Series 28 Practice Exam.
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1. A shareholder requests that a stock certificate be reissued in a new name after a private sale. Which entity is primarily responsible for cancelling the old certificate and issuing the new one on the issuer's records?
- A. The clearing corporation
- B. The transfer agent
- C. The custodian bank
- D. The introducing broker-dealer's operations department
Show answer & explanation
Answer: B
The transfer agent maintains the issuer's official ownership records and is responsible for cancelling old certificates and issuing new ones when ownership changes; a custodian bank, the clearing corporation, and an introducing firm's operations staff play different roles that do not include altering the issuer's registrar records.2. Under the standard method, a firm's books show money liabilities counted as aggregate indebtedness of $900,000 against a computed net capital cushion of $75,000. Dividing one figure by the other yields what result, expressed as a ratio to 1?
- A. 15 to 1
- B. 20 to 1
- C. 12 to 1
- D. 8 to 1
Show answer & explanation
Answer: C
The ratio is found by dividing aggregate indebtedness by net capital, so $900,000 divided by $75,000 produces a ratio of 12 to 1. The other figures come from dividing by a different, incorrect base amount rather than performing that division on the numbers actually given.3. A FINOP is compiling the broker-dealer's periodic report to regulators that summarizes net capital computation, income statement results, and balance sheet position for the period just ended. What is the primary regulatory purpose of this recurring filing?
- A. To report execution quality statistics for customer orders
- B. To give regulators a periodic snapshot of the firm's financial condition, including net capital adequacy
- C. To replace the need for an annual certified audit
- D. To document the firm's compliance with recordkeeping requirements for customer complaints
Show answer & explanation
Answer: B
The core reason a broker-dealer files this recurring report is to let regulators track ongoing financial health, including whether the firm continues to satisfy its net capital obligations, between the less frequent independently audited filings. Complaint recordkeeping and execution-quality reporting are handled through separate channels entirely.4. A broker-dealer's annual financial report to regulators must, unlike its more frequent periodic reports, be examined by an independent public accountant. Why does this added requirement exist?
- A. To verify the accuracy of trade execution timestamps
- B. To substitute for the firm's ongoing net capital computations
- C. To recalculate the firm's investor-protection fund assessment on its behalf
- D. To provide independent assurance over the fairness of the firm's financial statements and internal controls, given the higher stakes of an annual filing
Show answer & explanation
Answer: D
An annual filing carries higher stakes than routine periodic reports, so an independent accountant examines the statements and related controls to give outside assurance they fairly present the firm's financial condition; that assurance role is distinct from timestamp verification, assessment math, or the firm's own ongoing net capital computation.5. In the most recent quarter, a broker-dealer earned $420,000 in commission revenue, $95,000 in interest income, and incurred $310,000 in total operating expenses. What was the firm's net income for the quarter, before taxes?
- A. $515,000
- B. $205,000
- C. $110,000
- D. $825,000
Show answer & explanation
Answer: B
Net income equals total revenue, meaning commissions plus interest income, minus total operating expenses; here that is $515,000 in combined revenue less $310,000 in expenses. Reporting revenue alone without subtracting expenses, omitting the interest income from revenue before subtracting, or adding expenses to revenue instead of subtracting each reflect a dropped or reversed step rather than the completed calculation.6. On a broker-dealer's balance sheet, furniture, fixtures, and prepaid rent are classified as which type of asset for general financial reporting purposes?
- A. Customer-related assets
- B. Contra-liability accounts
- C. Current assets
- D. Fixed and other non-liquid assets
Show answer & explanation
Answer: D
Furniture, fixtures, and prepaid rent are non-liquid items that provide ongoing operating benefit rather than being readily convertible to cash, so general financial reporting groups them with fixed and other non-liquid assets rather than treating them as current, customer-related, or contra-liability items.7. A broker-dealer wholly owns a non-regulated subsidiary that guarantees none of the parent's obligations and is not itself a broker-dealer. For purposes of the parent's periodic financial reporting to regulators, how should the subsidiary generally be treated?
- A. Added automatically to aggregate indebtedness at the subsidiary's total liabilities
- B. Fully consolidated into the broker-dealer's regulatory financial statements as if it were a branch
- C. Ignored entirely, since unregulated subsidiaries need not appear anywhere in the filing
- D. Carried on the broker-dealer's books as an investment in a non-consolidated subsidiary, separate from the regulated entity's own operating results
Show answer & explanation
Answer: D
Because the subsidiary is unregulated and provides no guarantee to the parent, regulators generally want the broker-dealer's own regulatory financial statements to reflect only its own operations; the investment in that subsidiary is carried as a separate asset rather than blended in through full consolidation, which would obscure the regulated entity's standalone condition.8. A broker-dealer's periodic financial report includes a computation of gross revenues, which regulators use, in part, to help verify amounts owed under the industry's investor-protection assessment. Why does accurate gross revenue reporting matter here?
- A. It sets the interest rate charged on the firm's subordinated debt
- B. It forms the base figure from which the firm's assessment obligation to the investor-protection fund is calculated
- C. It determines how many customer accounts the firm may open
- D. It determines the firm's minimum net capital requirement directly
Show answer & explanation
Answer: B
Gross revenue reported in the periodic filing feeds into the calculation of what the firm owes toward the industry's investor-protection fund, so an accurate figure matters for that assessment; it is unrelated to minimum net capital thresholds, subordinated debt pricing, or how many accounts a firm may open.9. A broker-dealer began the year with retained earnings of $1,200,000. During the year it earned net income of $340,000 and paid no dividends, but recorded a $60,000 prior-period adjustment that reduced retained earnings. What is the firm's ending retained earnings?
- A. $1,540,000
- B. $1,600,000
- C. $800,000
- D. $1,480,000
Show answer & explanation
Answer: D
Ending retained earnings equals the beginning balance plus net income for the period, adjusted for any prior-period corrections and dividends; here that is $1,200,000 plus $340,000 less the $60,000 adjustment, producing $1,480,000. Omitting the adjustment, treating it as an addition instead of a reduction, or subtracting net income instead of adding it each produce an incorrect total.10. When a registered representative enters a customer order, operations staff must ensure the order ticket captures certain minimum information before the order is routed for execution. Which of the following is essential to an order ticket's completeness?
- A. The registered representative's continuing education completion date
- B. The firm's annual net capital figure as of the prior audit
- C. Time of order entry, account identification, and buy/sell instruction
- D. The customer's employer's tax identification number
Show answer & explanation
Answer: C
A complete order ticket must capture the essential facts operations staff need to process and audit the trade later, such as when it was entered, which account it belongs to, and whether it is a purchase or a sale; continuing-education dates, tax identification numbers, and firmwide capital figures belong in entirely different records.11. A trade confirmation sent to a customer after execution must disclose specific details about the transaction so the customer can verify what occurred. Which item is a core required disclosure on a trade confirmation?
- A. The firm's aggregate indebtedness ratio
- B. The firm's total assets under management firmwide
- C. The customer's home mailing address history
- D. The price, quantity, and capacity (as principal or agent) in which the firm acted
Show answer & explanation
Answer: D
A trade confirmation exists so the customer can verify exactly what happened in the transaction, so it must disclose the execution price, quantity, and the capacity in which the firm acted; firmwide asset totals, address history, and capital ratios are unrelated to confirming an individual trade.12. What is the primary operational purpose of a broker-dealer's stock record?
- A. To compute the firm's net capital ratio
- B. To record employee attendance for compliance training
- C. To list customer complaints received during the period
- D. To track, security by security, every position the firm holds or controls and where it is located
Show answer & explanation
Answer: D
The stock record's core function is to track every security position the firm holds or controls, position by position, along with its location, so the firm always knows what it has and where; it is not where complaints are logged, capital ratios are computed, or attendance is tracked.13. During a periodic reconciliation of its stock record to physical certificates and depository positions, a firm identifies a security position it cannot locate or account for. What should the firm's operations area do first?
- A. Investigate and resolve the difference, and reflect any confirmed shortage appropriately in its books, including capital treatment if unresolved
- B. Report the discrepancy directly to the transfer agent for correction
- C. Wait until the next annual audit to address it
- D. Immediately liquidate an equivalent customer position to cover the shortfall
Show answer & explanation
Answer: A
When a reconciliation turns up an unaccounted-for position, operations must investigate the cause and resolve it, reflecting any confirmed shortage appropriately in the firm's books and, if it remains unresolved, in its capital treatment; liquidating an unrelated customer position, waiting for the next audit, or routing the issue straight to the transfer agent would not actually resolve the discrepancy.14. A firm sells a security to a customer but is unable to deliver the shares to the buying broker-dealer by settlement date. This unsettled obligation is recorded operationally as which of the following?
- A. A fail to deliver
- B. A good delivery
- C. A customer reserve deposit
- D. A subordinated loan
Show answer & explanation
Answer: A
When a seller cannot deliver securities to the buying firm by the agreed settlement date, that unsettled obligation is recorded as a fail to deliver; it is not a good delivery, which describes a completed and compliant transfer, nor is it a financing arrangement or a customer reserve item.15. A broker-dealer holds customer shares in street name. When the issuer pays a cash dividend, what is the firm's operational responsibility?
- A. Collect the dividend and credit it to the beneficial owners' accounts in the correct amounts and timeframe
- B. Convert the dividend into additional shares regardless of customer instruction
- C. Retain the dividend as compensation for custody services
- D. Report the dividend only to the transfer agent, with no obligation to the customer
Show answer & explanation
Answer: A
Because the firm holds the shares in street name on the customer's behalf, it must collect dividends paid by the issuer and credit the correct amount to the beneficial owner in a timely manner; keeping the dividend, converting it to shares without instruction, or reporting only to the transfer agent would ignore the firm's obligation to the actual owner.16. What does a delivery-versus-payment (DVP) settlement arrangement generally require?
- A. Payment is made 30 days before securities are delivered
- B. Securities are delivered with no payment obligation
- C. Only institutional customers may use the arrangement
- D. Securities and payment are exchanged simultaneously as part of the same settlement instruction
Show answer & explanation
Answer: D
Delivery-versus-payment settlement is built so that securities and payment change hands as part of the same coordinated instruction, minimizing the risk that one side delivers without receiving the other; a fixed advance-payment gap, delivery with no payment obligation, or an institution-only restriction do not describe how DVP actually works.17. A broker-dealer wants to enter into a subordinated loan agreement to bolster its capital base. Before the agreement can be treated as satisfying regulatory requirements, what must generally occur?
- A. The agreement must receive required prior written approval from the applicable regulator before it can be given capital treatment
- B. The firm must first liquidate an equivalent amount of customer securities
- C. The loan must be unsecured and repayable on demand at any time
- D. The firm may treat the funds as capital as soon as the lender wires the cash
Show answer & explanation
Answer: A
A subordinated loan can only be counted toward regulatory capital once the agreement has received the required prior written approval, since capital treatment is not automatic; treating funds as capital the moment cash arrives, requiring an unrelated customer liquidation, or demanding an unsecured, on-demand structure all misstate what actually triggers capital treatment.18. Why does a broker-dealer maintain a fidelity bond covering its officers and employees?
- A. To replace the need for net capital
- B. To satisfy customer margin requirements
- C. To insure against market risk on the firm's trading positions
- D. To insure against employee dishonesty and certain other specified losses
Show answer & explanation
Answer: D
A fidelity bond protects the firm against losses from employee dishonesty and other specified causes, functioning like insurance against internal misconduct; it has nothing to do with customer margin requirements, net capital adequacy, or market risk on the firm's own trading book.19. As part of its anti-money-laundering program, a broker-dealer's operations area is responsible for retaining records that support which of the following?
- A. Documentation evidencing customer identification and monitoring of unusual account activity
- B. The firm's marketing budget for the following year
- C. The firm's advertising review file exclusively
- D. The registered representatives' vacation schedules
Show answer & explanation
Answer: A
Anti-money-laundering recordkeeping is meant to document that the firm knows its customers and is watching for unusual account activity, supporting the firm's broader compliance program; it has nothing to do with marketing budgets, employee vacation schedules, or advertising files.20. When a client's written allegation of unauthorized trading arrives at an introducing firm, what does the recordkeeping rulebook require the operations and compliance area to do?
- A. Maintain a record of the complaint, including its disposition, in the firm's complaint file
- B. Forward the complaint only to the transfer agent
- C. Discard the complaint once it is verbally resolved with the customer
- D. Record the complaint solely in the registered representative's personal notes
Show answer & explanation
Answer: A
A written complaint alleging unauthorized trading must be logged, tracked, and its ultimate disposition recorded in the firm's complaint file so there is a documented history; discarding it after an informal resolution, routing it only to the transfer agent, or leaving it solely in a representative's personal notes would leave no reliable firm record.21. A small introducing broker-dealer enters into an agreement with a larger firm under which the larger firm carries customer accounts, holds customer funds and securities, and prepares customer statements. What best describes this arrangement?
- A. A fully disclosed clearing arrangement, where the clearing firm carries accounts on behalf of the introducing firm
- B. A transfer agency agreement
- C. A give-up agreement solely for trade execution
- D. A subordinated loan agreement
Show answer & explanation
Answer: A
When a larger firm carries customer accounts, holds customer funds and securities, and produces statements on behalf of a smaller introducing firm, that describes a fully disclosed clearing relationship; a give-up agreement covers only execution, a subordinated loan concerns capital, and a transfer agency agreement concerns issuer recordkeeping, none of which match this arrangement.22. A trade is executed at the wrong price due to an operations input mistake. Where should the resulting gain or loss from correcting the trade generally be recorded?
- A. In the firm's fidelity bond claim file
- B. In the customer's personal account, so the customer bears the cost
- C. Nowhere, since pricing errors are simply ignored
- D. In the firm's designated error account, separate from customer accounts
Show answer & explanation
Answer: D
Losses or gains created by an operational pricing mistake are captured in the firm's own designated error account so the cost is isolated from customer accounts; charging it to the customer, ignoring it, or routing it through a fidelity bond claim would each shift or hide a cost that belongs to the firm.23. Why do broker-dealers generally separate the duties of the person who executes trades from the person who reconciles the firm's books and records?
- A. To increase trade execution speed
- B. Because regulators require identical staff to perform both functions
- C. To lower the firm's fidelity bond premium automatically
- D. To reduce the risk that a single individual could both create and conceal errors or misconduct
Show answer & explanation
Answer: D
Keeping trade execution and books-and-records reconciliation in different hands makes it much harder for a single person to both create an error or improper entry and then conceal it during reconciliation; this is a basic internal-control principle, not a mandate for identical staffing, a speed technique, or an automatic bond-premium reduction.24. A registered person wants to engage in an outside business activity for compensation. What is generally the firm's supervisory obligation before the activity begins?
- A. The firm must review and, as applicable, approve or record the proposed outside activity consistent with its supervisory procedures
- B. The firm must immediately terminate the registered person
- C. The obligation belongs solely to the issuer of any security being sold
- D. No obligation exists as long as the activity is unrelated to securities
Show answer & explanation
Answer: A
Before a registered person begins an outside business activity for compensation, the firm generally must review it against its supervisory procedures and approve or record it as appropriate, since unsupervised outside activity can create conflicts or investor-protection risks; assuming no obligation exists, jumping straight to termination, or treating it as solely the issuer's concern all misstate the firm's role.25. In the context of a broker-dealer's net capital computation, which of the following assets would generally be classified as 'non-allowable' and therefore excluded from net capital?
- A. Prepaid rent and unsecured receivables from customers
- B. Money market instruments held in a segregated account
- C. Cash on deposit with a bank
- D. Fully marginable, readily marketable securities held in the firm's proprietary account
Show answer & explanation
Answer: A
Prepaid rent and unsecured customer receivables are not readily convertible into cash to meet obligations, so they are excluded as non-allowable assets when computing net capital; cash, marginable proprietary securities, and segregated money market instruments are the kinds of liquid, readily available items that remain allowable.26. Why do regulators apply 'haircuts' — percentage deductions — to the market value of a broker-dealer's proprietary securities positions when computing net capital?
- A. To calculate the firm's investor-protection fund assessment
- B. To set the interest rate the firm pays on subordinated debt
- C. To determine which customers are eligible for margin accounts
- D. To account for potential price volatility and the risk that positions could be liquidated at less than current market value
Show answer & explanation
Answer: D
Haircuts exist to build a cushion against the possibility that a proprietary position could not be sold at its full current market value in a stressed environment, reflecting the position's price volatility and liquidity risk; they have no connection to fund assessments, customer margin eligibility, or the pricing of subordinated debt.27. What does a broker-dealer's 'aggregate indebtedness' generally represent in the standard net capital computation?
- A. The total value of customer securities held in safekeeping
- B. The market value of the firm's fixed assets
- C. The total par value of the firm's outstanding subordinated debt
- D. The firm's total money liabilities arising in the ordinary course of business, subject to certain specified exclusions
Show answer & explanation
Answer: D
Aggregate indebtedness is built from the firm's ordinary-course money liabilities, with certain items specifically excluded, and is used together with net capital to compute the firm's regulatory ratio; it is not a measure of customer securities held, subordinated debt outstanding, or fixed-asset value.28. A firm's ratio of ordinary-course money liabilities to its capital cushion is steadily climbing toward the ceiling permitted under the standard method. What is the firm generally required to do as that ratio nears its maximum threshold?
- A. Immediately cease all further securities lending activity firmwide
- B. Convert automatically to the alternative net capital method with no notice required
- C. Provide early notification to its regulator so the firm's financial condition can be monitored more closely
- D. Distribute the excess to partners as a capital withdrawal
Show answer & explanation
Answer: C
As a firm's ratio approaches the maximum permitted level, it is generally expected to give its regulator early notification so its deteriorating financial condition can be watched more closely before it becomes a bigger problem; an outright halt to securities lending, an automatic method switch, or a partner distribution would not address the underlying capital concern.29. A firm electing the alternative net capital method computes its minimum net capital requirement as a percentage of which figure?
- A. Its total assets on the balance sheet
- B. Its gross revenue for the trailing twelve months
- C. Its aggregate debit items as computed under the customer reserve formula
- D. Its total aggregate indebtedness
Show answer & explanation
Answer: C
Under the alternative method, minimum net capital is tied to a percentage of the firm's aggregate debit items as computed in the customer reserve formula, rather than to aggregate indebtedness (which is the basis under the standard method), total balance-sheet assets, or trailing gross revenue.30. Before a broker-dealer's partner or owner may withdraw capital from the firm, what must generally happen given the impact such a withdrawal could have on net capital?
- A. No restriction applies as long as the firm remains solvent on a GAAP basis
- B. The withdrawal must first be approved by the transfer agent
- C. The withdrawal is automatically added back to aggregate indebtedness
- D. The firm must evaluate and, where required, provide advance notice to its regulator if the withdrawal would significantly reduce net capital
Show answer & explanation
Answer: D
Because a capital withdrawal can materially weaken a firm's net capital cushion, the firm must evaluate the impact and, where required, give its regulator advance notice before a significant withdrawal proceeds; GAAP solvency alone does not remove that obligation, and a transfer agent has no role in capital withdrawals.31. A broker-dealer has total assets of $2,400,000 and total liabilities of $1,650,000, giving ownership equity of $750,000. After identifying $180,000 of non-allowable assets and applying $40,000 of haircuts on remaining securities positions, what is the firm's net capital?
- A. $570,000
- B. $610,000
- C. $530,000
- D. $750,000
Show answer & explanation
Answer: C
Net capital starts from ownership equity and then subtracts non-allowable assets and haircuts, so $750,000 minus $180,000 minus $40,000 leaves $530,000. Omitting either the haircut or the non-allowable-asset adjustment, or leaving equity unadjusted altogether, each overstate the true net capital figure.32. Which of the following is generally treated as an 'allowable asset' in a net capital computation, assuming it meets marketability and other conditions?
- A. Prepaid insurance premiums
- B. Readily marketable securities held long in the firm's proprietary account
- C. An unsecured advance to an employee
- D. Furniture and fixtures
Show answer & explanation
Answer: B
Readily marketable proprietary securities can generally be converted to cash quickly, which is why they are treated as an allowable asset, subject to an applicable haircut; furniture, prepaid premiums, and unsecured employee advances are not readily convertible to cash and are instead treated as non-allowable.33. A broker-dealer holds a subordinated loan from a qualified lender that meets regulatory requirements for capital treatment. How does this subordinated debt generally affect the firm's net capital computation, as compared to ordinary liabilities?
- A. It is treated the same as any other liability and reduces net capital dollar-for-dollar
- B. It automatically increases aggregate indebtedness without limit
- C. It has no effect whatsoever on the firm's financial statements
- D. It may be added to the firm's capital base for net capital purposes rather than treated as a liability that reduces net capital
Show answer & explanation
Answer: D
Because a qualifying subordinated loan meets the conditions for capital treatment, it can be added to the firm's capital base rather than reducing net capital the way an ordinary liability would; that special treatment is precisely why firms use subordinated debt to bolster net capital, unlike an unrestricted addition to aggregate indebtedness or an item with no balance-sheet effect.34. A broker-dealer holds a large equity position representing an unusually high percentage of a single issuer's outstanding float, well beyond its other proprietary positions in aggregate. What additional net capital consideration does this concentration typically trigger?
- A. A complete exemption from haircuts because the position is 'long-term'
- B. An additional capital charge for undue concentration, beyond the position's standard haircut
- C. No additional consideration; standard haircuts alone always apply regardless of concentration
- D. Automatic reclassification of the position as an allowable asset
Show answer & explanation
Answer: B
When a proprietary position is unusually concentrated relative to the firm's other holdings, it can be harder to liquidate without moving the price, so an additional concentration charge is generally applied on top of the position's standard haircut; concentration does not exempt a position from haircuts or automatically make it more allowable.35. A firm has an aged fail-to-deliver from a securities transaction that remains open well beyond the normal settlement cycle. How is this aged fail generally treated for net capital purposes?
- A. It is generally treated as a non-allowable asset or subject to a capital charge the longer it remains unresolved
- B. It automatically converts to a subordinated loan
- C. It is added directly to the firm's allowable assets at full market value
- D. It has no net capital impact until the transaction is one year old
Show answer & explanation
Answer: A
The longer a fail-to-deliver remains open past normal settlement, the more it is treated as a non-allowable asset or subject to an increasing capital charge, reflecting the growing risk that it will not resolve favorably; it does not sit without consequence for a full year, convert into financing, or count at full market value as an allowable asset.36. What is the general purpose of the minimum net capital requirement imposed on broker-dealers?
- A. To determine the maximum commission the firm may charge customers
- B. To calculate the firm's investor-protection fund premium exclusively
- C. To ensure the firm maintains a baseline financial cushion sufficient to meet obligations to customers and counterparties
- D. To set the interest rate on customer margin loans
Show answer & explanation
Answer: C
The minimum net capital requirement exists to make sure every broker-dealer keeps a baseline financial cushion adequate to meet its obligations to customers and other firms, even under adverse conditions; it has nothing to do with commission ceilings, margin loan pricing, or fund-premium calculations.37. A broker-dealer's investment in an unconsolidated, non-regulated subsidiary generally receives what treatment in the parent's net capital computation?
- A. It is excluded from the balance sheet entirely
- B. It automatically becomes part of aggregate indebtedness
- C. It is generally treated as a non-allowable asset, since it is not readily convertible to cash to meet obligations to customers
- D. It is treated as a fully allowable asset at cost
Show answer & explanation
Answer: C
An investment in a non-regulated subsidiary is not something the firm can quickly convert to cash to meet obligations to customers, so it is generally treated as a non-allowable asset in the net capital computation; it still appears on the balance sheet, is not simply omitted, and is not itself a liability added to aggregate indebtedness.38. Which of the following best describes 'net capital' in general terms?
- A. The total par value of a firm's issued shares
- B. A firm's liquid, readily available capital after adjusting net worth for non-allowable assets, haircuts, and other specified items
- C. The firm's gross revenue for the current fiscal year
- D. The market value of customer securities held in custody
Show answer & explanation
Answer: B
Net capital is the firm's liquid, readily available capital once net worth has been adjusted for non-allowable assets, haircuts, and other specified items, giving a picture of the cushion actually available to meet obligations; it is not the same as par value of stock, gross revenue, or the value of customer securities in custody.39. Two affiliated broker-dealers are both registered and both file separate net capital computations. Under what general condition might one firm nonetheless need to reflect a capital-support obligation to the other in its own net capital treatment?
- A. Only when both firms use the same clearing firm
- B. Never — affiliated broker-dealers' net capital computations are always fully independent
- C. When one firm has entered into a formal guarantee or similar commitment to support the other's capital position
- D. Whenever both firms share a common holding company, with no further condition needed
Show answer & explanation
Answer: C
A firm's own net capital treatment is generally affected by an affiliate only when it has taken on a formal guarantee or similar binding commitment to support that affiliate's capital position; merely sharing a parent holding company or a clearing firm, without such a commitment, does not by itself create that obligation, and affiliated computations are not automatically fully insulated from every affiliate relationship either.40. A broker-dealer's FINOP notices that a growing volume of customer margin debits is increasingly funded through bank loans collateralized by customer securities, causing aggregate indebtedness to rise faster than net capital. What is the most likely near-term effect on the firm's regulatory ratio?
- A. The aggregate-indebtedness-to-net-capital ratio is unaffected because bank loans are excluded from aggregate indebtedness entirely
- B. Net capital will automatically increase to offset the additional indebtedness
- C. The firm's minimum dollar net capital requirement will decrease proportionally
- D. The aggregate-indebtedness-to-net-capital ratio will worsen (rise), moving the firm closer to its maximum permitted level
Show answer & explanation
Answer: D
If aggregate indebtedness rises faster than net capital, the resulting ratio moves higher, bringing the firm closer to its maximum permitted level and reducing its financial cushion; bank loan liabilities are not simply excluded from the computation, net capital does not rise automatically to compensate, and the minimum requirement does not fall as a result.41. In simple terms, what does a broker-dealer's net capital rule chiefly protect against?
- A. The risk that a firm's investment banking division underperforms
- B. The risk that the firm's marketing materials are misleading
- C. The risk that a registered representative gives poor investment advice
- D. The risk that a firm becomes financially unable to meet its obligations to customers and other broker-dealers
Show answer & explanation
Answer: D
The net capital rule exists chiefly to protect against the risk that a broker-dealer becomes financially unable to meet its obligations to customers and to other firms it deals with, by requiring a baseline capital cushion; it is not aimed at investment banking performance, the quality of investment advice, or the accuracy of marketing materials.42. What is the primary purpose of the special reserve bank account that a broker-dealer maintains for the exclusive benefit of customers?
- A. To pay employee bonuses during periods of low revenue
- B. To collateralize the firm's subordinated loans
- C. To fund the firm's proprietary trading activities
- D. To hold cash (or qualified securities) segregated for customers, separate from the firm's own operating funds
Show answer & explanation
Answer: D
The special reserve bank account exists to hold cash or qualified securities that are segregated specifically for customers, kept apart from the firm's own operating funds so those amounts remain available even if the firm runs into trouble; it is not a source of funding for proprietary trading, bonuses, or collateral for the firm's own borrowing.43. A broker-dealer computes a 'reserve formula' periodically comparing amounts it owes to customers against amounts customers owe it. What does a positive net balance owed TO customers generally require the firm to do?
- A. Deposit that amount (or maintain it) in the special reserve bank account for customers
- B. Withdraw an equivalent amount from the firm's own operating account
- C. Report the balance only if it exceeds the firm's total net capital
- D. Convert the balance into a subordinated loan from customers
Show answer & explanation
Answer: A
When the formula shows the firm owes customers more than customers owe the firm, that net amount must be deposited into, or maintained in, the special reserve bank account so it is protected for customers; the requirement is not conditioned on comparison to net capital, does not describe a simple withdrawal, and does not turn the balance into financing.44. What does the 'possession or control' requirement generally obligate a broker-dealer to do with respect to customers' fully paid and excess margin securities?
- A. Physically possess them or hold them in another acceptable control location, free of liens that would prevent prompt delivery to the customer
- B. Convert them into cash equivalents automatically
- C. Lend them freely to other broker-dealers without restriction
- D. Transfer them to the firm's proprietary account
Show answer & explanation
Answer: A
The possession-or-control requirement obligates the firm to either physically hold fully paid and excess margin securities or keep them in another acceptable control location, free of liens that could block prompt delivery back to the customer; it does not permit unrestricted lending, automatic conversion to cash, or moving the securities into the firm's own proprietary account.45. In broad terms, what is the overall goal of the rules governing customer protection, funding, and cash management at a broker-dealer?
- A. To maximize the firm's trading profits
- B. To eliminate the need for customer account statements
- C. To safeguard customer cash and securities so they remain available to customers even if the firm encounters financial difficulty
- D. To set the commission schedule for customer trades
Show answer & explanation
Answer: C
Taken together, the customer protection, funding, and cash management rules exist to safeguard customer cash and securities so they remain available to customers even if the firm runs into financial difficulty; they are not designed to maximize the firm's own trading profits, eliminate account statements, or dictate commission pricing.46. A customer's fully paid securities are being held by the broker-dealer as collateral under a bank loan the firm took out for its own working capital needs, without the customer's securities being excluded from that pledge. What compliance problem does this generally create?
- A. It likely violates possession-or-control and anti-commingling protections, since fully paid customer securities generally may not be pledged to secure the firm's own obligations
- B. None, since firms may always hypothecate any customer securities they hold
- C. It only matters if the customer has a margin account
- D. It is permitted as long as the loan is disclosed in the firm's annual report
Show answer & explanation
Answer: A
Pledging a customer's fully paid securities to secure the firm's own bank loan generally violates possession-or-control and anti-commingling protections, since those securities are not the firm's to pledge for its own obligations; broad hypothecation authority does not extend to fully paid securities, the issue is not limited to margin accounts, and simple disclosure in an annual report does not cure the underlying problem.47. What is a 'free credit balance' in a customer's account?
- A. The maximum margin a customer may borrow against securities
- B. Cash the customer is owed on demand that the firm holds but has not been directed to invest
- C. The customer's unrealized gain on open positions
- D. A fee credited to the customer for trading errors
Show answer & explanation
Answer: B
A free credit balance is cash sitting in a customer's account that the firm holds on the customer's behalf and owes back on demand, simply because the customer has not directed it be invested elsewhere; it is not a margin borrowing limit, a correction fee, or a measure of unrealized gain on positions.48. Why do regulators restrict how a broker-dealer may use customer free credit balances?
- A. To protect customer funds from being commingled with, or put at risk from, the firm's proprietary business activities
- B. To increase the interest rate the firm pays on the balances
- C. To eliminate the firm's need for a special reserve account
- D. To allow the firm to use those funds interchangeably with its own working capital
Show answer & explanation
Answer: A
Restricting the use of customer free credit balances is meant to protect that cash from being commingled with, or exposed to the risk of, the firm's own proprietary business activities; it is not intended to let the firm treat customer cash as its own working capital, to set interest rates, or to remove the need for the reserve account, which these restrictions actually support.49. A broker-dealer's customer reserve computation shows customer debit items (mainly margin loans) exceeding customer credit items (mainly free credits and fully paid-for balances owed to customers). What does this generally indicate about the required reserve deposit for that period?
- A. The firm must transfer the excess directly into its net capital
- B. The firm must return the excess debits to customers immediately
- C. The firm must deposit an amount equal to the excess of debits over credits
- D. No deposit is required, since a net debit position does not create a reserve requirement in the customer's favor
Show answer & explanation
Answer: D
The reserve requirement exists to protect amounts the firm owes customers, so when debits exceed credits there is no net amount owed to customers and therefore no reserve deposit required for that period; depositing the excess, moving it into net capital, or returning debits to customers would each misread what a net debit position actually means.50. A firm needs to borrow against customer margin securities to fund its own bank loan. Which condition must generally be satisfied for this pledging of customer securities to be permissible?
- A. The firm may pledge any customer's securities to cover any other customer's debit
- B. The pledge is permissible only if the customer is an employee of the firm
- C. No customer consent is ever required for any pledged securities
- D. The customer must have signed a margin or hypothecation agreement permitting the firm to pledge those particular securities, and only up to the amount owed by that customer
Show answer & explanation
Answer: D
Pledging customer margin securities is generally only permissible when the customer has signed a margin or hypothecation agreement authorizing it, and the amount pledged is limited to what that specific customer owes; it is not something the firm can do without any agreement, across unrelated customers' debits, or only for employee accounts.51. What is a 'good control location' in the context of safeguarding customer fully paid and excess margin securities?
- A. The firm's own vault, regardless of lien status
- B. Any location the firm's compliance department verbally approves
- C. A location, such as a qualified clearing corporation or bank, meeting specified criteria for safely holding customer securities free of liens
- D. Any correspondent broker-dealer's account
Show answer & explanation
Answer: C
A good control location is a place, such as a qualified clearing corporation or bank, that meets specific criteria for safely holding customer securities free of liens that could block prompt delivery to the customer; an informal verbal approval, the firm's own vault regardless of lien status, or just any correspondent account does not automatically satisfy those criteria.52. A broker-dealer's reserve formula computation is due, and the firm determines it currently holds more in the special reserve account than the formula requires for that period. What may the firm generally do with the excess?
- A. Nothing; excess deposits can never be withdrawn under any circumstance
- B. Withdraw the excess, since only the required amount must remain on deposit for customers' benefit
- C. Transfer the excess to the firm's fidelity bond reserve
- D. Automatically apply the excess toward next year's net capital requirement
Show answer & explanation
Answer: B
Only the amount the formula actually requires must stay on deposit for customers' benefit, so a firm holding more than that required amount may generally withdraw the excess; treating the deposit as permanently locked, automatically applying it to a future year's net capital, or shifting it to a fidelity bond reserve all misstate what the excess may be used for.53. Which of the following would generally be classified as a customer credit item in a broker-dealer's customer reserve computation?
- A. The firm's minimum net capital requirement
- B. Free credit balances and other amounts the firm owes to customers
- C. The firm's own proprietary trading gains
- D. A margin loan the customer owes the firm
Show answer & explanation
Answer: B
A customer credit item reflects amounts the firm owes back to customers, such as free credit balances and fully paid-for balances, since those are liabilities the firm holds on customers' behalf; a margin loan runs the other direction as a customer debit, and the firm's own trading gains and its net capital requirement are firm-level figures that do not belong in the customer side of the formula at all.54. Which fundamental accounting equation must remain in balance on a broker-dealer's balance sheet at all times?
- A. Net Capital = Aggregate Indebtedness divided by a fixed ratio
- B. Cash Inflows = Cash Outflows
- C. Assets = Liabilities + Owners' Equity
- D. Revenue = Expenses + Net Income
Show answer & explanation
Answer: C
The balance sheet must always satisfy assets equal to liabilities plus owners' equity; that identity is what keeps a firm's books in balance, distinct from an income-statement relationship, a net capital ratio calculation, or a simple cash-flow comparison, each of which serves a different analytical purpose.55. A customer's stock purchase order executes on Monday and settles on Wednesday. For financial reporting purposes, on which date should the resulting commission revenue generally be recorded on the broker-dealer's books?
- A. The trade date, because that is when the transaction is executed and the obligation arises
- B. The date the customer's confirmation is mailed
- C. The date the firm's monthly statement is generated
- D. The settlement date, because cash has not moved until then
Show answer & explanation
Answer: A
Commission revenue is generally recognized on the trade date, since that is when the transaction is executed and the firm's right to compensation arises, regardless of when cash actually settles, a confirmation is mailed, or a periodic statement happens to be produced.56. Before a broker-dealer's bookkeeping staff can produce accurate financial statements for a reporting period, they must first prepare a listing of every general ledger account with its ending debit or credit balance. What is this listing called, and what is its function?
- A. The blotter, used to record daily trade activity
- B. The customer reserve computation, used to determine cash to segregate
- C. The trial balance, used to verify that total debits equal total credits before statements are drawn
- D. The stock record, used to track securities positions by location
Show answer & explanation
Answer: C
A trial balance simply lists every ledger account's ending balance so bookkeeping staff can confirm total debits equal total credits before those balances are used to build the income statement and balance sheet; it says nothing about trade activity or reserve amounts, which are captured in entirely separate records.57. For a physical securities delivery to satisfy 'good delivery' standards between broker-dealers, what must generally be true of the certificates and any needed documentation?
- A. The certificates must be accompanied by the customer's original account application
- B. The certificates must be in negotiable form, properly endorsed or accompanied by valid stock or bond powers, in the correct denominations
- C. The certificates must be less than 30 days old
- D. The certificates must be delivered in person by the registered representative
Show answer & explanation
Answer: B
Good delivery generally requires that certificates be in negotiable form, properly endorsed or accompanied by valid stock or bond powers, and in the correct denominations, so title can pass cleanly; an arbitrary age limit, in-person delivery by a representative, or attaching the customer's account application are not what makes a delivery good.58. For securities held in street name, a broker-dealer receives proxy materials from the issuer ahead of a shareholder vote. What is the firm's operational obligation regarding these materials?
- A. Vote all shares according to the firm's own preference
- B. Discard the materials since only registered holders may vote
- C. Return the materials unopened to the transfer agent
- D. Forward the proxy materials to beneficial owners, or vote per their instructions and applicable rules, rather than disregarding them
Show answer & explanation
Answer: D
For securities held in street name, the firm must pass proxy materials through to the beneficial owner or handle voting according to the owner's instructions and applicable rules, since the firm is not the true economic owner; voting according to its own preference, discarding the materials, or returning them unopened would deprive the beneficial owner of a shareholder right.59. Regulators require broker-dealers to maintain a written plan addressing how the firm will continue critical operations following a significant business disruption. What is the primary operational purpose of this plan?
- A. To eliminate the need for a fidelity bond
- B. To set the firm's net capital requirement during emergencies
- C. To guarantee the firm will never lose money during a disruption
- D. To ensure the firm can meet obligations to customers and counterparties despite an unexpected disruption to normal operations
Show answer & explanation
Answer: D
A business continuity plan exists so the firm can keep meeting its obligations to customers and counterparties even after an unexpected disruption to normal operations; it cannot guarantee the firm never loses money, and it does not substitute for a fidelity bond or alter net capital requirements during an emergency.60. A firm operating under the standard method may not let its ordinary-course liabilities exceed 15 times its capital cushion. Given liabilities counted as aggregate indebtedness of $1,050,000, what minimum net capital must the firm hold to stay within that 15-to-1 ceiling?
- A. $157,500
- B. $52,500
- C. $70,000
- D. $105,000
Show answer & explanation
Answer: C
To stay within a maximum 15-to-1 ratio, net capital must be at least aggregate indebtedness divided by 15, so $1,050,000 divided by 15 equals $70,000. The other figures result from dividing by a different multiple or misplacing a decimal rather than dividing by the actual permitted ratio.61. A broker-dealer receives a capital contribution from its parent company in the form of cash. How does this contribution generally affect the firm's net capital, assuming no restrictions apply?
- A. It is treated as a liability that reduces net capital
- B. It has no effect until the following fiscal year
- C. It must be excluded from net capital until independently audited
- D. It increases net capital, since cash is a fully allowable asset with no haircut
Show answer & explanation
Answer: D
An unrestricted cash capital contribution increases net capital immediately, since cash is a fully allowable asset that is not subject to a haircut; it does not sit idle until the next fiscal year, function as a liability, or require an independent audit before it can count.
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Key facts: Series 28 exam
The Series 28 is administered by FINRA, with 95 scored questions, a 2 hours time limit and a passing score of 69%.
This free Series 28 practice test has 61 original questions written to FINRA's official content outline, last checked against it on August 9, 2026. Every question shows a worked explanation, and nothing here requires a signup.
As of 2026, the Series 28 exam fee is $195.
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Official sources
Every exam fact on this page traces to a primary document published by the body that administers the exam.
- Introducing Broker-Dealer Financial and Operations Principal Qualification Examination (Series 28) Content OutlineFINRAfinra.org
- Series 28 – Introducing Broker-Dealer Financial and Operations Principal ExamFINRAfinra.org
- FINRA Rule 1210 (Registration of Associated Persons) — Supplementary Material .06, Waiting Period for Retaking a Failed ExaminationFINRAfinra.org
Last verified against the official exam content outline:
Frequently asked questions
How many questions are on the Series 28 exam, and how should a practice test mirror that?
The Series 28 exam has 95 multiple-choice questions, so a useful practice test should also run 95 questions to match the real pacing and coverage.
What score do I need on a Series 28 practice test to feel exam-ready?
The actual Series 28 requires a 69% passing score, so most candidates treat consistently scoring above that threshold on practice tests as a sign of readiness.
What topics should a Series 28 practice test cover?
A good practice test should mirror the four FINRA content functions: financial reporting, operations and books-and-records regulations, net capital, and customer protection and cash management, weighted the same way the real exam weights them.
Is this Series 28 practice test free and does it require signing up?
Yes, this practice test is free to use and does not require creating an account or providing payment information.
How long should I spend on each question during a Series 28 practice test?
Since the real exam allows 2 hours for 95 questions, practicing at that same overall pace, rather than lingering too long on any single question, helps build the stamina and time discipline the real exam demands.
How many times can I retake a practice test versus the real Series 28 exam?
You can take a practice test as many times as you like, but for the real exam FINRA requires a 15 calendar day wait before a first or second retake, and a 60 calendar day wait after three failed attempts.