Series 24 - Financial Responsibility
and Net Capital Exam-Graded A
What are the two requirements for a subordinated loan? - ANSWER-It must:
- Be in writing for a specified amount of cash or securities
- Have at least a one year duration; no prepayment for first year
What are the three requirements for a temporary subordinated loan? - ANSWER--
Allowed for a maximum duration of 45 days
- No more than three such loans in a 12-month period
- Firm's ratio of AI/NC does not exceed 10:1 or its net capital is not below 120% of the
minimum
When must temporary and regular subordinated loan agreements be filed? - ANSWER-
For SEC, 10 days prior to the effective date. For FINRA, temporary loan agreements 10
days prior to the effective date; and regular subordinated loan agreements 30 days prior
to the effective date.
What is total capital, tentative net capital, and net capital? - ANSWER-Equity + Debt =
Total Capital.
Total Capital - Non-Allowable Assets = Tentative Net Capital.
Tentative Net Capital - Haircuts on security positions = Net Capital.
What is the minimum net capital requirement for a prime broker? - ANSWER-
$1,500,000
What is the minimum net capital requirement for a qualified block positioner? -
ANSWER-$1,000,000
What is the minimum net capital requirement for a carrying broker? - ANSWER-
$250,000
What is the minimum net capital requirement for underwriters and market makers? -
ANSWER-$100,000
What is the minimum net capital requirement for non-carrying brokers? - ANSWER-
$50,000. They receive, but do not hold, customer funds.
What is the minimum net capital requirement for other broker-dealers? - ANSWER-
$5,000. They neither receive nor hold customer funds.
, What are net capital requirements for a market maker? - ANSWER-$100,000 minimum
and $1,000,000 maximum.
$1,000 per stock at $5 or less.
$2,500 per stock above $5.
Does aggregate indebtedness (AI) include subordinated loans? - ANSWER-No. AI does
not include subordinated or collateralized loans (that are not collaterlized by customer
funds).
What is the haircut on common stock with a ready market? - ANSWER-15%
What is the haircut on limited market stock (e.g. OTCBB) (i.e. fewer than 3 market
makers)? - ANSWER-40%
What is the haircut on assets not readily convertible into cash, or on restricted stock
(private placements)? - ANSWER-100%
What is the haircut on undue concentrations? - ANSWER-An extra 15% on any one
non-exempt security position that exceeds 10% of Tentative Net Capital, calculated on
the "concentrated" amount above the 10% limit.
A broker-dealer has computed Tentative Net Capital of $100,000. The firm holds a
$30,000 position in ABC common stock in its inventory. What is the TOTAL haircut to be
taken on the ABC position? - ANSWER-$7,500. The the regular 15% haircut ($4,500),
plus an additional 15% ($3,000) on the amount that exceeds the 10% concentration limit
($20,000).
How often and when must carrying BDs file FOCUS Part I and Part II reports? -
ANSWER-Part I monthly within 10 business days of month end, Part II quarterly within
17 business days of the end of the month and quarter, Part II audited annual within 60
days (90 days if extension granted by SEC).
How often and when must introducing (non-carrying) BDs file FOCUS Part I and Part IIA
reports? - ANSWER-Part I not required, Part II quarterly within 17 business days of the
end of the quarter, Part II audited annual within 60 days (90 days if extension granted
by SEC).
What problems constitute a net capital violation? - ANSWER--N.C. is below minimum
dollar amount
-A.I. to N.C. ratio is greater than 15:1, New firm 8:1
-Outstanding subordinated debt exceeds 70% of debt-equity total for a period exceeding
90 days
What problems require an early warning report? - ANSWER--N.C. is below 120% of
minimum dollar amount
-A.I. to N.C. ratio is greater than 12:1
and Net Capital Exam-Graded A
What are the two requirements for a subordinated loan? - ANSWER-It must:
- Be in writing for a specified amount of cash or securities
- Have at least a one year duration; no prepayment for first year
What are the three requirements for a temporary subordinated loan? - ANSWER--
Allowed for a maximum duration of 45 days
- No more than three such loans in a 12-month period
- Firm's ratio of AI/NC does not exceed 10:1 or its net capital is not below 120% of the
minimum
When must temporary and regular subordinated loan agreements be filed? - ANSWER-
For SEC, 10 days prior to the effective date. For FINRA, temporary loan agreements 10
days prior to the effective date; and regular subordinated loan agreements 30 days prior
to the effective date.
What is total capital, tentative net capital, and net capital? - ANSWER-Equity + Debt =
Total Capital.
Total Capital - Non-Allowable Assets = Tentative Net Capital.
Tentative Net Capital - Haircuts on security positions = Net Capital.
What is the minimum net capital requirement for a prime broker? - ANSWER-
$1,500,000
What is the minimum net capital requirement for a qualified block positioner? -
ANSWER-$1,000,000
What is the minimum net capital requirement for a carrying broker? - ANSWER-
$250,000
What is the minimum net capital requirement for underwriters and market makers? -
ANSWER-$100,000
What is the minimum net capital requirement for non-carrying brokers? - ANSWER-
$50,000. They receive, but do not hold, customer funds.
What is the minimum net capital requirement for other broker-dealers? - ANSWER-
$5,000. They neither receive nor hold customer funds.
, What are net capital requirements for a market maker? - ANSWER-$100,000 minimum
and $1,000,000 maximum.
$1,000 per stock at $5 or less.
$2,500 per stock above $5.
Does aggregate indebtedness (AI) include subordinated loans? - ANSWER-No. AI does
not include subordinated or collateralized loans (that are not collaterlized by customer
funds).
What is the haircut on common stock with a ready market? - ANSWER-15%
What is the haircut on limited market stock (e.g. OTCBB) (i.e. fewer than 3 market
makers)? - ANSWER-40%
What is the haircut on assets not readily convertible into cash, or on restricted stock
(private placements)? - ANSWER-100%
What is the haircut on undue concentrations? - ANSWER-An extra 15% on any one
non-exempt security position that exceeds 10% of Tentative Net Capital, calculated on
the "concentrated" amount above the 10% limit.
A broker-dealer has computed Tentative Net Capital of $100,000. The firm holds a
$30,000 position in ABC common stock in its inventory. What is the TOTAL haircut to be
taken on the ABC position? - ANSWER-$7,500. The the regular 15% haircut ($4,500),
plus an additional 15% ($3,000) on the amount that exceeds the 10% concentration limit
($20,000).
How often and when must carrying BDs file FOCUS Part I and Part II reports? -
ANSWER-Part I monthly within 10 business days of month end, Part II quarterly within
17 business days of the end of the month and quarter, Part II audited annual within 60
days (90 days if extension granted by SEC).
How often and when must introducing (non-carrying) BDs file FOCUS Part I and Part IIA
reports? - ANSWER-Part I not required, Part II quarterly within 17 business days of the
end of the quarter, Part II audited annual within 60 days (90 days if extension granted
by SEC).
What problems constitute a net capital violation? - ANSWER--N.C. is below minimum
dollar amount
-A.I. to N.C. ratio is greater than 15:1, New firm 8:1
-Outstanding subordinated debt exceeds 70% of debt-equity total for a period exceeding
90 days
What problems require an early warning report? - ANSWER--N.C. is below 120% of
minimum dollar amount
-A.I. to N.C. ratio is greater than 12:1
