Series 24 General Securities Principal Exam

Correct: FINRA Rule 5270 broadly prohibits a member or associated person from trading in a security or any related financial instrument (including derivatives like options) when they possess material, non-public information (MNPI) about an imminent block transaction in that security. This prohibition remains in effect until the information about the block trade has been made publicly available through a trade reporting system or other public media. Incorrect: The standard is not based on the price of the proprietary trade relative to the client’s price, as the act of trading on MNPI itself is the violation. There is no ‘riskless principal’ exemption that allows a firm to trade ahead of a block order for its own benefit based on non-public knowledge. While a block trade is typically defined as 10,000 shares or more, the focus of the rule is the misuse of information; simply meeting a size threshold does not create an automatic exemption for trading on non-public information. Takeaway: FINRA Rule 5270 prohibits trading in any security or related instrument while possessing non-public information about an upcoming block trade until that information is public.

Correct: Under FINRA supervisory and registration rules, a principal is permitted to delegate the performance of certain supervisory tasks, such as the initial screening of correspondence for potential complaints or red flags, to other qualified individuals, including unregistered persons. However, the principal must ensure that the individuals are properly trained to perform the specific task and the principal must maintain ultimate responsibility for the adequacy of the review and the overall supervisory system. Incorrect: Option b is incorrect because while the ultimate supervisory decision must be made by a principal, the mechanical or clerical task of screening for keywords or flagging items for further review does not require registration. Option c is incorrect because registration waivers are intended for individuals who are required to be registered but seek an exemption from examination requirements, which does not apply to clerical staff. Option d is incorrect because FINRA Rule 1210 does not mandate a 12-month employment threshold for staff to perform delegated clerical tasks. Takeaway: Principals may delegate the execution of supervisory tasks like correspondence screening to unregistered staff, but they cannot delegate the ultimate responsibility for the effectiveness of the supervision.

Correct: FINRA Rule 2140 prohibits any member firm or associated person from interfering with a customer’s request to transfer their account in connection with the departure of a registered representative. The rule is absolute in that employment disputes, including allegations of non-compete or non-solicitation violations, cannot be used as a justification to delay or block the Automated Customer Account Transfer Service (ACATS) process. The customer’s right to choose their financial institution and move their assets freely is a fundamental protection that overrides the firm’s contractual grievances with the former employee. Incorrect: Seeking an emergency injunction or temporary freeze on transfers is an improper use of the ACATS system to resolve a private contract dispute, as the firm must pursue legal remedies against the representative without involving the customer’s assets. Requiring additional documentation, such as notarized statements or voluntary confirmation letters, constitutes an unnecessary hurdle that interferes with the prompt transfer of accounts. Distinguishing between house accounts and other leads does not grant the firm the right to block a customer-initiated transfer; regardless of how the lead was generated, the customer’s instruction to move the account must be honored without interference. Takeaway: FINRA Rule 2140 mandates that customer account transfers must proceed without delay, regardless of any underlying employment or non-solicitation disputes between the firm and a departing representative.

Correct: Under FINRA Article V, Section 2, and Rule 1010, associated persons are required to keep their Form U4 current. If a firm discovers that a reportable event, such as a bankruptcy within the last 10 years, was omitted, they must file an amendment to the Form U4 within 30 days of discovery. Furthermore, Rule 1122 prohibits the filing of misleading or incomplete information, meaning the firm must also evaluate if the omission was a willful attempt to hide information, which could lead to statutory disqualification. Incorrect: Option B is incorrect because Form BDW is used for the withdrawal of a broker-dealer’s registration, not for individual representative disclosure issues. Option C is incorrect because financial disclosures like bankruptcy are mandatory on Form U4 regardless of whether they involve criminal activity. Option D is incorrect because the 30-day amendment rule applies to the discovery of any material change or omission; waiting for an annual renewal would violate FINRA’s timely filing requirements. Takeaway: Firms must amend Form U4 within 30 days of discovering any material omission or change in an associated person’s reportable history to maintain CRD accuracy.

Correct: Under SEC Regulation S-P (the Safeguards Rule), broker-dealers are required to adopt written policies and procedures that address administrative, technical, and physical safeguards for the protection of customer records and information. These safeguards must be reasonably designed to ensure the security and confidentiality of customer records, protect against anticipated threats or hazards to the security of those records, and protect against unauthorized access that could result in substantial harm or inconvenience to any customer. Incorrect: Providing notices only at account opening is insufficient because firms must generally provide annual privacy notices to customers if they share nonpublic personal information with non-affiliated third parties. Restricting access to a single physical terminal is an impractical operational control that does not satisfy the broader requirement for a comprehensive safeguard program. Requiring an ‘opt-in’ for affiliate sharing is incorrect because Regulation S-P generally allows sharing with affiliates; the ‘opt-out’ requirement specifically applies to sharing nonpublic personal information with non-affiliated third parties. Takeaway: Regulation S-P requires firms to implement comprehensive administrative, technical, and physical safeguards to ensure the security and confidentiality of customer information.

Correct: Under FINRA Rule 3110, a registered principal is responsible for the supervision and review of correspondence and internal communications. The evidence of review must be documented and must clearly identify the person who performed the review, the date of the review, and the communications that were subject to the review. Delegating the final review and approval authority to an unregistered person is a violation of supervisory requirements, as the principal must be the one performing the substantive oversight. Incorrect: Delegating the final review to an unregistered person is not permitted, regardless of quarterly audits or lexicon efficacy. A monthly attestation is insufficient if the actual review was performed by an unauthorized individual. Registering the assistant as a Series 6 representative would not be sufficient for the review of correspondence; a principal registration (such as Series 26 or Series 24) is required to supervise and approve the communications of other registered representatives. Takeaway: Registered principals must personally conduct or directly oversee the review of correspondence and maintain specific, identifiable evidence of that review to meet regulatory supervisory standards.

Correct: Section 17 of the Securities Act of 1933 makes it unlawful to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. In the context of variable products, failing to mention surrender charges or market risk while touting returns constitutes a material omission, regardless of whether a prospectus is available elsewhere. Incorrect: Providing a link to a prospectus does not relieve a firm of its obligation to ensure that individual marketing pieces are balanced and not misleading on their own. Section 17(a)(2) and (3) do not require a showing of scienter (intent to defraud); negligence is sufficient for a violation. Furthermore, the statute explicitly covers omissions of material facts, not just active misrepresentations, making the focus on ‘outright lies’ insufficient for compliance. Takeaway: Compliance principals must ensure that all communications regarding securities include a balanced presentation of risks and benefits to avoid material omissions prohibited by Section 17.

Correct: Under the Investment Advisers Act of 1940, broker-dealers are excluded from the definition of an investment adviser only if their advice is solely incidental to their business and they receive no special compensation for it. Charging a separate fee or an asset-based fee for advice constitutes special compensation, which requires the individual to be registered as an investment adviser representative (IAR). Incorrect: The exclusion for broker-dealers does not apply when special compensation like a fee is charged, making the ‘solely incidental’ argument invalid for fee-based accounts. There is no 90-day grace period for conducting advisory business without the proper registration being active in the CRD. Furthermore, a firm’s status as a dually registered entity does not grant automatic advisory registration to its representatives; each individual must be properly qualified and registered in the appropriate capacity. Takeaway: Receiving special compensation for investment advice, such as an asset-based fee, requires registration as an investment adviser representative regardless of the firm’s dual registration status.

Correct: Under SEC Rule 15b2-2, the SEC or a self-regulatory organization (SRO) is required to conduct an inspection of a newly registered broker-dealer within six months of its registration to verify compliance with financial responsibility rules (such as net capital and customer protection rules). An inspection to determine compliance with all other applicable regulatory requirements must be conducted within twelve months of registration. Incorrect: The suggestion of a ninety-day full-scope examination is incorrect as the rule provides a tiered timeline of six and twelve months. The idea that an independent audit can substitute for a regulatory inspection is false; the SRO or SEC must perform the inspection. The eighteen-month timeframe exceeds the statutory limits established by Rule 15b2-2 for both financial and general conduct inspections. Takeaway: Newly registered broker-dealers must be inspected for financial responsibility within six months and for general rule compliance within twelve months of their registration date.

Correct: Section 20A of the Securities Exchange Act of 1934 provides a private right of action for ‘contemporaneous traders’—those who traded the same class of securities on the opposite side of the market at the same time as the insider. The statute limits the total amount of damages to the profit gained or loss avoided in the transaction, and further mandates that this amount be reduced by any disgorgement obtained by the SEC in a related proceeding. Incorrect: Seeking treble damages is a civil penalty available to the SEC in enforcement actions, not a measure of recovery for private plaintiffs under Section 20A. The requirement for a direct fiduciary duty is a characteristic of certain common law fraud claims, but Section 20A was specifically designed to provide a remedy for market participants who do not have a direct relationship with the insider. Furthermore, private rights of action under Section 20A are independent and do not require a prior SEC enforcement action to be initiated or completed. Takeaway: Section 20A allows contemporaneous traders to sue for damages limited to the insider’s ill-gotten gains, minus any amounts the insider has already disgorged to the SEC.

Correct: According to FINRA Rule 2330(c), a registered principal must review and determine whether to approve the recommended purchase or exchange of a deferred variable annuity no later than seven business days after an office of supervisory jurisdiction (OSJ) receives a complete and correct application package. This timeframe is a specific regulatory requirement designed to ensure timely oversight of these complex products. Incorrect: The timeframe of ten business days is incorrect as the rule explicitly mandates seven business days. The requirement for principal review and suitability determination applies to all recommended deferred variable annuity transactions, not just those meeting specific net worth or exchange thresholds. Furthermore, variable annuities are generally long-term investments, and a principal should not approve a transaction where the client has immediate liquidity needs, as this would likely violate suitability standards regardless of any signed disclosure. Takeaway: FINRA Rule 2330 requires a registered principal to approve or reject a deferred variable annuity application within seven business days of its receipt at an OSJ.

Correct: Under FINRA Rule 2150(c), an associated person is prohibited from sharing in the profits or losses of a customer’s account unless three conditions are met: the associated person obtains prior written authorization from the member firm, the associated person obtains prior written authorization from the customer, and the sharing is strictly proportionate to the financial contributions made by each party. The proportionality requirement is only waived if the account is held with an immediate family member. Incorrect: The suggestion of using a liability waiver and checking disciplinary history is incorrect because these do not satisfy the specific regulatory requirements for joint accounts between representatives and clients. Providing a written guarantee against losses is a violation of FINRA Rule 2150(b), which prohibits members and associated persons from guaranteeing a customer against loss. Structuring the account as a discretionary account relates to trade execution authority but does not address the legal requirements for sharing in the financial outcomes of the account. Takeaway: Sharing in a customer’s account requires prior written consent from both the firm and the customer, with profits and losses shared in direct proportion to the financial contribution, unless the customer is an immediate family member.

Correct: Under FINRA Rule 2210, retail communication is defined as any written communication distributed to more than 25 retail investors within a 30-calendar-day period; these typically require principal approval before use. Correspondence is distributed to 25 or fewer retail investors within a 30-day period, and institutional communication is distributed only to institutional investors (such as banks or insurance companies). Neither correspondence nor institutional communication requires principal pre-approval, provided the firm has established alternative supervisory procedures for their review. Incorrect: The suggestion that all variable product communications require pre-filing with FINRA is incorrect, as filing requirements depend on the firm’s status and the specific content of the retail communication. The claim that individual letters to 12 prospects are retail communication is incorrect because they fall under the ’25 or fewer’ threshold for correspondence. Finally, the classification of individual letters to retail prospects as institutional communication is incorrect, as institutional status is determined by the nature of the entity (e.g., bank, SRO, or person with $50 million in assets), not the net worth of an individual prospect. Takeaway: The classification of communications depends on the recipient type and count: more than 25 retail investors constitutes retail communication, 25 or fewer retail investors is correspondence, and institutional entities qualify as institutional communication.

Correct: Under FINRA Rule 1010 and Article V of the FINRA By-Laws, member firms are required to keep Form U4 information current. When a firm learns of a reportable event, such as a bankruptcy, that was not previously disclosed, they must file an amendment to the Form U4 promptly, but no later than 30 days after learning of the event. Additionally, FINRA Rule 1122 prohibits the filing of information that is incomplete or misleading, so the principal must also evaluate the circumstances of the omission. Incorrect: Terminating the registration via Form U5 is not the standard procedure for correcting a disclosure omission; an amendment is the appropriate mechanism. Waiting for the annual renewal period is a violation of the requirement to update the CRD promptly (within 30 days). The SEC is not the primary recipient for individual U4 amendments, as these are handled through the FINRA CRD system, and the CRD is specifically designed to track such disclosures throughout a representative’s career. Takeaway: Firms must amend a representative’s Form U4 within 30 days of discovering any reportable information to maintain compliance with FINRA disclosure and registration requirements.

Correct: When handling account registration changes due to divorce, a principal must ensure the firm obtains and verifies legal authorization, such as a certified divorce decree or a Qualified Domestic Relations Order (QDRO). Furthermore, because the ex-spouse is not an existing client, the firm must follow standard onboarding procedures, including a new account application and identity verification (KYC), before assets can be legally transferred into a new account in their name. Incorrect: Processing the transfer before legal verification is complete represents a significant failure in internal controls and could lead to unauthorized asset movement. Relying on verbal confirmation from an attorney or using a suspense account without formal documentation does not meet the regulatory standards for recordkeeping and asset protection. Finally, variable contracts can be split or transferred pursuant to valid legal orders, so a blanket rejection would be inappropriate and potentially a violation of the contract terms. Takeaway: Principals must verify legal documentation and complete full new account registration procedures before executing internal transfers resulting from a change in marital status.

Correct: FINRA Rule 3220 (Influencing or Rewarding Employees of Others) prohibits any person associated with a member firm from giving anything of value in excess of $100 per individual per year to any person where such payment is in relation to the business of the recipient’s employer. The rule also requires firms to maintain a separate record of all such gifts and gratuities. Incorrect: Approving the expense based on a business milestone is incorrect because the $100 limit is absolute regardless of the occasion. Classifying a gift basket as business entertainment is incorrect because entertainment exclusions generally apply to hosted events like meals or sporting events where the donor is present; a physical gift remains subject to the gift limit. Verifying firm-wide limits is incorrect because the regulatory threshold is applied on a per-individual basis, not an aggregate firm basis. Takeaway: FINRA Rule 3220 strictly limits gifts and gratuities to $100 per person per year when the gift is related to the business of the recipient’s employer.

Correct: Under SEC Rule 15c3-5, a broker-dealer with market access must maintain direct and exclusive control over the risk management controls and supervisory procedures. This regulatory requirement ensures that the broker-dealer, as the gatekeeper to the markets, is the sole party responsible for setting and maintaining the financial and regulatory filters. These controls must be applied on a pre-trade basis to prevent the entry of orders that exceed predetermined credit or capital thresholds. The rule specifically prohibits the broker-dealer from delegating this responsibility to a client or an independent third party, as the broker-dealer must be able to independently verify and enforce the limits without interference from the entity generating the order flow. Incorrect: Approaches that suggest relying on a client’s internal risk management systems, even with real-time notifications or due diligence, fail because the rule mandates pre-trade prevention under the broker-dealer’s exclusive control, not post-trade monitoring or reliance on external systems. Delegating the administration of controls to a third-party technology provider is only permissible if the broker-dealer retains direct control over the parameters and the vendor is not the client or an affiliate of the client. Furthermore, allowing a client to set their own intraday limits or modify thresholds would violate the core principle of independent oversight intended to mitigate systemic risk and prevent erroneous or manipulative trading activity. Takeaway: Broker-dealers must maintain direct and exclusive control over pre-trade risk management filters and are prohibited from delegating the setting of credit or capital limits to clients.

Correct: Under Rule 19h-1 of the Securities Exchange Act of 1934, when a Self-Regulatory Organization (SRO) like FINRA proposes to allow a person subject to statutory disqualification to become or remain associated with a member firm, the SRO must file a notice with the SEC. For the firm, this process begins with filing an MC-400 application. FINRA reviews the merits of the application, including the firm’s proposed heightened supervisory procedures. If FINRA approves, it then files the 19h-1 notice with the SEC, which has the ultimate authority to object to the association. Incorrect: Filing the Rule 19h-1 notice directly with the SEC is incorrect because the notice is a filing made by the SRO (FINRA), not the member firm. The idea that a felony conviction over five years old exempts the firm from the 19h-1 process is incorrect; any felony conviction within the last 10 years triggers a statutory disqualification. Obtaining a waiver from a state securities administrator is not a prerequisite for FINRA to file a 19h-1 notice with the SEC, as the 19h-1 process is a federal regulatory requirement between the SRO and the SEC. Takeaway: The Rule 19h-1 process requires FINRA to notify the SEC of its intent to admit an individual subject to statutory disqualification after the firm has successfully petitioned through an MC-400 application.

Correct: FINRA Article V, Section 3, mandates that a member firm notify FINRA within 30 days of an associated person’s termination. The disclosure must be accurate and include whether the person was under internal review for certain violations. Whistleblower protections do not override the regulatory requirement to report the true reasons for termination or the existence of internal reviews on Form U5 to the Central Registration Depository (CRD). Incorrect: Delaying the Form U5 filing beyond the 30-day window is a direct violation of FINRA Article V, Section 3, regardless of the complexity of the situation. Firms cannot unilaterally extend filing deadlines through internal procedures. Furthermore, reporting a termination as voluntary or omitting details of an active internal investigation when such details are required by the form constitutes a failure to provide accurate and complete information to regulators. Takeaway: Firms must fulfill Form U5 disclosure requirements accurately and within 30 days, even when the associated person is a whistleblower, to maintain the integrity of the CRD system.

Correct: Under FINRA Article V and Rule 1210, member firms are required to investigate the good character, business repute, and qualifications of an applicant before applying for registration. This includes verifying the accuracy of the Form U4 and investigating any red flags, such as internal investigations or customer disputes, even if they did not lead to formal disciplinary action. This proactive due diligence prevents the filing of misleading information, which is prohibited under FINRA Rule 1122. Incorrect: Relying solely on a candidate’s attestation is insufficient because the firm has an independent obligation to verify the applicant’s background. Postponing the Form U4 filing while the candidate performs securities-related work is a violation of registration requirements, as individuals must be registered before engaging in such business. Retrospective reviews are inadequate for registration risks because the firm is responsible for the accuracy of the Form U4 at the time of filing. Takeaway: Principals must perform proactive due diligence and verify all disclosures on Form U4 against available records to ensure the integrity of the registration process and compliance with FINRA By-Laws.

Correct: Under SEC Rules 17h-1T and 17h-2T, the determination of a Material Associated Person (MAP) is based on the potential for that entity to materially impact the broker-dealer’s financial or operational health. This includes assessing the nature and magnitude of the relationship, the financial interdependence, and the operational reliance (such as the technology subsidiary providing the order routing system) between the broker-dealer and the associated person. Incorrect: While intercompany agreements and net capital impact are relevant, they are only components of the broader material impact assessment rather than the defining standard. Registration with foreign authorities may impact the specific reporting exemptions available, but it does not dictate the initial identification of a MAP. Regulation S-X tests are used for general financial reporting but do not replace the specific risk-based criteria established for broker-dealer risk assessment under the 17h rules. Takeaway: A Material Associated Person (MAP) is identified by the potential for its financial or operational status to materially affect the stability of the broker-dealer.

Correct: Under Regulation T, if a customer buys a security in a cash account and sells it before paying for it in full (a practice often referred to as free-riding), or fails to pay within the required timeframe (S+2 or T+4), the account must be restricted or ‘frozen’ for 90 days. During this period, the broker-dealer is prohibited from executing a purchase for the customer unless the full purchase price is already held in the account. Incorrect: Retroactive extensions are not permitted for the purpose of masking a violation after a sale has already occurred to cover the cost. Transferring customer debits to error accounts to circumvent credit rules is a violation of both Regulation T and recordkeeping requirements. While firms must manage net capital, simply taking a charge does not satisfy the regulatory obligation to enforce the 90-day freeze required by Regulation T for payment failures in cash accounts. Takeaway: Regulation T requires a 90-day account freeze for cash account violations where securities are sold before being fully paid for by the customer.

Correct: Under SEC Rule 17a-5, when a broker-dealer changes its independent public accountant, it must notify the SEC and its DEA (such as FINRA) within 15 business days. This notice must disclose any disagreements on accounting principles or practices, financial statement disclosure, or auditing scope/procedure during the 24 months preceding the change. The firm must also request a letter from the former accountant addressed to the SEC stating whether they agree with the firm’s disclosures, which must be filed as an exhibit to the notice. Incorrect: Option B is incorrect because the regulatory timeframe is 15 business days, not 30 calendar days, and the notification is required regardless of whether a material weakness was identified in the final audit report. Option C is incorrect because the former accountant’s letter is a mandatory component of the change-of-auditor notice under Rule 17a-5, not contingent on the existence of a formal investigation. Option D is incorrect because the 2-business-day timeframe typically applies to net capital or recordkeeping violations under Rule 17a-11, and the former accountant does not file a separate report directly to the SEC in this context. Takeaway: Broker-dealers must notify regulators of a change in independent accountants within 15 business days and include a letter from the former auditor regarding any disagreements or reportable events from the prior 24 months.

Correct: Rule 17h-1T under the Securities Exchange Act of 1934 requires broker-dealers to maintain records concerning the financial and operational condition of Material Associated Persons (MAPs). A MAP is an affiliate or parent whose business activities are reasonably likely to have a material impact on the financial or operational condition of the broker-dealer. The most effective control is a robust identification process coupled with the maintenance of specific records, such as risk management policies, financial statements, and organizational charts, which allow the firm and regulators to monitor potential risks to the broker-dealer’s net capital and liquidity. Incorrect: Designating all affiliates as MAPs is not required and creates an unnecessary administrative burden that does not focus on actual risk. Form 17-H is a quarterly and annual filing, not a monthly one, and focusing only on the parent company ignores the specific risks posed by individual MAPs. Relying solely on consolidated parent company audits is insufficient because Rule 17h-1T specifically requires detailed, entity-specific records for each identified MAP to ensure transparency into the risks each one poses to the broker-dealer. Takeaway: Broker-dealers must accurately identify Material Associated Persons (MAPs) and maintain detailed financial and risk records for these entities to comply with Rule 17h-1T and mitigate the risk of affiliate-driven financial distress.

Correct: Under SEC guidance and FINRA rules regarding expense sharing agreements, a broker-dealer is required to record all expenses related to its business activities on its own books and records. Even if a third party or affiliate pays for these expenses and waives reimbursement, the broker-dealer must still recognize the expense. If the broker-dealer is not obligated to repay the affiliate, the recording of the expense is typically balanced by a simultaneous capital contribution. This ensures that the financial statements and net capital computations accurately reflect the true costs of operating the broker-dealer. Incorrect: Excluding expenses based on a waiver or indemnity letter is prohibited because it allows a firm to artificially inflate its net capital by hiding operational costs. Recording these costs only as contingent liabilities is incorrect because the services have already been consumed, necessitating an immediate expense recognition under accrual accounting. Treating the waiver as a year-end capital contribution without monthly accruals violates the requirement for contemporaneous recordkeeping and fails to provide an accurate ongoing picture of the firm’s financial health. Takeaway: Broker-dealers must record all expenses incurred in the conduct of their business on their financial statements, regardless of whether an affiliate pays those costs or waives reimbursement.

Correct: FINRA Rule 4530 requires member firms to promptly report specific events, including findings by the firm that an associated person has violated any securities-related or investment-related laws, rules, or regulations. The report must be filed no later than 30 calendar days after the firm knows or should have known of the event. In this scenario, the conclusion of the internal investigation that a rule violation occurred triggers the mandatory reporting requirement. Incorrect: The other options represent common misconceptions or different regulatory areas. Linking 4530 reporting to net capital or FOCUS filings is incorrect as 4530 is focused on conduct and disciplinary events rather than financial solvency. Internal mediation cannot supersede the mandatory reporting requirements for rule violations. Rule 17h-1T pertains to risk assessment for large broker-dealers and their affiliates, which is a separate regulatory framework from the conduct-related reporting required by Rule 4530. Takeaway: Firms must report specific regulatory violations and disciplinary actions under Rule 4530 within 30 calendar days of the firm concluding that a reportable event has occurred.

Correct: Under FINRA Rule 1017, a member firm must file a Continuing Membership Application (CMA) for any material change in business operations. The most critical step is determining materiality. FINRA provides safe harbor provisions under IM-1011-1 that allow for limited expansion without a CMA, but adding a proprietary trading desk and prime brokerage services—which typically carry higher net capital requirements and different risk profiles—would almost certainly constitute a material change requiring a 1017 filing at least 30 days prior to implementation. Incorrect: While fidelity bond coverage must be maintained, it is a secondary compliance requirement rather than the primary driver of the 1017 application process. Requesting a waiver of the 30-day notice period is not a standard procedural approach for material business changes, as the Department requires time to review the impact on the firm’s financial and operational stability. Updating Form BD is an administrative requirement that follows or coincides with the application process, but it does not replace the necessity of the materiality assessment and the CMA itself. Takeaway: The foundational step in the Rule 1017 process is determining if a business expansion is a material change by evaluating it against the firm’s existing membership agreement and safe harbor provisions.

Correct: Under SEC Rule 15c3-3, broker-dealers are required to perform two separate computations: one for ‘Customers’ and one for ‘PAB’ (Proprietary Accounts of Broker-Dealers). Credit balances of other broker-dealers must be included in the PAB computation. Furthermore, the firm must maintain separate bank accounts for these two categories. A surplus in the Customer reserve account cannot be used to offset a deficiency in the PAB reserve account, ensuring that retail customer protections are not compromised by the risks associated with carrying accounts for other broker-dealers. Incorrect: Option b is incorrect because PAB protections are regulatory requirements that cannot be waived by the correspondent firm to allow commingling with retail customer funds. Option c is incorrect because there is no ‘de minimis’ percentage or threshold that allows for the commingling of PAB and Customer credits in the reserve formula. Option d is incorrect because the definition of ‘Customer’ and ‘PAB’ under Rule 15c3-3 includes various legal entities and other broker-dealers, not just natural persons. Takeaway: Broker-dealers must maintain strictly separate computations and bank accounts for Customer and PAB reserve requirements to prevent the commingling of retail and professional firm assets.

Correct: Under SEC Rule 17h-1T, broker-dealers are required to maintain specific records for Material Associated Persons (MAPs). These records must include an organizational chart of the ultimate holding company, consolidated and consolidating financial statements, and information regarding material legal or arbitration proceedings. This requirement is designed to allow the SEC to monitor the financial health of affiliates that could impact the broker-dealer’s stability. Incorrect: The suggestion to update records only during the annual audit is incorrect because Rule 17h-1T requires the maintenance of current records to support quarterly reporting. Focusing on tax returns and a 5% revenue threshold is incorrect as the rule specifically mandates financial statements and organizational charts regardless of that specific revenue metric. Requiring internal audit reports and CEO certifications is a general risk management practice but does not fulfill the specific regulatory record-keeping requirements for MAPs defined in the 17h rules. Takeaway: SEC Rule 17h-1T mandates that broker-dealers maintain comprehensive organizational and financial records for all Material Associated Persons to facilitate regulatory risk assessment.

Correct: Under SEC Rule 15c3-1 (Net Capital Rule), specifically Appendix C, if a broker-dealer guarantees the indebtedness of a subsidiary or affiliate, those liabilities must be included in the broker-dealer’s calculation of aggregate indebtedness. This ensures that the parent’s net capital accurately reflects the potential drain on its resources. Consolidation for net capital purposes requires specific conditions to be met, including legal opinions on the availability of assets to satisfy the obligations. Incorrect: Treating the guarantee only as a contingent liability for audit purposes is incorrect because net capital rules require quantitative inclusion in aggregate indebtedness calculations. The net worth of the subsidiary is not a sufficient condition to exclude the debt from the parent’s AI if a guarantee exists. Finally, while the subsidiary is a separate legal entity, the contractual guarantee creates a regulatory obligation for the parent to account for that liability in its capital computations. Takeaway: A broker-dealer’s guarantee of a subsidiary’s debt generally requires the inclusion of that debt in the parent’s aggregate indebtedness to ensure regulatory capital adequacy.