregate Indebtedness Standard

[ \text{Required Net Capital}

\max(\text{Fixed Dollar Minimum},\ \text{Percentage Requirement Based on Aggregate Indebtedness}) ]

For exam purposes, remember the concept: the firm must maintain the greater of the applicable fixed-dollar minimum and the required amount based on indebtedness. If the firm is near a limit, the conservative answer is usually to reduce liabilities, increase allowable capital, restrict withdrawals, or notify as required.

Net Capital Calculation Sequence

Do not jump straight from balance sheet equity to net capital. The exam often tests the order.

1. Start with ownership equity / net worth

   • Assets minus liabilities under appropriate accounting principles.
   • Confirm liabilities are complete, including accruals.

2. Add qualified subordinated borrowings if allowable

   • Only properly documented and approved subordinated liabilities count.
   • Ordinary loans payable are generally liabilities, not capital.

3. Deduct nonallowable assets

   • Assets that are not readily convertible to cash or are not collectible in time.
   • Common examples: furniture, fixtures, prepaid expenses, unsecured receivables, aged receivables, certain deposits, and unresolved differences.

4. Apply securities haircuts

   • Proprietary securities positions are reduced by required deductions.
   • More volatile or less liquid positions usually create larger capital charges.

5. Apply operational and concentration charges

   • Fails, deficits, undue concentration, open commitments, and other specific charges may reduce net capital.

6. Compare net capital to the required minimum

   • Required capital is the greater of the applicable fixed minimum or formula-based requirement.

7. Determine excess net capital

   • Excess net capital is the cushion above the requirement.

[ \text{Excess Net Capital}

\text{Net Capital}

\text{Required Net Capital} ]

Allowable vs. Nonallowable Assets

Quick Classification Rule

Ask:

1. Is the asset cash or readily convertible to cash?
2. Is it free of restriction?
3. Is it collectible promptly?
4. Is there a ready market?
5. Does a rule require a haircut or deduction?

If the answer is no, restricted, aged, uncertain, or unsupported, expect a deduction or nonallowable treatment.

Aggregate Indebtedness Quick Review

Aggregate indebtedness generally focuses on the firm’s money liabilities. The Series 28 often tests whether a balance sheet item belongs in aggregate indebtedness, net capital, both, or neither.

AI Ratio Decision Point

If the question gives aggregate indebtedness and net capital, calculate the ratio and compare it with the applicable limit or warning threshold described in the question.

Plain-English version:

• Higher aggregate indebtedness means more required capital.
• Lower net capital makes the ratio worse.
• Accruing an expense can reduce net worth and increase indebtedness at the same time.
• Reclassifying a receivable as nonallowable reduces capital even though total assets may not change.

Introducing Broker-Dealer vs. Carrying Broker-Dealer

This distinction is central to the Series 28.

Customer Protection Rule Decision Path

    flowchart TD
	    A[Does the firm carry customer accounts?] -->|Yes| B[Expect carrying-firm customer protection obligations]
	    A -->|No| C[Does the firm receive or hold customer funds or securities?]
	    C -->|No| D[Noncarrying / introducing analysis]
	    C -->|Receives only for prompt transmission| E[Check payable to correct party and promptly forward]
	    C -->|Holds or controls| F[Potential custody issue and higher regulatory concern]
	    D --> G[Verify fully disclosed clearing arrangement]
	    E --> G
	    G --> H[Maintain books, records, notices, and exemption support]
	    F --> I[May lose expected treatment; review net capital and customer protection consequences]

Customer Funds and Securities Traps

FOCUS Reports and Financial Reporting

FOCUS reporting is a high-yield Series 28 topic because it connects books, records, capital, and regulatory supervision.

Reporting Review Rules of Thumb

• The books must support the report.
• The report must support the net capital computation.
• The net capital computation must be current enough to detect deterioration.
• Material errors require correction, not silence.
• A firm cannot solve a capital deficiency by delaying the filing.

Books and Records: What to Recognize Quickly

FINRA and SEC recordkeeping expectations are a major part of the financial operations function.

Accrual Accounting Traps

Series 28 questions often hide capital issues inside accounting treatment.

Haircuts and Market Risk

A haircut is a regulatory deduction from the value of proprietary positions. It recognizes that securities may decline in value before they can be liquidated.

Haircut Mistakes

• Using market value as net capital without deduction.
• Netting long and short positions when the rules do not allow it.
• Ignoring concentration.
• Treating restricted stock as freely marketable.
• Forgetting proprietary accounts held at the clearing firm.
• Ignoring unsettled trades that create position exposure.

Fails, Receivables, and Operational Charges

Fails and aged balances are common exam topics because they connect operations to capital.

Exam Rule of Thumb

If an item is old, unresolved, unsecured, disputed, or unsupported, expect the exam to push you toward a deduction, charge, notice, or corrective action.

Early Warning, Deficiency, and Corrective Action

The financial and operations principal must identify capital problems before they become firm-threatening.

Conservative Exam Answer Pattern

When capital is threatened, the best answer usually prioritizes:

1. Recompute net capital accurately.
2. Stop or limit business if required.
3. Notify regulators when required.
4. Correct books and records.
5. Add capital or reduce liabilities.
6. Document the action.

Capital Withdrawals and Subordinated Loans

Capital withdrawals are risky because they reduce the cushion protecting customers and creditors.

Subordination Trap

A loan from an owner is not automatically capital. It must meet the requirements for qualified subordinated debt. Otherwise, it is a payable that may worsen aggregate indebtedness.

Securities Settlement and Operations

Even an introducing broker-dealer must understand trade flow, settlement exposure, and clearing relationships.

Current Settlement Awareness

For many U.S. securities, regular-way settlement is commonly tested as a short settlement cycle. Always confirm the current settlement standard in current exam materials, because settlement cycles can change.

Margin, Credit, and Customer Balances

An introducing firm may not carry margin balances itself, but questions can still test margin concepts because the firm introduces accounts and supervises customer activity.

Underwriting and Contingent Offerings

Series 28 candidates should recognize when underwriting activity affects capital or customer funds.

Offering Trap

A “best efforts” label does not eliminate financial responsibility. Customer funds in a contingent offering must be handled exactly as required by the offering terms and applicable rules.

SIPC and Customer Protection Concepts

SIPC concepts may appear in financial operations questions.

Supervisory and Principal Responsibilities

A Series 28 principal is expected to understand both calculation and control.

Delegation Trap

A FinOp may delegate tasks, but not accountability. If a clerk prepares a capital computation incorrectly, the principal is still expected to supervise, review, and correct it.

AML, Privacy, and Operational Controls

The Series 28 is financial-operations focused, but operational control questions may include related compliance themes.

Trial Balance and Reconciliation Review

A common exam pattern gives a list of balances and asks what adjustment is needed.

Reconciliation Decision Rule

If a reconciliation difference cannot be explained and supported, do not give the firm capital credit for the favorable side of the difference.

Common Series 28 Candidate Mistakes

1. Confusing net worth with net capital
   Net worth is only the starting point. Net capital requires regulatory deductions.

2. Ignoring nonallowable assets
   Accounting assets are not always regulatory capital assets.

3. Forgetting accruals
   Unpaid expenses can reduce net worth and increase aggregate indebtedness.

4. Treating owner loans as capital automatically
   Only properly qualified subordinated borrowings receive capital treatment.

5. Assuming introducing firms have no customer protection obligations
   Introducing firms still need proper handling, prompt transmission, records, and exemption support.

6. Missing the clearing broker relationship
   Clearing deposits, commissions receivable, fails, and trade breaks often come from the clearing statement.

7. Overlooking haircuts on proprietary positions
   Marketable securities are not counted at full market value for net capital.

8. Failing to age receivables and fails
   Old items become capital problems.

9. Choosing a business-growth answer over a capital-protection answer
   The exam usually rewards financial responsibility, not revenue maximization.

10. Relying on labels instead of facts
    “Introduced,” “escrowed,” “subordinated,” or “fully disclosed” must be supported by actual documentation and conduct.

Fast Calculation Practice Table

Mini Drill Examples

Example 1: Nonallowable Asset

A firm has net worth of 300,000, including 40,000 of furniture and 20,000 of prepaid insurance. Before haircuts, what is the impact?

• Furniture is nonallowable.
• Prepaid insurance is generally nonallowable.
• Tentative capital is reduced by 60,000 before other deductions.

Example 2: Accrued Expense

A firm forgot to accrue 25,000 in legal expenses.

• Liabilities increase by 25,000.
• Net worth decreases by 25,000.
• Aggregate indebtedness may increase by 25,000.
• Net capital and AI ratio both worsen.

Example 3: Proprietary Security Position

A firm owns marketable securities.

• The position may be an allowable asset.
• But it must be reduced by the applicable haircut.
• If concentrated or illiquid, additional deductions may apply.

Example 4: Clearing Receivable

A clearing broker owes the introducing firm a commission receivable.

• If current, supported, and collectible, it may receive favorable treatment.
• If aged, disputed, or unsupported, expect nonallowable treatment or a charge.

Topic Drill Priorities

Use original practice questions to drill the highest-yield Series 28 areas in this order:

1. Net capital computation

   • Nonallowable assets
   • Haircuts
   • Subordinated loans
   • Capital charges

2. Aggregate indebtedness

   • Included vs excluded liabilities
   • AI ratio
   • Required capital
   • Excess capital

3. Introducing broker-dealer operations

   • Fully disclosed clearing
   • Customer funds and securities
   • Clearing deposits
   • Commission receivables

4. Books and records

   • Ledgers
   • Blotters
   • Trial balance
   • Reconciliations
   • Record preservation

5. Regulatory reporting

   • FOCUS concepts
   • Annual audit support
   • Amendments and notices
   • SIPC-related concepts

6. Operational risk

   • Fails
   • DKs
   • Aged receivables
   • Suspense items
   • Trade breaks

7. Supervision and controls

   • Written procedures
   • Delegation
   • Escalation
   • Capital withdrawal review

Final Quick Review Checklist

Before you move into a mock exam, make sure you can answer these without notes:

• What is the difference between net worth and net capital?
• Which assets are usually nonallowable?
• How do haircuts affect proprietary positions?
• What liabilities are usually included in aggregate indebtedness?
• How do you calculate excess net capital?
• What happens when a firm discovers an unrecorded liability?
• Why can a prepaid expense reduce regulatory capital?
• What makes a receivable nonallowable?
• How does an introducing firm handle customer checks and securities?
• What is the purpose of a fully disclosed clearing agreement?
• Why are fails and DKs financial responsibility issues?
• What records support a FOCUS report?
• What should a FinOp do when capital is near a warning level?
• Why is an owner loan not automatically capital?
• What is the difference between SIPC protection and market-loss protection?

Practical Next Step

Use this Quick Review to identify weak areas, then move directly into Series 28 topic drills with original practice questions and detailed explanations. Focus especially on net capital, aggregate indebtedness, nonallowable assets, customer funds handling, and FOCUS-report support before attempting full-length mock exams.