Series 24 Net Capital Practice Questions
Question 1
A broker-dealer that carries customer accounts and holds customer funds uses the basic method and has aggregate indebtedness of $4,800,000. What is its minimum net capital requirement?
- A. $320,000
- B. $250,000
- C. $480,000
- D. $720,000
Show answer and explanation
Correct answer: A. $320,000
Under the basic method a carrying firm must maintain the greater of $250,000 or 6 2/3% of aggregate indebtedness. 6 2/3% of $4,800,000 is $320,000, which exceeds the $250,000 floor.
- A. Correct: 6 2/3% x $4,800,000 = $320,000, which is greater than $250,000.
- B. This is the dollar floor, but the percentage test produces a higher figure, and the greater of the two applies.
- C. This applies 10% of aggregate indebtedness, which is not the Rule 15c3-1 percentage.
- D. This applies 15%, confusing the 15-to-1 ratio limit with the percentage minimum.
Question 2
A broker-dealer has custody of fully paid customer securities but routinely uses them to satisfy proprietary short positions without required consent or control. Which regulatory concern is most direct?
- A. SEC customer-protection possession-or-control requirements.
- B. The mutual-fund prospectus-delivery exemption for open-end investment company shares.
- C. Municipal-bond underwriting syndicate account and allocation rules for new issues.
- D. The firm's advertising approval structure for retail communications and web content.
Show answer and explanation
Correct answer: A. SEC customer-protection possession-or-control requirements.
The customer protection rule requires a broker-dealer to maintain possession or control of customers' fully paid and excess-margin securities. Using them for proprietary short positions without proper authority defeats that safeguard.
- A. Misuse of fully paid customer securities directly implicates the possession-or-control requirements.
- B. Prospectus-delivery exemptions concern offering documents and have nothing to do with custody of customer securities.
- C. Syndicate rules govern municipal underwritings, not custody of customers' fully paid securities.
- D. Advertising approval is a communications matter unrelated to safeguarding customer securities.
Question 3
A broker-dealer does not carry customer accounts, does not hold customer funds or securities, and promptly transmits all customer checks and securities it receives to the carrying firm. Under SEC Rule 15c3-1, what is this firm's minimum net capital requirement?
- A. $5,000
- B. $50,000
- C. $100,000
- D. $250,000
Show answer and explanation
Correct answer: A. $5,000
Under SEC Rule 15c3-1(a), a broker-dealer that does not carry customer accounts, does not hold customer funds or securities, and promptly transmits all customer checks and securities to another broker-dealer that carries the accounts is subject to the lowest minimum net capital tier: $5,000.
- A. A broker-dealer that does not carry customer accounts, does not hold customer funds or securities, and promptly transmits everything it receives to the carrying firm qualifies for the lowest minimum net capital tier of $5,000 under Rule 15c3-1.
- B. $50,000 corresponds to a different, higher-obligation category of broker-dealer, not this fully-disclosed, non-carrying introducing firm.
- C. $100,000 applies to firms with greater responsibilities (e.g., certain market makers or firms handling customer funds), not this pass-through introducing broker.
- D. $250,000 applies to firms carrying customer accounts or with broader responsibilities, which does not describe this firm.
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A broker-dealer is computing net capital under SEC Rule 15c3-1 and is reviewing its balance sheet. Which asset must be deducted in full from net worth as a non-allowable asset?
- A. Commissions receivable from its clearing firm that are collectible within 30 days and are not past due
- B. Exchange-listed equity securities owned in the firm's trading account
- C. Office furniture, leasehold improvements, and prepaid rent on the firm's main office
- D. Cash held in the firm's operating account at a commercial bank
Show answer and explanation
Correct answer: C. Office furniture, leasehold improvements, and prepaid rent on the firm's main office
Net capital is a liquidity measure, so assets that cannot be readily converted to cash, such as fixed assets and prepaid expenses, are non-allowable and are deducted in full under Rule 15c3-1. Liquid assets stay in the computation, with haircuts applied to securities.
- A. Currently collectible receivables from a clearing firm are allowable assets, so they are not deducted in full.
- B. Marketable listed securities are allowable; they are reduced by a percentage haircut rather than deducted in full.
- C. Furniture, leasehold improvements, and prepaid rent cannot be quickly converted to cash to meet customer or creditor claims, so each is a non-allowable asset.
- D. Cash at a bank is the most liquid allowable asset and is not deducted.