Series 24 · Supervision of General Broker-Dealer Activities · Free Lesson

Financial responsibility: net capital and reporting, customer protection and segregation, short interest, clearing arrangements and credit extension

Free FINRA Series 24 (General Securities Principal) lesson in Supervision of General Broker-Dealer Activities. 28 min read, ~4,250 words.

When a broker-dealer fails, customers ask one question: are my cash and securities still there? Every financial responsibility rule exists so the answer is yes.

The Securities Exchange Act of 1934 (Exchange Act) addresses that risk in Exchange Act Section 15(c)(3). That section directs the Securities and Exchange Commission (SEC) to write rules safeguarding the financial responsibility of brokers and dealers. The net capital rule keeps enough liquid assets to absorb losses and wind down in an orderly way. The customer protection rule walls off customer property from the firm's creditors.

As a principal, you supervise compliance with financial responsibility requirements and the firm's funding and cash management. Funding means equity, subordinated loans and bank borrowing. Cash management means forecasting daily payment needs so no shortfall tempts anyone toward customer money. You review capital and reserve computations, escalate owner withdrawals and new loans, and see that required notices go out on time.

Net capital is net worth minus assets the firm cannot quickly turn into cash and minus haircuts, the percentage deductions on securities the firm owns.

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Common mistakes

Bottom line

Exam shortcut

When a stem gives a capital percentage, place it on the 150/125/120/100 ladder and pick the action at the lowest rung crossed. Rule 4120 binds only carrying and clearing firms, so a stem about an introducing firm points to Rule 17a-11. For an owner withdrawal, check the $500,000 30-day total before the 30% and 20% tests.

The full lesson (about 4,250 words, 28 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.

Learning objectives

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