Answers
- 1. Answer: C. Rationale: The minimum net capital requirement for carrying firms or clearing firms is $250,000. A carrying firm is one that handles customer accounts.
- 2. Answer: B. Rationale: The net capital requirement for dealers is $100,000.
- 3. Answer: D. Rationale: Net capital is the excess of a firm’s liquid assets over a firm’s total liabilities. In other words, the firm’s liquid assets minus the firm’s total liabilities.
- 4. Answer: D. Rationale: Aggregate indebtedness is made up of a firm’s liabilities that are not secured by any of the firm’s assets. This includes accounts payable, loans that are backed by customer securities, and customer free credit balances. The ratio of aggregate indebtedness to net capital of an established firm cannot be greater than 15:1. The ratio of aggregate indebtedness to net capital of a first-year firm cannot be greater than 8:1.
- 5. Answer: B. Rationale: In calculating the net capital requirement for broker-dealers, the SEC allows for a discount to the market value of securities they hold, called a haircut. For commonly traded equity securities, the SEC Net Capital Rule allows firms to take a 15% haircut on their inventory of standard securities. 15% of $25,000 is $3,750.
- 6. Answer: B. Rationale: A subordination agreement is an investment in a broker-dealer. The investor loans money and/or securities to the firm, and the firm pays interest on this subordinated debt. Subordinated debt has the lowest priority of any debt in liquidation proceedings.
- 7. Answer: C. Rationale: The SEC requires broker-dealers to file subordination agreements 10 days before the effective date. The number of copies that must be submitted to the SEC is two.