60 Series 28 Exam Concepts You Need to Know Before Test Day

Rule 17a-5 requires a broker-dealer's financial and operational reports to be prepared in accordance with generally accepted accounting principles, including the relevant FASB statements. The practical areas the exam cares about are valuation and mark to market of securities positions, revenue recognition, fair value measurement, accruals, and how assets and liabilities are categorized. The mechanism to understand is that the FOCUS report is built from the same general ledger and trial balance that produce the GAAP financial statements. GAAP tells you how to record an item; the regulatory rules then decide whether it counts. A security can be fairly valued under GAAP yet still be non-allowable for net capital purposes, so the principal must reconcile both views.

Memory hook:GAAP records it; the Net Capital Rule decides whether it counts.

FOCUS Part I is the net capital computation; Part IIA adds the income statement and supplemental schedules for quarterly filers. Classification is the whole game: assets are either allowable or non-allowable, liabilities are either cash obligations or deferrals, and revenue and expenses are recognized under GAAP. Non-allowable assets, such as furniture, equipment, and prepaid expenses, are deducted from net worth. Aggregate indebtedness counts only cash liabilities, while deferrals like deferred revenue are excluded. Because every line on the trial balance must land in the right bucket, the financial and operations principal reviews classifications before the report is filed, since a misclassified item distorts both net capital and the ratio.

Memory hook:Cash liabilities feed aggregate indebtedness; deferred items and prepaid assets do not.

Filing frequency depends on the firm's status. Monthly FOCUS filers submit Part I within 10 business days after month end. Quarterly filers submit Parts I and IIA within 17 business days after quarter end, and they do not file in the intervening months. The method is electronic filing through FINRA's regulatory systems; paper submissions are not the norm. A firm that changes its fiscal year must follow the notification procedures in Rule 17a-5(n). The exam tests whether you can pair the right form part with the right filer type and the right count of business days, so anchor on 10 for monthly and 17 for quarterly.

Memory hook:Monthly 10, quarterly 17, always business days, always electronic.

FINRA Rule 4524 layers supplemental schedules onto the FOCUS filing, collecting information the standard form does not capture, such as details on bank accounts, subsidiaries, customer credit balances, and other financial data FINRA wants for surveillance. FINRA Rule 4523 attacks a different control weakness: suspense accounts. The firm must assign responsibility for each general ledger account to a specific registered principal, identify every suspense account, and review and clear those accounts on a regular basis. The mechanism is accountability; a suspense account that lingers is where errors, fails, and even fraud hide. Expect questions pairing which rule covers supplemental FOCUS content versus which rule governs suspense account controls.

Memory hook:4524 supplements the report; 4523 names who owns each ledger account.

Form custody is filed with the FOCUS report under SEA Rule 17a-5(a)(3), and it answers one question in detail: where are customer securities and funds actually held? The form identifies whether the firm carries customer accounts itself or uses a clearing firm, whether it maintains possession or control of customer assets, and where those assets are located. For a typical introducing broker-dealer that clears through a carrying firm, the form documents that the introducing firm does not hold customer assets. The form matters because custody status drives obligations under the Customer Protection Rule, including reserve requirements and possession or control standards. Filing accurately keeps the firm's regulatory profile consistent with how it actually operates.

Memory hook:Form custody maps where customer assets sit, firm by firm.

Under Rule 17a-5(d), the annual report, audited by an independent public accountant, must be filed within 60 calendar days after fiscal year end. There is one significant extension: if the accountant has notified the firm of a material weakness in internal control over the financial responsibility rules and the firm intends to remediate, the firm may file within 45 calendar days after the accountant notifies the firm that the material weakness no longer exists. Amendments follow a parallel discipline; if the firm amends the annual report, it must file the amendment with the SEC, the appropriate SROs, and SIPC. The exam pairs the 60-day baseline with the material weakness extension, so keep the two clocks separate.

Memory hook:Sixty days after year end, unless a material weakness buys time from the all-clear.

Rule 17a-5(f) sets the bar for the independent public accountant: the firm must be independent and registered with the PCAOB. If the accountant is dismissed or resigns, Rule 17a-5(f)(3) requires the broker-dealer to notify the SEC within 30 days of the change, and the accountant may also provide a statement regarding the circumstances. Rule 17a-5(h) covers the bad news scenario: when the accountant concludes the firm is noncompliant with the financial responsibility rules or identifies a material weakness, the accountant notifies the firm, and the firm must file that notification with the SEC within 24 hours of receiving it. The exam tests who notifies whom and which clock applies.

Memory hook:Accountant change: 30 days. Accountant's bad news: 24 hours to the SEC.

SIPC membership carries assessment obligations, and the forms are mechanical. The SIPC-6, General Assessment Payment Form, accompanies the member's semiannual assessment payment to SIPC, reporting the amounts due based on the assessment SIPC has determined. The SIPC-7, General Assessment Reconciliation Form, is the annual true-up: the member reconciles the assessments actually paid during the year against what was owed and reports the result to SIPC. The mechanism is simple arithmetic across two filings, but the exam checks whether you know which form pays and which form reconciles. A firm filing a SIPC-7 must make sure the reconciliation ties to its SIPC-6 payments and its own books, since discrepancies invite follow-up.

Memory hook:SIPC-6 sends the money; SIPC-7 squares the money.

SEA Rule 17a-11 and FINRA Rule 4120(a) create an early warning system. A firm must notify the SEC and its designated examining authority within 24 hours when its net capital falls below 120 percent of its minimum requirement, or when its ratio of aggregate indebtedness to net capital exceeds 12 to 1, computed under the basic method. There is no 15-to-1 alternative-method early warning: 15 to 1 is the basic method's violation threshold, while alternative method firms must maintain net capital of at least 2 percent of aggregate indebtedness and trigger early warning through the 120 percent test. The notifications also cover equity withdrawals that push the firm near its minimum. Compare the fact pattern against the thresholds.

Memory hook:120 percent of minimum or 12 to 1 basic method means a 24-hour call; 15 to 1 is a breach, not a warning.

A Material Associated Person is an associated person whose activities could expose the firm to risks that are material to its financial or operational condition, such as a person with authority over customer funds or an affiliate with significant dealings. SEA Rule 17h-1T is the recordkeeping side: the firm must maintain records identifying MAPs and information about them. Rule 17h-2T is the reporting side: the firm must file a report with the SEC within 15 days of becoming aware that a person is or will become a MAP, or that a material change has occurred. The exam tests the pairing of records versus reports and the awareness trigger that starts the clock.

Memory hook:1T records, 2T reports; awareness starts the 15-day clock.

SEA Rule 10b-10 requires a broker-dealer to send a confirmation at or before completion of the transaction, and the content list is long: the security, date and time of execution, price, quantity, capacity as principal or agent, commission or markup, and related disclosures. FINRA Rule 11210 reinforces the uniform practice point: each party to the transaction sends its own confirmation, so the buyer's firm and the seller's firm each document their side. An introducing firm that gives up its side of the business still owes confirmations covering its customers. The exam tests content items and the timing rule, especially that delivery at or before completion means by settlement, not whenever convenient.

Memory hook:At or before completion, and each side sends its own paper.

FINRA Rule 11320 sets dates of delivery. Regular way settlement for corporate securities, including equities and corporate debt, is one business day after the trade date, T plus 1. Cash trades settle the same day. When-issued and when-distributed contracts settle when the security is issued or distributed. Government and municipal securities generally settle as the parties agree, with next-day settlement common. The exam's move is to give you a trade date and ask for the settlement date, or to test whether a holiday or weekend shifts the count. Count business days only, and remember the buyer's payment and the seller's delivery both fall on the same settlement date unless the contract specifies otherwise.

Memory hook:Regular way is next business day; cash is today; count business days only.

A security trades ex-dividend, ex-rights, or ex-warrants on the date the market fixes, and the ex-date decides who gets the benefit. Under FINRA Rule 11140, if a trade occurs on or after the ex-date, the seller keeps the dividend, right, or warrant even though the buyer will hold the security at settlement. If the trade is executed before the ex-date but settles after the record date, the buyer is still entitled, and a due bill transfers the payment from seller to buyer. Rule 11840 covers the mechanics of rights and warrants themselves, including delivery of certificates. The exam hinges on the ex-date versus the record date, so track both.

Memory hook:Ex-date splits the benefit: seller on or after, buyer before.

FINRA Rule 11810 gives the buying party a remedy when the seller fails to deliver on time. The buyer sends a written buy-in notice, and if the securities still do not arrive, the buyer may purchase them in the market and charge the difference to the defaulting seller. Rule 11820 is the mirror image: if the buyer fails to pay, the seller may sell out the securities and hold the buyer responsible for any loss. Both procedures require notice before action, and the defaulting party bears the economic consequences of the market move. The exam tests the sequence, notice first then execution, and which party can invoke which remedy, so keep buyer and seller roles straight.

Memory hook:No delivery, buy it in; no payment, sell it out.

FINRA Rule 11740 addresses two related uniform practice problems. Marking to the market applies when a contract remains open past the settlement date: the failing party pays the other side the difference between the contract price and the current market price, re-establishing the contract at the market level so neither side carries an unpriced exposure. Differences delivered is the other concept: when the seller delivers securities that differ from those sold, in quantity or kind, the receiving party may accept them, and the parties settle the price difference. Both mechanisms keep markets orderly by pricing deviations instead of unwinding them. The exam asks who pays the difference and how the contract is adjusted, so follow the money.

Memory hook:Mark to market reprices the open contract; differences delivered prices the mismatch.

FINRA Rule 11870, implemented through ACATS, moves customer accounts between firms on a fixed clock. The customer authorizes the transfer with the receiving firm. The receiving firm must submit the transfer instructions within one business day. The delivering firm must validate the instructions or object within one business day, and it must complete the transfer within three business days after validation. Positions that cannot be transferred require notice to the receiving firm, and disputes go to a defined process rather than unilateral refusal. The exam gives you a day count and asks what happens next, so memorize the sequence: one day to submit, one day to validate, three days to complete.

Memory hook:ACATS: submit in one, validate in one, deliver in three.

The FINRA 11890 series lets parties unwind trades that are clearly erroneous, meaning the price, size, or execution deviates so far from the market that no reasonable participant would have intended it. Rule 11891 sets the general standard; 11892 governs exchange-listed securities and 11893 governs OTC equity securities, each with its own criteria and filing windows, which are short, on the order of 30 minutes from execution. Rule 11894 provides review by the Uniform Practice Code Committee when a party contests a decision, and the committee's determination is the appeal mechanism within the industry framework. The exam tests whether a trade meets the criteria, which rule applies by security type, and who reviews the dispute.

Memory hook:92 listed, 93 OTC, 94 the committee appeal; a bad price alone is not enough.

SEA Rule 17a-3(a) tells the firm which records to make and how fast. The order ticket, the memorandum of each brokerage order, must be prepared no later than the end of the business day on which the order was entered, capturing the time of entry, the terms, the account, and who handled it. Blotters record purchases and sales and are prepared daily. The broader list covers customer ledgers, cash and margin records, and memoranda of securities transactions. The mechanism is contemporaneous documentation: a record made at the moment of the event is the evidence the firm relies on in disputes, audits, and reconstructions. The exam tests what must be recorded and by when, so watch the end-of-day trigger.

Memory hook:Order ticket by end of trade day; blotter daily; record it as it happens.

SEA Rule 17a-4 sets how long records last and in what form. Most records must be kept three years, with the first two years in an easily accessible place; key books such as blotters, ledgers, and journals carry six-year retention. Electronic storage is permitted under Rule 17a-4(f) if the system preserves records in a non-rewriteable, non-erasable format, verifies the storage process automatically, allows retrieval without undue delay, and maintains an audit trail of the system. The firm also needs the capacity to download indexes and a duplicate set or an audit-trail alternative. The exam pairs a record type with a retention period or tests whether an electronic system meets the preservation conditions.

Memory hook:Three years general, six for the core books, first two easily accessible.

FINRA Rule 4370 requires each member to create and maintain a written business continuity plan addressing data backup and recovery, mission critical systems, alternate physical locations, communications with customers, employees, and regulators, and regulatory reporting continuity. The plan is the firm's playbook for fires, floods, power failures, and cyber events, and it must be reasonably designed so the firm can meet its obligations to customers. The rule also requires emergency contact information, which the firm must provide to FINRA and update promptly when personnel or details change, so regulators can reach decision-makers during a disruption. The exam tests the plan's required elements and the duty to keep emergency contacts current, since a stale contact defeats the purpose of the rule.

Memory hook:4370: written plan for the disaster, live contacts for the regulators.

Rule 4530 is FINRA's event-reporting rule, and the mechanics matter as much as the list. When a member learns of a reportable event—written customer complaints, criminal charges, regulatory actions, expulsions, arbitrations and awards, settlements, or bankruptcies—it files a report through FINRA's reporting system within 30 calendar days of discovery. Separately, the firm files a quarterly statistical and summary report of customer complaints within 15 calendar days after the quarter ends. If previously reported information materially changes, an amendment is due within 30 calendar days of learning of the change. The clock always starts at discovery, not when the underlying event occurred, which is where most timing questions turn.

Memory hook:Thirty days from discovery; fifteen days after quarter end.

Rule 4512 governs what you must know about each customer and how often you refresh it. At account opening the firm records essential facts—name, date of birth, address, employment, financial status, investment objectives—and must update that information at least every 36 months. A customer signature is required for accounts in which the firm exercises discretion or holds funds or securities. Rule 2231 pairs with this on the statement side: customer account statements go out at least quarterly, no later than 10 business days after the calendar quarter ends. Firms may omit statements for inactive accounts carrying no security or cash balance, which is the one carve-out worth remembering.

Memory hook:Refresh facts every 36 months; statements out within 10 business days of quarter end.

Rule 1210 sets the registration requirements: pass the Security Industry Essentials exam plus the appropriate representative and principal exams. Rule 1220 defines the categories, and the one that matters here is the Introducing Broker-Dealer Financial and Operations Principal (Series 28), distinct from the Financial and Operations Principal (Series 27) that carrying firms must designate. Rule 1230 exempts persons whose functions are solely clerical or ministerial, along with certain other limited roles. Rule 1240 imposes continuing education: the Regulatory Element must be completed annually, and the Firm Element requires annual training tailored to the firm's business. A registered person who fails to complete required CE has their registration designated inactive until the training is finished.

Memory hook:28 introduces, 27 carries; clerical staff stay unregistered; skipped CE means inactive.

These three rules form a pyramid. Rule 3110 is day-to-day supervision: written supervisory procedures, designated supervisors, and review of correspondence, internal communications, and customer trades. Rule 3120 sits above it: the firm's supervisory control system must be tested and verified annually, and the results go into an annual report to senior management identifying the systems tested, a summary of the test results, and any amendments to procedures. Rule 3130 caps the pyramid: once a year the CEO certifies that the firm has processes to establish, maintain, review, test, and modify compliance policies reasonably designed to meet FINRA and MSRB rules—and the CEO must review the Rule 3120 report before signing that certification, which is filed with FINRA.

Memory hook:3110 supervises, 3120 tests and reports, 3130 the CEO certifies.

Rule 3220 caps gifts to employees of other firms at 100 dollars per person per year. The limit is cumulative: three 40-dollar dinners for the same client contact breach it even though no single gift did. Two carve-outs matter. Promotional items of trivial value that bear the member's name—pens, calendars—do not count against the limit. And ordinary and usual business expenses are not gifts at all: a legitimate business meal, travel, or entertainment incurred in the normal course of business falls outside the 100-dollar cap, provided it is not excessive and the firm can document the business purpose. The exam usually tests whether an item is a gift, a promotional item, or a genuine business expense.

Memory hook:One hundred dollars, one person, one year—unless it's a real business expense.

Rule 3310 requires every member to maintain an AML program reasonably designed to achieve and monitor compliance with the Bank Secrecy Act. The minimums: policies to detect and cause reporting of suspicious activity, customer identification procedures, ongoing employee training, independent testing, and designation of an AML compliance officer. Independent testing must occur no less than annually, except that members that do not carry customer accounts and do not hold customer funds or securities—typical introducing firms—may conduct testing every two years. Where a clearing relationship exists, the clearing agreement must specify which firm performs which AML functions, but each firm retains responsibility; the introducing firm cannot delegate away its own obligation to maintain a compliant program.

Memory hook:Functions can be shared in the agreement; responsibility cannot; custody-free firms test every two years.

The dividing line is whether securities are involved. Rule 3270 covers outside business activities: paid work outside the firm that is not securities-related—selling real estate, consulting. The person gives written notice before engaging, and the firm may impose conditions or restrict the activity. Rule 3280 covers private securities transactions: any securities transaction outside the regular course of employment, compensated or not. The person must give written notice describing the role and whether compensation is expected. If compensation is involved, the firm must either deny the activity or treat the person as if they were associated with that other business and supervise accordingly. With no compensation, the firm may simply impose conditions.

Memory hook:3270 is the outside job; 3280 is the outside trade.

Rule 5130 keeps IPO shares away from industry insiders. Restricted persons include associated persons of the underwriter or any other FINRA member, portfolio managers, and fiduciaries or accounts holding beneficial interests for restricted persons. The rule is tested through its exceptions. The de minimis provision permits a restricted person to buy up to 500 shares and 25,000 dollars in value, but only in an offering that exceeds 1 million dollars. Registered investment companies are exempt entirely, as are rights offerings, bona fide employee stock purchase plans, and offerings made outside the United States. The exam typically turns on whether the buyer fits a restricted category and whether an exception rescues the allocation.

Memory hook:Five hundred shares, twenty-five thousand dollars, only in deals over one million.

Two arbitration codes and two expedited rules. Rule 12200 governs customer disputes: arbitration is required if a valid arbitration agreement exists or if FINRA's rules compel it, and once a customer files a claim, the firm must arbitrate. Rule 13200 makes arbitration mandatory for industry disputes—between members, between members and associated persons, and between associated persons of different members. Rules 9557 and 9559 handle troubled firms: when a member is subject to Rules 4110, 4120, or 4130 for financial or operational difficulties, FINRA may deny business expansion or impose conditions through expedited proceedings, and Rule 9559 provides the accelerated hearing procedures, including the respondent's right to request a hearing on a compressed timetable.

Memory hook:Customers under 12200, industry under 13200, troubled firms get the fast track.

The minimums form a ladder tied to what the firm touches. An introducing broker-dealer that does not receive or hold customer funds or securities needs only 5,000 dollars. If it receives customer funds or securities but promptly transmits them, or holds them subject to SEA Rule 15c3-3, the minimum rises to 50,000 dollars. A carrying firm needs 250,000 dollars. For an introducing firm using the alternative method, the requirement is the greater of the applicable dollar floor or two-thirds of one percent of aggregate indebtedness. The decision rule is custody: the moment the firm can receive customer assets, the 5,000-dollar tier disappears and the higher floor applies.

Memory hook:Five thousand, fifty thousand, two hundred fifty thousand—custody sets the rung.

Both methods compute net capital as net worth minus deductions; they differ in the requirement and in how haircuts are handled. The basic method demands net capital of at least six and two-thirds percent of aggregate indebtedness, subject to a minimum of 25,000 dollars. The alternative method demands two percent of aggregate indebtedness subject to a 250,000-dollar floor, and only firms complying with SEA Rule 15c3-3 may use it. Under the basic method, securities haircuts are deducted directly from net worth. Under the alternative method, haircuts are instead converted into a haircut capital equivalent that becomes part of required capital, which rewards firms with clean, liquid books. The ratios and the 15c3-3 gate are the tested distinctions.

Memory hook:Basic bleeds six and two-thirds; alternative eases to two percent—if you meet 15c3-3.

Aggregate indebtedness is the denominator that drives the basic method's ratio. It equals all money liabilities—customer credit balances, payables, accrued expenses, short-term borrowings—with a short list of exclusions. The two that matter most: liabilities subordinated to the claims of general creditors under a qualifying subordination agreement are excluded, and deferred federal, state, and local income taxes are excluded because they are not money liabilities. That asymmetry is the point of the rule. A properly documented subordinated loan adds capital to the net worth side of the computation without adding a dollar to aggregate indebtedness, which is exactly why Appendix D sets such strict terms for qualifying agreements. Deferred taxes are similarly excluded from the ratio.

Memory hook:Money owed counts; true subordinations and deferred taxes don't.

Paragraph (c)(2)(i) forces the books to reflect economic reality before net worth counts as capital. Securities are marked to market: unrealized losses are deducted and unrealized gains are added, so a firm cannot carry stale cost values. Deferred tax provisions are deducted from net worth even though deferred taxes are excluded from aggregate indebtedness—the two adjustments run in opposite directions, and candidates routinely mix them up. The paragraph also sweeps in liabilities not shown on the balance sheet: contingent liabilities, discretionary liabilities, and guarantees of the loans of others are deducted. The decision rule: anything that could drain cash without appearing on the trial balance comes out of net worth before it counts as capital.

Memory hook:Mark to market both ways; deferred taxes out of net worth but never into indebtedness.

Paragraph (c)(2)(iv) removes anything a firm could not quickly turn into cash. Deduct 100 percent of the carrying value of furniture, equipment and fixtures, leasehold improvements, prepaid expenses, organization costs, goodwill, exchange memberships, and receivables from officers, employees, parent companies, or affiliates. Non-marketable securities land here too, overlapping paragraph (c)(2)(vii). The mechanism is a straight write-off from net worth—no percentages, no aging schedules, no partial credit. When reviewing a trial balance, the practical move is to walk each asset line and ask one question: could this be sold for cash by tomorrow? If the honest answer is no, it comes out of net capital entirely.

Memory hook:If you can't sell it by tomorrow, it doesn't count as capital.

Failed trades create receivables, and the rule penalizes them for age, measured from the settlement date. For failed-to-receive receivables—securities you bought but never got—the deduction is 15 percent of the market value of the securities contracted to purchase for fails aged 5 to 30 calendar days, and 30 percent of market value for fails aged more than 30 calendar days; fails aged fewer than 5 days carry no charge. Failed-to-deliver receivables are treated differently: deduct the excess of the receivable over the current market value of the securities to be delivered, plus the applicable haircut. So the first question on any aging item is which side of the trade the firm sits on, because the two fails use entirely different formulas.

Memory hook:Fails to receive: 15 percent at 5 to 30 days, 30 percent after; fails to deliver pay the spread plus haircut.

Paragraph (c)(2)(vi) assigns a haircut to each product class, and the deduction is taken from net worth under the basic method. Equity securities with a ready market take 15 percent of market value—that is the calculation behind the outline's own sample item, where 2,000 shares at 154 produce a 46,200-dollar haircut. U.S. Government securities take a much lighter charge, sliding from zero percent at the shortest maturities up to six percent at the longest. Other classes—municipals, corporate debt, convertibles—carry their own schedules, generally lighter than equities for high-quality short paper. Where a firm is both long and short the same security, the haircut applies to the greater of the long or short market value.

Memory hook:Fifteen for stocks; governments slide from zero to six with maturity.

Paragraph (c)(2)(vi)(M)(1) adds a penalty when a firm bets too heavily on one name. If the market value of a single security exceeds 10 percent of tentative net capital—net capital before haircuts—the firm takes an additional deduction equal to the applicable haircut multiplied by the portion of the position above that 10 percent threshold. The mechanism is a second bite of the same rate, applied only to the excess. Example logic: with tentative net capital of 1 million dollars, a 200,000-dollar equity position exceeds the threshold by 100,000 dollars, so the extra charge is 15 percent of 100,000, or 15,000 dollars, on top of the regular haircut on the whole position.

Memory hook:Ten percent of tentative capital; only the excess pays the haircut twice.

Paragraph (c)(2)(vii) handles securities that cannot be sold freely. Non-marketable securities—those with no ready market under the rule's definition—are deducted from net worth at 100 percent of carrying value, unless the firm can substantiate a realizable liquidation value that justifies a smaller deduction. Control and restricted securities get their own treatment: even where a market exists, securities whose sale is legally restricted take a 30 percent deduction, reflecting the discount a buyer would demand for the lock-up risk. The decision sequence on any question: first ask whether a ready market exists; if not, expect the full write-off. If a market exists but the securities are restricted or give control, apply the 30 percent charge.

Memory hook:No market, no capital; restricted or control means thirty percent off.

Paragraph (c)(2)(viii) charges for promises. An open contractual commitment is any agreement to buy or sell securities at a future date—firm-commitment underwritings, when-issued or when-distributed trades, forward contracts, delayed deliveries. The deduction has two components: the haircut that would apply to the underlying securities, plus the amount by which the firm is out of the money—the excess of the contract price over current market value on a purchase commitment, or the excess of market value over contract price on a sale commitment. For when-issued securities, the applicable haircut is applied to market value. The logic is that a commitment locks the firm into tomorrow's delivery at today's risk, so capital must stand behind both.

Memory hook:A commitment gets the haircut plus whatever the contract is underwater.

Paragraph (c)(2)(v) addresses the gap between what the records say and what the vault holds. A long securities difference means the firm actually holds more of a security than its records show; the deduction is the applicable haircut on the market value of the excess. A short securities difference means records show positions the firm does not have in its possession or control; the deduction is 100 percent of market value. The asymmetry makes sense: extra shares are probably an asset, so they take only a haircut, while missing shares are probably a liability, so they are written off entirely. On any question, classify the difference first—long or short—because the treatment swings from partial to total.

Memory hook:Long differences pay the haircut; short differences pay in full.

Under Rule 15c3-1(c)(2)(xiv), a firm whose fidelity bond carries a deductible must compare that deductible against the minimum net capital it is required to maintain. Any amount of the deductible in excess of the required minimum is deducted from net worth in the net capital computation. The logic is simple: a large deductible is a contingent claim on the firm's capital, so the rule treats the excess as if it were already lost. Example: a firm with a $50,000 minimum requirement and an $80,000 bond deductible takes a $30,000 deduction from net worth. The charge is separate from, and in addition to, haircuts and other deductions, so it can quietly push a thin firm below its minimum.

Memory hook:Deductible over the minimum drains net worth dollar for dollar.

A ready market exists when a security can be sold promptly at a price that is reasonably ascertainable. The rule puts the burden squarely on the firm: it must adopt and implement policies and procedures reasonably designed to determine whether a market is ready, and it must have a reasonable basis for concluding that it is. In practice the determination rests on an active interdealer market and readily available quotations. If the firm cannot support a ready market determination, the security is treated as non-marketable and the deduction becomes the greater of the standard haircut or the excess of cost over current market value. The determination therefore directly drives how large a haircut the position takes.

Memory hook:No documented basis, no ready market, and the haircut balloons.

Net capital is not a month-end-only test. A firm must maintain compliance continuously, moment to moment, and if net capital falls below the minimum, or aggregate indebtedness exceeds 1,500% of net capital under the basic method, at any point, the firm is in violation and must notify its designated examining authority promptly. The early warning threshold sits above the violation line: when net capital drops below 120% of the required minimum, or aggregate indebtedness exceeds 1,200% of net capital, the firm must give notice even though it still technically complies. That buffer alerts regulators before an actual deficiency occurs and simultaneously restricts equity capital withdrawals, which is where the next lesson picks up.

Memory hook:120% of minimum or 1,200% of AI means early warning, not breach.

When a firm's net capital is less than 120% of its required minimum, its ability to move equity capital out the door is restricted. Under Rule 15c3-1(e)(1) and FINRA Rule 4110(c), the firm may not withdraw equity capital or pay a dividend that would reduce net capital below that 120% line without giving advance notice to FINRA, and to the SEC where the rule requires it. The notice gives regulators a window to object before the money leaves. The test is prospective: compute pro forma whether the withdrawal pushes net capital under 120% of the minimum. If it does, notice comes first, and the firm waits for clearance before the funds move.

Memory hook:Below 120%, money stays home until regulators hear about it.

Appendix D sets the standards a subordination agreement must meet before borrowed funds count as regulatory capital. The agreement must be in writing and approved in advance by the designated examining authority. It must run for a minimum term of one year, and repayment cannot be demanded while the firm's net capital is below its minimum or its aggregate indebtedness exceeds the permitted ratio, so the lender is stuck until capital health is restored. The lender must also waive any claim to the funds in the event of the firm's insolvency proceedings, subordinating itself to general creditors. When qualified, the proceeds count as an allowable asset and the liability is excluded from aggregate indebtedness, improving both sides of the ratio at once.

Memory hook:One-year term, insolvency waiver, DEA approval, or it is just debt.

FINRA Rule 4150 generally bars a member from guaranteeing or assuming another person's obligations or from pledging its net capital as collateral. The important exception is the flow-through benefit: a subsidiary broker-dealer can satisfy its own minimum net capital using a parent's capital when the parent is itself a broker-dealer subject to Rule 15c3-1, guarantees the subsidiary's obligations, and computes net capital on a consolidated basis under Appendix C. When those conditions hold, the parent's capital flows through to the subsidiary as if it were the subsidiary's own. The guarantee must be in writing, and the consolidated computation is what lets regulators see the whole family's capital position rather than a parent's snapshot alone.

Memory hook:Parent guarantees, parent consolidates, only then does capital flow through.

Appendix C lets a broker-dealer compute net capital and aggregate indebtedness on a consolidated basis with certain subsidiaries and affiliates, treating the whole group as a single broker-dealer. Eligible affiliates are those subject to Rule 15c3-1, or that would be but for their particular status. The price of consolidation is the precluded acts in Appendix C(d): the broker-dealer and its affiliates generally cannot incur indebtedness to non-affiliates except in the ordinary course of business, cannot declare dividends or otherwise reduce capital without giving notice to the designated examining authority, and cannot enter into unsecured loans with affiliates outside the ordinary course. Violating these conditions undermines the benefit of the consolidated computation and invites regulatory consequences.

Memory hook:Consolidate the group, but dividends and outside debt need DEA notice.

FINRA Rule 4110 works as a consequence ladder for capital problems. Under 4110(a), a member whose net capital falls below its minimum, whose aggregate indebtedness exceeds 1,500% of net capital under the basic method, or whose net capital falls below 2% of aggregate indebtedness under the alternative method, must reduce its business and cannot expand it until the ratios recover. Rule 4110(d) targets creative financing: proceeds from sale-leaseback transactions, factoring of receivables, and similar arrangements are treated as liabilities rather than equity, and the member must report these arrangements to FINRA. The point is to stop a firm from dressing borrowed money up as capital or monetizing assets to mask a deficiency.

Memory hook:4110(d): factored receivables and sale-leasebacks are debt in capital clothing.

Rule 4120 is the firm's own duty. A member experiencing financial or operational difficulties, such as net capital below the minimum, books and records that are not current, or failure to make required filings, must promptly notify FINRA and curtail its business, meaning no expansion and no new activities without approval. Rule 4130 is FINRA's side of the ledger: once a member is in financial or operational difficulty, FINRA can impose conditions, including raising the minimum net capital the member must maintain, restricting the opening of new accounts, requiring approval for business expansion, or directing the member to reduce or cease operations. Together they form a notification-plus-restraint regime for troubled firms.

Memory hook:4120 is the firm's confession; 4130 is FINRA's prescription.

The (k)(2) exemption releases an introducing broker-dealer from the reserve and custody requirements of Rule 15c3-3, but only if every condition is met: the firm is subject to the net capital rule, does not hold customer funds or securities, promptly transmits any customer payments it receives, carries all customer margin accounts through a clearing broker under a written agreement, and clears its transactions through a clearing member. FINRA Rule 1020 adds the gate: the firm must apply to FINRA and receive approval to claim the exemption, and any change of exempt status also requires FINRA approval. In deciding, FINRA looks at the firm's financial condition, the type of business it conducts, and its procedures for safeguarding customer assets.

Memory hook:No customer assets, clearing agreement in place, and FINRA signs off first.

A firm that holds customer funds must make a periodic computation under Rule 15c3-3(e)(1): compare the funds required to be held in possession or control against what the firm actually holds. If liabilities exceed allowable assets, the deficiency is deposited into a special reserve bank account for the exclusive benefit of customers at a bank, generally by the next banking day after the computation. The account is segregated, and funds come out only when a later computation shows an excess. Parallel mechanics apply to the PAB account: money belonging to proprietary accounts of broker-dealers, meaning other broker-dealers acting as customers, is computed separately and deposited in a distinct PAB account, never commingled with the customer reserve.

Memory hook:Compute the deficiency, deposit the cash, keep PAB money in its own bucket.

Under Rule 15c3-3(d), fully paid and excess margin customer securities must be kept in the firm's possession or control, meaning held by the firm, a clearing agency, or a bank control location. Limited exceptions allow temporary movement, but the securities must return within a short window or the firm must otherwise document possession or control. Rule 15c3-3(m) covers the sell side: a broker-dealer may not accept a customer's sell order unless it has possession or control of the securities or can reasonably expect to have them for delivery by settlement. Notably, paragraph (m) applies to every registered broker-dealer, including firms exempt from the rest of Rule 15c3-3, so an exempt introducing firm still cannot take sell orders it cannot deliver.

Memory hook:Exempt from reserves, never exempt from (m): no shares, no sell order.

Regulation T draws a hard line between two account types. In a cash account under Rule 220.8, the customer pays in full and no credit is extended; payment should arrive by settlement, and a customer who misses payment within the grace period can be placed in a 90-day restricted status requiring funds in advance before new purchases. In a margin account under Rule 220.4, the broker extends credit up to the Regulation T requirement, currently 50% for marginable equities, and a margin call can be met with cash or marginable securities. Rule 220.3(c) on maintenance of credit bars the creditor from increasing a loan on securities that are already below the required margin, so the firm cannot lend against underwater collateral.

Memory hook:Cash: full payment or 90-day freeze; margin: 50% down, no lending against underwater collateral.

FINRA Rule 4210 layers maintenance requirements on top of Regulation T: 25% maintenance on long marginable equities and 30% on shorts. Concentration adds a charge: when a single marginable equity security exceeds 30% of the greater of the account's current market value or the aggregate market value of all long marginable securities in the account, an additional 5 percentage points of maintenance applies to that position. Day trading has its own gate. A pattern day trader, generally someone making four or more day trades within five business days, must maintain minimum equity of $25,000 in the margin account before day trading and receives day-trading buying power based on a multiple of maintenance excess.

Memory hook:25 long, 30 short, plus 5 when one stock tops 30%; day traders need $25,000.

When a customer cannot pay for a cash account purchase by settlement, the firm can request an extension of time through FINRA Rule 4230. The request is submitted electronically through FINRA's system, and the member must state the reason, such as a check delayed in the mail or a bank error, which qualifies as a bona fide circumstance. Requests should be filed promptly, generally no later than two business days after the settlement date, and the firm must document the reason and retain records of both granted and denied requests. Extensions are an accommodation, not a right: repeated requests draw regulatory attention, and where an extension is unavailable or the customer fails again, the firm should still enforce the 90-day freeze.

Memory hook:Extension requests: bona fide reason, filed fast, through FINRA's system.

FINRA Rule 4311 requires the relationship between an introducing firm and its carrying firm to be governed by a written clearing agreement that spells out who does what: clearance and settlement, custody of funds and securities, order and account statement handling, books and records, anti-money laundering responsibilities, and supervision. Under 4311(c)(1)(E), the agreement must allocate responsibility for the extension of credit, including margin calls, maintenance enforcement, and related monitoring, between the carrying and introducing firm. The allocation matters because each firm remains accountable to regulators for the functions assigned to it, and the agreement is the roadmap examiners use to assign responsibility when a margin or credit obligation falls through the cracks.

Memory hook:No written allocation of credit duties, no compliant carrying agreement.

Regulation SHO attacks fails at two points. Rule 203 is preventive: before accepting or entering a short sale, the firm must borrow the security or have reasonable grounds to believe it can be borrowed, a documented locate, though bona fide market making and underwriting activity are excepted. Rule 204 is corrective: a firm with a fail-to-deliver in an equity security must close it out by purchasing or borrowing the security within the prescribed period after settlement, and threshold securities face an accelerated close-out requirement. A firm that fails to close out a threshold security is restricted from further short sales in that security until it delivers. Locate documentation and close-out deadlines are the operational heart of the pair.

Memory hook:203: locate before you short. 204: close out what you failed to deliver.

SEA Rule 15c2-4 protects investors in offerings that do not go forward unless a minimum amount is raised. Payments received from purchasers in connection with the offering must be transmitted promptly to the bank or other person specified in the prospectus, typically an escrow agent, and the broker-dealer cannot use or hold those funds itself. If the minimum amount specified in the prospectus is not received by the expiration date, all money must be returned promptly to the purchasers. The rule exists because underwriting money sitting in a broker-dealer's own account is customer money at risk if the firm fails; the escrow mechanism keeps it out of the firm's hands from the start.

Memory hook:15c2-4: escrow holds it, and no minimum means money goes back.

Subordinated loans and secured demand notes are the two standard tools for boosting regulatory capital. A subordinated loan that satisfies Appendix D—written, approved in advance by the designated examining authority, minimum one-year term, repayment conditioned on capital health, insolvency waiver—counts as capital: the proceeds are an allowable asset and the liability is excluded from aggregate indebtedness. A secured demand note reverses the collateral flow: the lender advances funds to the firm, and the firm pledges its own securities to the lender as collateral for the note. If the pledged securities are allowable assets and the note otherwise meets Appendix D, the proceeds qualify as an allowable asset and the note is excluded from aggregate indebtedness.

Memory hook:Subordinated loan or SDN, the lender waits; in an SDN the firm pledges its own securities.

Regulation S-P has two halves. The privacy half requires a firm to deliver an initial notice of its privacy policies when a customer relationship begins and annually thereafter, and to give customers the opportunity to opt out before their nonpublic personal information is shared with nonaffiliated third parties, though sharing with service providers under confidentiality agreements and for joint marketing is excepted from the opt-out. The safeguarding half requires a written program to protect customer records and information from unauthorized access, with oversight of service providers and regular testing of controls. For a Series 28 candidate, the operational angle is that customer data flows through operations daily, so safeguards are an operations responsibility, not just a compliance memo.

Memory hook:Initial notice, annual notice, opt-out unless a service provider or joint marketer.