Series 26 Investment Company and Variable Contracts Products Principal Exam

Correct: Rule 17h-1T requires broker-dealers to maintain specific records for each Material Associated Person (MAP). These records must include the MAP’s organizational charts, financial information (such as consolidated financial statements), and, critically, the policies and systems the MAP uses to monitor and control financial and operational risks. This includes risks related to market, credit, and liquidity that could impact the stability of the broker-dealer. Incorrect: The requirement for the MAP to file reports directly with the SEC is incorrect because the reporting obligation (Rule 17h-2T) falls on the broker-dealer, not the MAP itself. Limiting records to transactions exceeding 10% of tentative net capital is a confusion with specific reporting thresholds for certain financing activities, but it does not satisfy the general recordkeeping requirements for risk management policies. While certain exemptions exist for MAPs regulated by other entities (like banks), a blanket waiver is not automatically granted simply because a MAP is foreign-regulated; the broker-dealer still maintains specific recordkeeping duties under the rule. Takeaway: Under Rule 17h-1T, broker-dealers are responsible for maintaining comprehensive records of the risk management policies and financial condition of all Material Associated Persons to safeguard against systemic risk.

Correct: FINRA Rule 11320 defines the specific delivery requirements for various types of transactions, including ‘cash,’ ‘regular way,’ and ‘seller’s option.’ For non-standard settlements like ‘seller’s option,’ the delivery date is a specific day agreed upon at the time of the contract (not less than two business days nor more than 60 days). The most critical preventive measure is ensuring that the trade comparison process accurately identifies and validates these specific dates at the outset. This prevents operational ‘fails’ and ensures that the general ledger and FOCUS reports accurately reflect the firm’s delivery obligations and assets. Incorrect: Converting seller’s option contracts to regular way settlement would violate the contractual agreement between the parties and does not address the operational need to track diverse delivery dates. Increasing net capital haircuts is a capital preservation strategy but does not prevent the operational or regulatory failure of misidentifying delivery dates. Restricting cash transactions to pre-funded accounts is a credit risk policy and does not address the requirement to ensure same-day delivery as mandated by the ‘cash’ settlement rules under Rule 11320. Takeaway: Effective compliance with delivery date regulations requires the precise capture and validation of non-standard settlement terms during the trade comparison process to ensure accurate financial reporting and settlement execution.

Correct: Under FINRA Rule 3310 and the Bank Secrecy Act, broker-dealers are required to establish and implement written Anti-Money Laundering (AML) programs reasonably designed to detect and cause the reporting of suspicious transactions. The pattern described—multiple transactions just below the 10,000 dollar threshold using cash equivalents—is a classic red flag for structuring. A registered principal’s primary responsibility upon discovering such red flags is to follow the firm’s internal escalation procedures, which necessitates involving the AML Compliance Officer (AMLCO). The AMLCO must then evaluate the activity to determine if a Suspicious Activity Report (SAR) must be filed with FinCEN. Simply accepting a representative’s explanation without independent verification and formal escalation constitutes a failure of supervisory duty and a breach of AML compliance protocols. Incorrect: Relying solely on written attestations from clients or the representative is an inadequate response to a clear red flag of structuring, as it fails to satisfy the firm’s obligation to independently investigate and report suspicious activity. Filing a Currency Transaction Report (CTR) is technically incorrect in this context because CTRs are generally triggered by physical currency (cash) deposits exceeding 10,000 dollars, whereas cashier’s checks and money orders are monetary instruments that typically trigger SAR filings when used in a suspicious pattern. Implementing heightened supervision or additional training for the representative addresses the personnel management aspect but fails to address the immediate regulatory requirement to report the potentially prohibited financial activity to the appropriate authorities. Takeaway: Principals must immediately escalate identified red flags, such as potential structuring, to the firm’s AML Compliance Officer to ensure compliance with SAR filing requirements and FINRA Rule 3310.

Correct: Under FINRA Rule 4140 and the Securities Exchange Act of 1934, regulators have the authority to request financial information at any time to ensure a firm’s continued solvency. The most appropriate response is to provide the requested trial balance and demonstrate that the firm is following GAAP (specifically FASB standards regarding fair value measurement) for its proprietary positions. This transparency allows regulators to verify that the firm’s net capital position is accurately reported despite market fluctuations. Incorrect: Requesting an extension until the next FOCUS filing is inappropriate because regulatory inquiries regarding capital adequacy during market stress require immediate attention. Withholding valuation methodologies is not permissible, as regulators have broad oversight authority to inspect the books and records that support financial statements. Claiming that systemic risk exempts a firm from granular reporting is incorrect; Rule 4140 specifically allows FINRA to require a member to provide financial information to protect investors and the public interest. Takeaway: FINOPs must provide timely, GAAP-compliant financial data and detailed valuation methodologies when responding to regulatory inquiries to demonstrate the firm’s ongoing financial integrity and capital adequacy during periods of market volatility or stress.

Correct: Under FINRA Rule 9557, a member firm that receives a notice regarding restrictions on its business activities (pursuant to Rules 4110, 4120, or 4130) has a specific and expedited window to request a hearing. The request must be filed in writing within seven days of the service of the notice. Furthermore, Rule 9557(d) explicitly states that the notice is effective immediately upon service and that a request for a hearing does not stay the effectiveness of the notice unless a Hearing Officer or the Department of Member Regulation orders otherwise to protect investors or the public interest. Incorrect: The other options are incorrect because they misstate the timeframe or the effect of the hearing request. A 15-day window is common in other regulatory filings but not for the expedited 9557 process. The idea that a request automatically stays the restrictions is incorrect; because these rules involve the financial integrity of the firm, the restrictions remain in place to protect the market. While corrective action plans are part of the broader dialogue with regulators, they do not replace the formal hearing request process defined in Rule 9557. Finally, FINRA does provide an internal hearing process before a matter would be appealed to the SEC. Takeaway: A request for a hearing under Rule 9557 must be filed within seven days of service and does not stay the immediate effectiveness of the business restrictions.

Correct: According to FINRA Rule 14104, the mediation process is voluntary and does not stay an arbitration proceeding unless all parties agree to the stay in writing, or the Director of Mediation grants a stay. This ensures that the arbitration timeline is preserved while parties attempt a good-faith settlement through mediation. Incorrect: The suggestion that mediation triggers a mandatory suspension of discovery is incorrect because mediation is intended to be a parallel, non-disruptive process. Mediators do not have the power to adjudicate or issue binding orders on evidence or valuation, as their role is strictly facilitative. Finally, parties never waive their right to continue with arbitration if mediation is unsuccessful; the process is non-binding until a settlement agreement is signed. Takeaway: Mediation under the FINRA 14000 Series is a voluntary, non-binding process that does not automatically stay or delay concurrent arbitration proceedings.

Correct: Under SEC Rule 17h-1T, a Material Associated Person (MAP) is defined based on the degree to which the associated person’s financial or operational condition is likely to have a material impact on the financial or operational condition of the broker-dealer. Factors such as centralized treasury functions and significant intercompany funding increase the likelihood that the affiliate’s distress would affect the broker-dealer, necessitating its inclusion in risk assessment recordkeeping and reporting. Incorrect: Registration with a foreign regulator does not exempt an affiliate from being a MAP if it poses a material risk to the domestic broker-dealer. While financial size and revenue are factors, they are not the sole determinants; the regulatory focus is on the ‘material impact’ to the broker-dealer’s stability. Maintaining separate accounting records is a standard requirement for all affiliates but does not mitigate the risk of financial contagion or operational interdependence that defines a MAP. Takeaway: The designation of a Material Associated Person (MAP) is primarily based on the potential for an affiliate’s distress to materially affect the broker-dealer’s financial or operational stability.

Correct: SEC Rule 17h-2T requires broker-dealers to file Form 17-H on a quarterly and annual basis. This form is specifically designed for risk assessment reporting of Material Associated Persons (MAPs). Material transactions, such as large unsecured loans or financing arrangements with affiliates, must be disclosed because they can significantly impact the financial and operational stability of the broker-dealer, regardless of whether the transaction was at market rates. Incorrect: Waiting for the annual audit is insufficient because Rule 17h-2T requires quarterly reporting of risks associated with MAPs. While FOCUS reports track capital, they do not replace the specific risk assessment disclosures required by Form 17-H for associated persons. Simply recording the transaction in the general ledger without the required regulatory disclosure fails to meet the transparency requirements intended to protect the broker-dealer from affiliate-level risks. Takeaway: Material transactions with Material Associated Persons must be disclosed quarterly via Form 17-H to allow regulators to monitor potential risks to the broker-dealer’s stability and capital structure.

Correct: Under FINRA Rule 4517, each member must provide required contact information to FINRA via the FINRA Contact System (FCS). This information must be updated promptly, but in any event no later than 30 days following any change. Furthermore, each member must review and, if necessary, update its required contact information within 17 business days after the end of each calendar year to ensure its continued accuracy. Incorrect: The suggestion to notify the District Office via written letter is incorrect because the rule specifically mandates the use of the FINRA Contact System (FCS). A 60-day window is also non-compliant as the limit is 30 days. Waiting for the next FOCUS report filing is incorrect because contact information requirements are distinct from financial reporting cycles. The timeframe for annual verification is 17 business days after the calendar year-end, not 15 business days or based on the fiscal year-end. Finally, Rule 3130 certifications are related to supervisory controls and do not satisfy the specific contact information update requirements of Rule 4517. Takeaway: FINRA Rule 4517 requires firms to update regulatory contact information in the FINRA Contact System within 30 days of a change and conduct an annual verification within 17 business days of the calendar year-end.

Correct: The Financial and Operations Principal (FINOP) is responsible for the accuracy of the firm’s financial statements and net capital computations. Margin deficits that are not met within the required timeframe must be treated as charges against net capital (non-allowable assets) to ensure the firm’s liquidity is accurately represented. Furthermore, when a whistleblower flags potential misconduct or concealment of financial instability, the FINOP must ensure the matter is handled through the proper compliance and AML channels to maintain the integrity of the firm’s regulatory reporting. Incorrect: Waiting for the next FOCUS report is incorrect because net capital must be maintained and calculated accurately at all times, not just at the time of filing. Relying on a trading desk’s justification for manual overrides that bypass regulatory requirements like Rule 4210 is a failure of internal controls and does not satisfy the FINOP’s duty to report accurate financial data. Requesting an extension from a clearing firm does not absolve the firm from its immediate obligation to reflect the financial reality of the deficits in its own books and records and net capital calculations. Takeaway: A FINOP must prioritize the immediate and accurate reflection of margin deficits in net capital computations regardless of internal overrides or pending whistleblower investigations.

Correct: Under FINRA Rule 3110.06, while firms are permitted to employ risk-based principles to prioritize the review of correspondence and internal communications, they must ensure the review process is effective and free from conflicts of interest. The correct approach addresses the two primary failures identified: the technical failure of the lexicon and the supervisory failure of the review hierarchy. Specifically, the rule requires that the person conducting the review must not be the person whose communications are being reviewed, nor can they be under the direct or indirect supervision of that person. Reassigning the Principal’s review to an independent party or a superior is a regulatory necessity to ensure objective oversight. Furthermore, the firm has an ongoing obligation to evaluate the effectiveness of its review procedures, which necessitates updating the surveillance lexicon to capture emerging risks and high-risk terminology associated with variable product guarantees. Incorrect: The approach of increasing random sampling and providing training to the junior representative fails because it does not resolve the structural conflict of interest where a subordinate reviews their supervisor; training cannot mitigate the inherent pressure a junior employee feels when auditing a superior. Transitioning to a 100% manual review is an over-correction that may actually decrease effectiveness by overwhelming staff with low-risk data, and it fails to address the specific conflict of interest regarding the Principal’s own emails. Simply documenting the failure as a technical glitch and having the Principal sign off on the junior representative’s logs is insufficient and non-compliant, as it maintains the Principal’s influence over the review of their own communications and fails to remediate the systemic lexicon deficiency. Takeaway: A compliant risk-based communication review program must utilize current, relevant surveillance criteria and ensure that reviewers are not subordinate to the individuals whose communications they are tasked with monitoring.

Correct: Under SEC Rule 15c3-3, a broker-dealer must maintain a Special Reserve Bank Account at a qualified institution. A critical requirement for this account is that the broker-dealer must obtain and preserve a written notification from the bank. This document must explicitly state that the funds or securities are being held for the exclusive benefit of customers and are not subject to any right, charge, security interest, lien, or claim of any kind in favor of the bank or any person claiming through the bank. Incorrect: Prioritizing affiliated institutions for the sake of intercompany transfers does not address the core regulatory requirement of asset segregation and can increase concentration risk. Focusing on interest rates or yields is a business consideration that is secondary to the legal and regulatory safety requirements of the Customer Protection Rule. Allowing reserve funds to be used for proprietary trading liquidity is a fundamental violation of the rule, which requires that customer funds be strictly segregated from firm activities. Takeaway: A qualified institution must provide a written agreement confirming that customer reserve funds are held for the exclusive benefit of customers and are free from any bank-imposed liens.

Correct: Under FINRA Rule 2210 and related regulatory notices, the use of a professional designation is considered a communication with the public and must not be misleading. If a designation is ‘earned’ through minimal effort, such as a simple fee or a non-proctored basic quiz, it lacks the academic or professional rigor required to justify the implied expertise. The most appropriate regulatory response is to cease the use of the misleading title immediately, evaluate the impact on clients who may have been misled, and strengthen the firm’s Written Supervisory Procedures (WSPs) by establishing a formal vetting process for all designations used by associated persons. Incorrect: Allowing the use of a disclaimer is insufficient because a disclaimer cannot cure a fundamentally misleading or fraudulent credential that implies a level of expertise the representative does not possess. Suggesting the representative earn a different certification while keeping the current one active fails to address the immediate compliance breach and allows the misleading communication to persist. Reporting a designation as an Other Business Activity (OBA) on Form U4 is a misunderstanding of the form’s purpose, as designations are professional credentials used in marketing, not separate business enterprises, and administrative filing does not mitigate the underlying violation of communication standards. Takeaway: Principals must proactively vet professional designations to ensure they represent rigorous standards and do not mislead the public, as required by FINRA’s communication and supervision rules.

Correct: Under FINRA Rule 3110(e) and Article V of the FINRA By-Laws, a member firm is required to conduct a thorough pre-registration search of reasonably available public records to verify the accuracy of the information contained in an applicant’s Form U4. This includes verifying the last three years of employment and checking for reportable events such as tax liens, which are considered material financial disclosures. Furthermore, the firm must ensure the individual does not engage in any activities requiring registration until the registration is officially processed and made effective through the CRD system. Implementing heightened supervision is a prudent risk management strategy when a candidate has a history of customer complaints or recent financial instability, even if those events do not result in a statutory disqualification. Incorrect: The approach of allowing a candidate to perform regulated activities immediately upon submission of the Form U4 is incorrect because registration must be effective before the individual can engage in the investment company or variable contracts business. Relying solely on a candidate’s self-disclosure without independent verification fails the firm’s regulatory obligation to perform due diligence under FINRA Rule 3110(e). Finally, classifying a candidate as a non-registered associated person to allow them to accept unsolicited orders is a violation of FINRA Rule 1210, as taking orders is a registered function that cannot be performed by clerical or non-registered staff regardless of whether the order was solicited or unsolicited. Takeaway: Firms must independently verify Form U4 disclosures against public records and the CRD system prior to filing to ensure all reportable financial and disciplinary events are accurately disclosed.

Correct: Under FINRA rules, any change to the information reported on Form U4, such as a new outside business activity or a reportable customer complaint, must be updated via an amendment within 30 days of the firm becoming aware of the event. This information is then made available to the public through the BrokerCheck system as mandated by FINRA Rule 8312. Furthermore, FINRA Rule 2267 requires that member firms provide customers with the BrokerCheck hotline number and website address in writing at least once every calendar year. A principal supervising multiple Offices of Supervisory Jurisdiction (OSJs) under Rule 3110.03 is responsible for ensuring these registration and disclosure requirements are met for all associated persons under their purview, regardless of the physical distance between the principal and the representatives. Incorrect: Waiting for a settlement or adjudication before reporting a customer complaint is a violation of FINRA rules, as pending complaints that meet specific criteria must be disclosed to the public via the CRD and BrokerCheck. Form BD is the Uniform Application for Broker-Dealer Registration and is used for firm-level information, not for individual representative disclosures like outside business activities or personal disciplinary history. Relying on periodic on-site inspections to update disclosure records is insufficient because the 30-day regulatory deadline for Form U4 amendments is triggered by the firm’s knowledge of the event, not the inspection cycle. Form BR is used for registering branch offices and does not serve as the mechanism for reporting individual disciplinary or employment events. Takeaway: Principals must ensure Form U4 amendments are filed within 30 days of a reportable event and that customers receive the required annual written notification regarding BrokerCheck availability.

Correct: Under FASB ASC 820 (Fair Value Measurement), which is the GAAP standard required for broker-dealer financial reporting, firms must use a fair value hierarchy (Levels 1, 2, and 3). For assets without active markets, firms must still estimate a fair value (the price that would be received to sell an asset) using the best information available, including management’s own assumptions about what market participants would use in pricing the asset. Incorrect: Using historical cost with disclosure is not permitted under GAAP for securities that must be marked to market. Applying an arbitrary 15% haircut is a net capital calculation requirement under Rule 15c3-1, but it does not satisfy the GAAP requirement for fair value measurement on the financial statements. Reclassifying assets as non-allowable does not exempt a firm from the requirement to properly value those assets on its balance sheet and general ledger according to GAAP. Takeaway: Broker-dealers must use a documented fair value hierarchy to mark securities to market, ensuring that even illiquid assets reflect current exit prices rather than historical costs.

Correct: SEC Rule 17h-1T requires broker-dealers to maintain records concerning Material Associated Persons (MAPs). The determination of whether an associated person is ‘material’ is not automatic; it requires the broker-dealer to evaluate several factors, including the nature of the business, the size of the entity, and the potential impact of the associated person’s financial and operational condition on the broker-dealer. This assessment is a prerequisite for proper risk management and regulatory reporting. Incorrect: Automatically designating an entity as a MAP without an assessment is not required and ignores the materiality threshold established by the SEC. Relying only on GAAP consolidated statements is insufficient because Rule 17h-1T requires specific, detailed recordkeeping regarding the organizational structure and risk management policies of MAPs that goes beyond standard financial reporting. Filing Form 17-H is a reporting requirement under Rule 17h-2T that follows the identification and recordkeeping process; it is not the initial step in the internal assessment of a new entity’s materiality. Takeaway: The FINOP must evaluate specific qualitative and quantitative factors to determine if an affiliate qualifies as a Material Associated Person for risk assessment recordkeeping and reporting.

Correct: Under GAAP (specifically FASB ASC 460), a guarantor is required to disclose information about its obligations under certain guarantees, even if the likelihood of the guarantor having to make any payments under the guarantee is remote. The disclosure must include the nature of the guarantee, the maximum potential amount of future payments, and the current status of the payment/performance risk. Additionally, because this involves an affiliate and a conflict of interest, the relationship must be clearly identified in the related-party transactions disclosure. Incorrect: Applying only the ‘probable and estimable’ threshold is incorrect because specific accounting standards for guarantees require disclosure regardless of the probability of loss. Recording the guarantee as a direct liability on the Statement of Financial Condition is incorrect because a guarantee is a contingent liability, not a primary obligation, unless the firm has been called to perform. Reporting the matter only in the Supplemental Report on Internal Control is insufficient as financial statement footnotes are the primary vehicle for disclosing off-balance sheet risks and related-party transactions to regulators and the public. Takeaway: Guarantees and related-party transactions must be disclosed in the financial statement footnotes, detailing the maximum exposure and the nature of the relationship, even if the probability of loss is remote.

Correct: Under FINRA Rule 4521(d), each report filed pursuant to the rule must be signed by the Financial and Operations Principal (FinOp) or the person designated as the equivalent. This ensures that the individual responsible for the firm’s financial and operational compliance has reviewed and verified the accuracy of the supplemental information provided to the regulator. Incorrect: The requirement for a FinOp signature is a specific regulatory mandate under Rule 4521, not a general filing system preference; therefore, the method of filing (portal vs. FOCUS) is not the primary deficiency. Board of Directors approval is an internal governance matter and is not required by Rule 4521 for regulatory responses. While FINRA has the authority to request audited information, Rule 4521 does not mandate a third-party audit certification for every supplemental liquidity report requested. Takeaway: Supplemental financial and operational reports requested by FINRA under Rule 4521 must be signed by the firm’s designated Financial and Operations Principal to ensure regulatory accountability.

Correct: According to FINRA Rule 1240, the Regulatory Element must be completed annually by December 31. If a registered person fails to complete it within the prescribed timeframe, their registration becomes ‘CE Inactive.’ While in this status, the individual is prohibited from performing any duties that require a securities registration, which includes the functions of a FINOP such as supervising financial recordkeeping or signing FOCUS reports. Incorrect: Termination via Form U5 is not the standard procedure for a Continuing Education lapse; rather, the status is changed to inactive until the requirement is met. There is no automatic 30-day grace period for the Regulatory Element; the deadline is firm unless a specific extension is granted by FINRA for extreme circumstances. A written attestation from a Chief Compliance Officer does not override the automated transition to CE Inactive status triggered by the system when the deadline passes. Takeaway: Failure to complete the annual Regulatory Element results in an immediate CE Inactive status, prohibiting the individual from performing any registered functions until the requirement is satisfied.

Correct: According to SEC Rule 17a-5, when a broker-dealer replaces its independent public accountant, it must file a notice with the SEC and its designated examining authority (DEA) within 15 business days. This notice must state whether, in the 24 months preceding the change, there were any disagreements with the former accountant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. This ensures transparency regarding potential ‘opinion shopping’ or disputes over financial integrity. Incorrect: Notifying within 2 business days is a requirement for specific net capital or recordkeeping violations under Rule 17a-11, not for auditor changes. Waiting for the next FOCUS report is insufficient as the 15-day window is a specific standalone requirement for auditor transitions. The requirement to notify applies regardless of whether the auditor resigned or was terminated by the firm, and it is not contingent upon the discovery of a hindsight deficiency. Takeaway: Broker-dealers must notify the SEC and their DEA within 15 business days of changing their independent public accountant and must disclose any material disagreements regarding accounting or auditing procedures.

Correct: Under Rule 17h-1T of the Securities Exchange Act of 1934, a Material Associated Person (MAP) is determined based on several factors, including the nature and proximity of the relationship between the broker-dealer and the affiliate. The core concern is the potential for the associated person’s financial or operational condition to have a material impact on the financial or operational condition of the broker-dealer, including its net capital and liquidity. Incorrect: Geographic location and FATF membership are relevant for AML/KYC purposes but are not the primary criteria for MAP designation under the 17h rules. While financial contributions are considered, there is no strict five percent revenue threshold defined in the rule as the sole determinant for materiality. The number of shared registered representatives is a factor in operational integration but does not address the broader financial risk assessment required for MAP identification. Takeaway: Identifying a Material Associated Person (MAP) requires a holistic assessment of the potential financial and operational impact an affiliate’s distress could have on the broker-dealer’s stability.

Correct: Under SEC Rule 15c3-1, specifically Appendix D, liabilities subordinated to the claims of creditors are excluded from aggregate indebtedness only if they are subject to a ‘satisfactory subordination agreement.’ A key requirement for an agreement to be deemed satisfactory is that it must be filed with and approved by the broker-dealer’s Designated Examining Authority (DEA), such as FINRA, before the firm can benefit from the exclusion in its regulatory capital computations. Incorrect: Excluding a liability immediately upon execution is incorrect because regulatory approval is a prerequisite for the exclusion. Affiliate status does not automatically grant an exclusion from aggregate indebtedness; the loan must still meet the formal subordination requirements of Appendix D. While subordination agreements have minimum term requirements (typically one year, not five), the primary regulatory trigger for AI exclusion is the formal approval of the agreement by the regulator, not just the length of the term. Takeaway: A subordinated loan is only excluded from aggregate indebtedness once the subordination agreement has been formally approved by the firm’s Designated Examining Authority.

Correct: According to FINRA Rule 11150(a), transactions in bonds which are dealt in ‘flat’ shall be ‘ex-interest’ as of the record date or the date of the closing of transfer books. This is a specific exception to the standard ex-date rules applied to other securities, reflecting the unique nature of bonds in default or income bonds where interest is not guaranteed. Incorrect: The option suggesting one business day preceding the record date describes the standard ex-dividend date for equity securities under Rule 11120, but does not apply to bonds trading flat. The option regarding two business days following the payment is incorrect as ex-dates are designed to precede or coincide with record dates to determine entitlement, not follow the payment. The option regarding the day after the announcement is incorrect because the rule specifically ties the ex-interest status to the record date or book closing, not the public announcement date. Takeaway: For bonds trading flat, the ex-interest date is specifically defined as the record date or the date the transfer books close.

Correct: Under SEC Rule 15c3-1, the net capital rule focuses on liquidity. Assets that are not readily convertible into cash are generally considered non-allowable. Security deposits and prepaid expenses (like regulatory fees) are illiquid and must be deducted from net worth. Conversely, receivables from clearing organizations arising from the ordinary course of business are typically treated as allowable assets because they represent liquid balances due from another regulated entity. Incorrect: Treating all GAAP assets as allowable is incorrect because the net capital rule is more restrictive than GAAP, focusing specifically on liquidity rather than just economic benefit. Security deposits are non-allowable regardless of their refund terms because they are not immediately available to satisfy creditor claims. Prepaid expenses, although valid assets under GAAP, are consistently treated as non-allowable in the net capital calculation because they cannot be liquidated to pay customers or other creditors. Takeaway: For net capital purposes, introducing broker-dealers must deduct illiquid assets such as security deposits and prepaids from net worth, while certain liquid receivables from clearing firms remain allowable assets.

Correct: Under FINRA Rule 13201, a claim alleging employment discrimination in violation of a statute is not required to be arbitrated under the Code. Such a claim may be arbitrated only if the parties have agreed to arbitrate it, either before or after the dispute arose. This is a significant exception to the general rule that industry disputes between associated persons and member firms must be arbitrated. Incorrect: The dollar amount of the claim does not change the fundamental rule regarding the arbitrability of statutory discrimination claims. State laws or the Uniform Securities Act do not override the specific FINRA Code of Arbitration Procedure regarding the choice of forum for federal statutory claims. The filing of a Form U5 or the termination of employment does not mandate arbitration for statutory discrimination claims; the requirement for mutual agreement still applies regardless of the employment status. Takeaway: Statutory employment discrimination claims are exempt from mandatory FINRA arbitration unless all parties specifically agree to arbitrate the matter.

Correct: FINRA Rule 2010 is a broad, catch-all provision requiring members to observe high standards of commercial honor and just and equitable principles of trade. Because this rule addresses the spirit of the law rather than just the letter, the most effective control is a proactive supervisory system. This system must look beyond simple rule-breaking to identify ethical lapses, such as undisclosed conflicts of interest or unfair trade practices, by integrating communication reviews with transaction analysis. Incorrect: Delegating ethical monitoring to a clearing firm is insufficient because the introducing broker-dealer retains independent regulatory responsibility for its own business conduct. Restricting the Code of Conduct to only those with discretionary authority is incorrect because Rule 2010 applies to all aspects of a member’s business conduct, regardless of the employee’s specific role. Annual attestations are considered a passive control; while helpful for documentation, they do not provide the active, ongoing oversight required to detect and prevent nuanced ethical violations in real-time. Takeaway: FINRA Rule 2010 requires an active and comprehensive supervisory approach to ensure all business conduct aligns with ethical standards and equitable principles of trade.

Correct: According to Rule 17a-5(h)(2), if an independent public accountant finds that a material weakness exists during an audit, they must notify the broker-dealer. Once notified, the broker-dealer is required to give telegraphic or facsimile notice to the SEC and its designated examining authority (DEA) within 24 hours. This rapid notification ensures that regulators are aware of significant internal control failures that could jeopardize the firm’s financial integrity or customer assets. Incorrect: Waiting until the final FOCUS report or the management representation letter is incorrect because the rule requires immediate 24-hour notification upon discovery. Filing an amended Form BD is a requirement for changes in registration information, not for reporting material weaknesses in internal controls. The requirement to notify regulators of a material weakness is not contingent upon a net capital deficiency; the weakness itself triggers the notification regardless of the current capital level. Takeaway: A broker-dealer must notify the SEC and its DEA within 24 hours after being informed by its independent accountant of a material weakness in internal accounting controls.

Correct: The quantitative care obligation requires a broker-dealer and its associated persons to have a reasonable basis to believe that a series of recommended transactions, even if in the customer’s best interest when viewed in isolation, is not excessive and is in the customer’s best interest when taken together in light of the customer’s investment profile. Under Regulation Best Interest and FINRA Rule 2111, a principal must supervise not just the individual suitability of a product, but the cumulative impact of costs, turnover, and surrender charges. A holistic review over a specific timeframe is the only way to determine if the frequency of switching or the total cost incurred by the customer has become excessive, thereby violating the quantitative care standard. Incorrect: Focusing solely on updating account forms to match objectives addresses the customer-specific obligation but fails to monitor for churning or excessive switching, which is the core of the quantitative care requirement. Mandating technical training on product riders addresses the reasonable-basis obligation—ensuring the representative understands the product—but does not mitigate the risk of excessive transaction volume across a series of trades. Implementing a blanket prohibition on certain transaction types for specific age groups is an overly restrictive approach that may prevent beneficial transactions and fails to apply the required professional judgment and nuanced supervisory review necessary to evaluate quantitative suitability on a case-by-case basis. Takeaway: The quantitative care obligation requires supervisors to evaluate the cumulative effect of a series of transactions to ensure the total cost and frequency are not excessive for the client’s profile, regardless of individual transaction suitability.