Series 27 > Chapter 5 > Flashcards

Chapter 5 Flashcards

(91 cards)

Study These Flashcards
1
Q

What is SEC Rule 15c3-1 commonly called?

A

The Net Capital Rule.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is the primary purpose of the Net Capital Rule?

A

To ensure broker-dealers maintain sufficient liquid assets to meet customer claims and risks.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What key risk does the Net Capital Rule prevent?

A

Excessive leverage by broker-dealers.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What standards does the Net Capital Rule establish?

A

Minimum liquidity standards.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is the key regulatory ratio under the Net Capital Rule?

A

Aggregate Indebtedness divided by Net Capital (AI/NC).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is the maximum permitted AI/NC ratio?

A

15 to 1.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What method determines net capital under AI?

A

Aggregate indebtedness (standard) method.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What does aggregate indebtedness generally include?

A

Liabilities not secured by firm-owned assets.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Are liabilities secured by firm-owned assets included in AI?

A

No.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Are loans secured by customer securities included in AI?

A

Yes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Are customer free credit balances included in AI?

A

Yes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What creates a customer free credit balance?

A

Funds owed to customers and payable on demand.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Are non-customer free credit balances included in AI?

A

Yes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Are accounts payable included in AI?

A

Yes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is a fail to receive for customers?

A

Securities not received on settlement date for customer purchases.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Are fails to receive for customers included in AI?

A

Yes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Are fails to receive for the firm’s account included in AI?

A

Generally no.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

When is a firm fail to receive included in AI?

A

When resold with no satisfactory offset.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is a satisfactory offset?

A

Stock borrowed or a fail to deliver.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Are securities loaned for the firm’s account included in AI?

A

No.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Why are firm securities loaned excluded from AI?

A

They are collateralized by firm securities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Are securities loaned for customer accounts included in AI?

A

Yes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Why are customer securities loaned included in AI?

A

The cash collateral belongs to customers.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What do securities borrowed usually support?

A

Customer short sales.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
What percentage of securities borrowed is excluded from AI?
85%.
26
What percentage of securities borrowed is included in AI?
15%.
27
Is the firm's short trading account included in AI?
No.
28
Are short security differences over 30 days old included in AI?
No.
29
Are subordinated loans included in AI?
No.
30
Are open contractual underwriting commitments included in AI?
No.
31
Are deferred tax liabilities included in AI?
No.
32
Are adequately secured fixed liabilities used in the business included in AI?
No.
33
What are the two types of subordination agreements?
Subordinated Loan Agreement (SLA) and Secured Demand Note (SDN).
34
What defines a Subordinated Loan Agreement?
Known rate, amount, and maturity.
35
What defines a Secured Demand Note?
Funds provided on demand with securities pledged as collateral.
36
Must FINRA approve subordination agreements?
Yes.
37
Does SIPC protect subordinated lenders?
No.
38
How may a broker-dealer reduce AI?
By the lesser of the reserve requirement or amount on deposit.
39
Which rule sets the reserve requirement?
SEC Rule 15c3-3.
40
What is the final step in calculating AI?
Deduct the lesser of required or deposited reserve.
41
What is the general net capital requirement ratio?
1/15 of aggregate indebtedness.
42
What is the first-year net capital requirement ratio?
1/8 of aggregate indebtedness.
43
Which requirement must always be met?
The greater of ratio or minimum dollar requirement.
44
What is the minimum net capital for a general securities firm?
$250,000.
45
What is the minimum net capital for a dealer or market maker?
$100,000.
46
What is the minimum net capital for a fully disclosed introducing broker?
$5,000.
47
What is the minimum net capital for an OTC derivatives dealer?
$20 million.
48
Can a $5,000 or $50,000 introducing broker do firm-commitment underwriting?
No.
49
What underwriting may such firms participate in?
Best-efforts or all-or-none.
50
How many proprietary trades may introducing brokers execute annually?
No more than 10.
51
What is the market-maker requirement per stock above $5?
$2,500.
52
What is the requirement per stock at $5 or below?
$1,000.
53
What is the maximum market-maker net capital requirement?
$1,000,000.
54
What is the alternative net capital method based on?
Aggregate debit items under Rule 15c3-3.
55
What is the minimum under the alternative method?
$250,000 or 2% of aggregate debit items.
56
What is the minimum equity percentage under the debt-equity rule?
30%.
57
What is moment-to-moment capital compliance?
Requirement to maintain sufficient net capital at all times.
58
59
60
61
What determines a broker-dealer’s minimum dollar net capital requirement?
The type of business the broker-dealer conducts.
62
Does a broker-dealer need to meet both the ratio test and the dollar minimum?
Yes, the firm must meet the greater requirement.
63
What is the minimum net capital for an OTC derivatives dealer?
$20,000,000
64
What activities define an OTC derivatives dealer?
Acts as a counterparty in eligible OTC derivative transactions.
65
What is the minimum net capital for a prime broker?
$1,500,000
66
What does a prime broker do?
Provides centralized clearing and account services for customers trading through multiple firms.
67
What is the minimum net capital for a qualified block positioner?
$1,000,000
68
What is the minimum net capital for a self-clearing executing firm in a prime brokerage agreement?
$1,000,000
69
What is the minimum net capital for firms that clear prime brokerage transactions?
$1,000,000
70
What is the minimum net capital for a general securities firm?
$250,000
71
What defines a general securities firm?
Carries customer accounts and holds customer funds or securities.
72
What is the minimum net capital for a clearing broker-dealer?
$250,000
73
What is the minimum net capital for a municipal broker’s broker?
$150,000
74
What activities are municipal broker’s brokers limited to?
Executing for other municipal dealers; no underwriting or proprietary trading.
75
What is the minimum net capital for a dealer or market maker?
$100,000
76
What makes a firm a dealer?
Executing more than 10 trades per year for its own investment account.
77
What is the minimum net capital for a firm that carries accounts but does not hold customer funds or securities?
$100,000
78
Which SEC rule paragraph applies to firms that carry accounts but do not hold funds?
SEC Rule 15c3-3 paragraph k(2)(i).
79
What is the minimum net capital for an introducing broker that receives customer securities for immediate delivery?
$50,000
80
Can a $50,000 introducing broker assume underwriting liability?
No.
81
What is the minimum net capital for a selling group member in a firm-commitment underwriting?
$50,000
82
What is the minimum net capital for firms selling mutual funds directly with the issuer?
$25,000
83
What products fall under the $25,000 requirement?
Redeemable investment company shares and insurance separate accounts.
84
What is the minimum net capital for a fully disclosed introducing broker?
$5,000
85
What does fully disclosed mean?
The clearing firm maintains all customer records.
86
What is the minimum net capital for subscription-only mutual fund sellers?
$5,000
87
What restriction applies to subscription-only mutual fund sellers?
Customer checks must be payable to the distributor.
88
What is the minimum net capital for all other broker-dealers (e.g., M&A or DPP firms)?
$5,000
89
When is a broker-dealer considered to be holding customer funds?
When payment is made directly in the broker-dealer’s name.
90
If a check is payable to a third party and promptly forwarded, is the firm holding funds?
No, if forwarded by noon of the next business day.
91
Which net capital requirement always takes priority?
The larger of the ratio requirement or dollar minimum.
Series 27
flashcards
Decks in class (4)
# Cards
Brainscape helps you reach your goals faster, through stronger study habits.
© 2026 Bold Learning Solutions. Terms and Conditions