Series 27 common mistakes
Series 27 · Understand the traps and how to avoid them.
Computes net capital as total assets minus total liabilities with one blanket haircut, instead of starting from total ownership equity and making the specific non-allowable-asset deductions and security-by-security haircuts required by Rule 15c3-1.
Accounting intuition says equity equals assets minus liabilities; candidates carry that shortcut into the net capital schedule and never build the allowability and haircut layers.
What to do instead
Use a fixed worksheet: start with total ownership equity, subtract each non-allowable asset line (prepaid expenses, goodwill, unsecured receivables, furniture) with a source reference, then apply the haircut table to each security class, then add back only qualified subordinated debt.
Counts a subordinated loan as net capital without confirming the agreement contains the required subordination provisions (no acceleration, minimum term, repayment suspended if net capital would fall below the requirement).
Cash is sitting in the bank account, so the candidate treats it as capital and never reads the loan document.
What to do instead
Keep a one-page subordination checklist: signed agreement on file, maturity and notice periods meet the rule, lender has no right to demand repayment that would breach net capital, and FINRA has been notified where required. Tie each subordinated loan on the net capital schedule to a completed checklist.
Applies the wrong haircut to a position-for example, using the non-investment-grade percentage for a municipal bond, or omitting the concentration haircut on an oversized position in one issuer.
Candidates memorize a handful of percentages and then pattern-match by name rather than classifying by the rule's exact criteria (security type, rating, remaining maturity, concentration).
What to do instead
Build a haircut lookup keyed to the categories in Rule 15c3-1(c)(2)(vi) and practice assigning unseen positions to a category before calculating. Add a separate concentration-haircut check for any position exceeding the threshold.
Prepares the customer reserve formula using only free credit balances, omitting other customer credits such as securities loaned, fails to receive, and long option market values.
The candidate treats the formula as 'cash we owe customers' rather than as a full Exhibit A computation with debit and credit sides.
What to do instead
Walk Exhibit A line by line, tying every credit line to the stock record and general ledger, and require a second reviewer to initial each line. Keep a mapping of which source document supports each line.
Assumes customer fully paid and excess margin securities are protected because they sit at a third-party custodian, without confirming a written possession-or-control agreement or performing daily segregation.
Custody is confused with the regulatory concept of possession or control, so no one checks the agreement or the daily seg reconciliation.
What to do instead
Verify the custody agreement satisfies Rule 15c3-3(c), reconcile the segregation account daily, and maintain a location schedule showing where each customer security is held and under what agreement.
Ignores aged fails-to-deliver in the net capital computation, so long sale fails past the allowed aging period are never deducted.
Fails live on the operations desk's aging report and are never routed to the person preparing the net capital schedule.
What to do instead
Produce a daily aged fail report and require the net capital preparer to sign off that every fail beyond the aging threshold has been deducted at the correct value. Reconcile the fail report to the clearing broker statement.
Files the FOCUS report without first reconciling the stock record, the clearing broker statement, and the general ledger, letting differences roll forward into the filing.
Month-end time pressure leads candidates to prepare the FOCUS from the trial balance alone.
What to do instead
Make a documented three-way reconciliation a precondition for filing: stock record to clearing statement to general ledger, with each break investigated and signed off before the FOCUS is submitted.
Applies a single three-year retention period to every book and record, missing the six-year requirement for blotters and the requirement that the most recent two years be readily accessible.
The three-year rule is familiar from other exams, so candidates generalize it to all records.
What to do instead
Build a retention matrix from Rules 17a-3 and 17a-4 mapping each record type to its retention period and accessibility requirement, and test yourself on the exceptions (blotters, order tickets, communications).
Files the wrong FOCUS part (Part II versus Part IIA) or misses the filing deadline because the monthly and quarterly schedules are confused.
The two parts look nearly identical and the candidate has not memorized which firms file which part and when.
What to do instead
Memorize the thresholds that select Part II versus Part IIA and the 17-business-day deadline, and place the due date on the close calendar at month-end so the filing is scheduled before the work begins.
Uses customer free credit balances or funds in the special reserve bank account to cover firm expenses or fund fails, effectively commingling customer and firm money.
A cash squeeze at settlement pushes the candidate to treat the reserve account as available liquidity.
What to do instead
Maintain separate firm and customer bank accounts, reconcile both daily, and require dual sign-off before any transfer out of a customer or reserve account. Treat the reserve account balance as untouchable for firm funding.