Series 27 cheat sheet

FOCUS Report Part II is filed monthly; Part IIA is filed quarterly; both report net capital, the customer reserve formula, and balance-sheet data.

Annual audited financial statements under SEA Rule 17a-5(d) are due within 60 days of fiscal year end for brokers carrying customer accounts.

Financial statements must be prepared in accordance with U.S. GAAP and audited by an independent PCAOB-registered accountant.

The annual audit package includes the balance sheet, income statement, changes in stockholders' equity, and statement of cash flows.

Net capital and customer reserve amounts reported in FOCUS must reconcile to the firm's general ledger and stock record.

A broker-dealer must file a prompt notification with the SEC and FINRA if it discovers a material error in previously filed financial reports.

FOCUS Part I is filed quarterly by every broker-dealer; Part II or IIA is filed by firms that carry customer accounts or hold customer funds.

Supporting workpapers for FOCUS filings must be retained and made available for examination.

The stock record lists every security position long and short, by location, including vault, DTC, and street-side holdings.

Settlement for most U.S. corporate securities occurs on T+1; fails to deliver or receive must be tracked and aged.

A buy-in may be executed when a seller fails to deliver securities by the required settlement date.

SEA Rule 17a-13 requires periodic counts of physical securities and verification of all positions at least annually.

Customer account statements must be sent at least quarterly; firms typically send monthly when there is account activity.

Dividends and interest are credited to customer accounts on payable date; due bills handle trades pending settlement.

DTC's Continuous Net Settlement system nets trades and manages fails between clearing members.

Transfer agents record changes in ownership; DWAC moves securities electronically between transfer agent and DTC.

Control accounts must agree with the stock record; differences are investigated and corrected promptly.

SEA Rule 17a-3 specifies records a broker-dealer must create; SEA Rule 17a-4 specifies retention periods.

Most books and records must be retained for six years, with the first two years readily accessible.

Order tickets and communications must be retained for three years, with the first two years readily accessible.

Written customer complaints must be retained for four years.

Partnership agreements, articles of incorporation, and minute books must be kept for the life of the enterprise.

Electronic records under Rule 17a-4(f) must be preserved in a non-rewriteable, non-erasable format with an audit trail.

FINRA Rule 4511 requires firms to make and preserve books and records in conformity with SEA Rules 17a-3 and 17a-4.

Records must be produced promptly to regulators upon request; obstruction or alteration is prohibited.

SEA Rule 15c3-3 requires a special reserve bank account for the exclusive benefit of customers.

The customer reserve formula compares customer credits with customer debits and determines the required deposit.

The reserve computation is made weekly as of the close of the last business day of the week.

Fully paid and excess-margin customer securities must be held in possession or control.

Free credit balances are customer funds and cannot be used to finance firm proprietary activity.

Customer securities may not be commingled with firm securities or pledged without customer consent.

A proprietary account of the broker-dealer may be excluded from the customer reserve if the firm meets conditions in the rule.

The special reserve account must be titled to show it is for the exclusive benefit of customers.

Net capital equals net worth plus qualifying subordinated loans minus nonallowable assets and securities haircuts.

Minimum net capital is generally $250,000 for firms carrying customer accounts and $100,000 for certain introducing firms.

The standard aggregate indebtedness to net capital ratio may not exceed 15 to 1.

A firm may elect the alternative net capital method, requiring net capital of at least 2% of aggregate customer-related debits.

Common stock positions generally carry a 15% haircut; haircuts increase with lower-rated or less liquid securities.

Subordinated loans qualify as net capital only if they meet SEA Rule 15c3-1d and are approved by FINRA.

Goodwill, furniture, fixtures, and prepaid expenses are nonallowable assets and are excluded from net capital.

A firm must notify the SEC and FINRA if net capital falls below the minimum or below 120% of the minimum (early warning).

Customer free credit balances and segregated funds are not available to fund firm operations.

Unsecured borrowings are aggregate indebtedness; subordinated loans may count as net capital if properly documented.

Daily cash forecasting compares expected settlements, fails, and customer debits to available cash.

Sweep programs move customer cash to money market funds or bank deposits and require clear disclosure.

Stock loan and repurchase agreements provide short-term funding and create collateral and counterparty risk.

A line of credit can fund temporary needs but cannot replace required net capital.

Commingling customer and firm cash in the same bank account is prohibited.

Cash management must ensure the special reserve bank account is funded by the required deadline.