Financial and Operations Principal Exam
The Series 27 exam qualifies candidates to serve as a Financial and Operations Principal (FINOP) at a FINRA member broker-dealer. FINOPs are responsible for the firm's financial and regulatory reporting, net capital compliance, customer protection obligations, and overall operational integrity. This role is typically held by the CFO, COO, or a designated financial officer who ensures the firm meets all SEC and FINRA financial responsibility rules.
Topic Weight Distribution
Content Outline
Subtopics
Key Concepts
The FOCUS report (Financial and Operational Combined Uniform Single report) is the primary financial report that broker-dealers must file with the SEC and FINRA. It provides a comprehensive snapshot of the firm's financial condition, including its balance sheet, income statement, net capital computation, and customer reserve calculations.
Most broker-dealers file the FOCUS report on a quarterly basis (FOCUS Part II), though certain firms carrying customer accounts may be required to file monthly (FOCUS Part IIA). The report must be filed within 17 business days after the end of each reporting period. The FINOP is personally responsible for the accuracy and timely filing of these reports and must sign the FOCUS report certifying its completeness.
Under SEC Rule 17a-5, every broker-dealer must engage an independent public accountant to conduct an annual audit of its financial statements. The audit must be performed in accordance with generally accepted auditing standards (GAAS) and must include an examination of the firm's financial statements, net capital computation, and customer reserve formula.
The auditor must issue reports on the financial statements, the firm's internal controls over compliance with the net capital rule and customer protection rule, and a compliance report or exemption report. The annual audit report must be filed with the SEC within 60 calendar days after the firm's fiscal year end. The FINOP must coordinate with the external auditors and ensure all audit findings are properly addressed.
Subtopics
Key Concepts
Clearance is the process of comparing and confirming trade details between the buyer and seller (or their agents), while settlement is the actual exchange of securities for payment. Most equity and corporate bond trades settle on a T+1 basis (one business day after the trade date).
The DTCC (Depository Trust and Clearing Corporation) is the central clearinghouse for most U.S. securities transactions. Its subsidiaries include the NSCC (National Securities Clearing Corporation), which handles trade comparison and netting, and the DTC (Depository Trust Company), which handles custody and settlement. The CNS (Continuous Net Settlement) system nets all of a firm's buy and sell transactions to reduce the number of securities and payments that must actually be exchanged. The FINOP must monitor settlement activity and ensure fails are promptly resolved.
SEC Rule 17a-3 specifies the records that broker-dealers must create and maintain, including trade blotters, general ledgers, customer account records, order tickets, trade confirmations, and customer complaint files. SEC Rule 17a-4 specifies how long each record must be retained.
Most general business records must be retained for at least three years (the first two in an easily accessible location), while certain records such as general ledgers and customer account records must be kept for six years. Records stored electronically must comply with the WORM (Write Once, Read Many) requirement, ensuring they cannot be altered or deleted. The FINOP must ensure the firm's recordkeeping systems are compliant and that all required records are properly maintained and available for regulatory examination.
Subtopics
Key Concepts
The net capital rule (SEC Rule 15c3-1) requires broker-dealers to maintain sufficient liquid capital to meet their obligations to customers and creditors. The computation starts with the firm's tentative net capital (net worth plus qualified subordinated debt minus non-allowable assets) and then subtracts haircuts on securities positions to arrive at net capital.
Non-allowable assets include fixed assets, prepaid expenses, unsecured receivables, and any assets that cannot be readily converted to cash. Haircuts are percentage deductions applied to the market value of securities to account for potential price declines. For example, equity securities typically receive a 15% haircut, while U.S. Treasury securities receive much smaller haircuts based on maturity. The FINOP must compute net capital daily and immediately notify regulators if the firm falls below minimum requirements.
Broker-dealers can compute their net capital requirement under one of two methods. The aggregate indebtedness (AI) standard requires that a firm's aggregate indebtedness (total money owed by the firm, including customer credit balances) not exceed 15 times its net capital. The minimum net capital under this method is $250,000 for firms carrying customer accounts or $5,000 to $100,000 for firms with more limited activities.
The alternative method requires that a firm maintain net capital equal to the greater of $250,000 or 2% of aggregate debit items (the total amount customers owe the firm). This method is typically used by larger firms that carry customer accounts. The alternative method does not use the 15:1 ratio but instead focuses on maintaining capital proportional to the firm's customer receivables. The FINOP must determine which method is most appropriate for the firm and ensure continuous compliance.
Subtopics
Key Concepts
The customer protection rule (SEC Rule 15c3-3) is designed to safeguard customer assets held by broker-dealers. It has two main components: the possession or control requirement and the reserve formula requirement.
The possession or control requirement mandates that broker-dealers must promptly obtain and maintain physical possession or control of all fully paid and excess margin securities carried for customer accounts. Fully paid securities must be held in good control locations such as a securities depository, a bank, or the firm's vault. The reserve formula requires the firm to compute weekly (or monthly for certain firms) the net amount owed to customers and maintain that amount in a Special Reserve Bank Account for the Exclusive Benefit of Customers. The FINOP is responsible for ensuring both requirements are met and for promptly addressing any deficiencies.
The Securities Investor Protection Corporation (SIPC) is a nonprofit membership corporation created by the Securities Investor Protection Act of 1970. It protects customers of failed broker-dealers by returning their cash and securities. SIPC coverage provides up to $500,000 per customer, of which no more than $250,000 may be in cash.
SIPC does not protect against investment losses -- it only protects against the loss of securities and cash due to a broker-dealer's financial failure. Most FINRA member broker-dealers are required to be SIPC members and pay annual assessments. When a broker-dealer fails, SIPC may initiate a liquidation proceeding in which a trustee is appointed to return customer property. The FINOP must ensure the firm maintains its SIPC membership, pays assessments on time, and provides required SIPC disclosure to customers.
Study Tips for the Series 27 Exam
- Master net capital computations. At 31% of the exam, net capital is your largest topic and the most calculation-heavy. Practice computing tentative net capital, applying haircuts, and determining minimum requirements until it becomes second nature.
- Know the customer reserve formula. Understand every line item in the reserve formula computation -- credits, debits, and how to determine the required deposit. Be able to identify which items go on which side of the formula.
- Learn haircut percentages. Memorize the standard haircut rates for different security types: 15% for equities, 0-6% for government securities (by maturity), and the specific haircuts for corporate bonds, municipal bonds, and options positions.
- Understand the settlement lifecycle. Know the complete trade processing cycle from execution through settlement, including the roles of DTCC, NSCC, and DTC. Understand how fails are created and resolved.
- Study recordkeeping retention periods. Know which records must be kept for three years and which for six years. Understand the WORM requirement for electronic records and what constitutes an easily accessible location.
- Use a calculator strategically. With 155 questions in 225 minutes, you have about 1.45 minutes per question. For calculation questions, set up the formula first, then compute. Do not spend excessive time on any single calculation.
Practice Questions
Test your knowledge with these Series 27-style questions. Click an answer to check if you are correct.
1. Under the aggregate indebtedness standard, a broker-dealer's aggregate indebtedness may not exceed what ratio to its net capital?
Correct: C. Under the aggregate indebtedness standard of SEC Rule 15c3-1, a broker-dealer's aggregate indebtedness (total liabilities) cannot exceed 15 times its net capital. If the ratio exceeds this level, the firm must take immediate action to reduce indebtedness or increase capital.
2. How often must a broker-dealer that carries customer accounts compute the customer reserve formula under SEC Rule 15c3-3?
Correct: B. Most broker-dealers that carry customer accounts must compute the customer reserve formula on a weekly basis, as of the close of the last business day of the week. The required deposit must be made by the following Tuesday (one business day after computation). Some smaller firms may qualify for monthly computation.
3. What is the standard haircut applied to equity securities under the net capital rule?
Correct: C. Under SEC Rule 15c3-1, equity securities (stocks) are subject to a standard 15% haircut, which is deducted from their market value in the net capital computation. This reflects the potential for price decline in the securities position. Government securities receive smaller haircuts, while less liquid securities may receive larger ones.
4. SIPC coverage provides protection up to what maximum amount per customer?
Correct: C. SIPC protects customers of failed broker-dealers up to $500,000 per customer, of which no more than $250,000 may be for cash claims. SIPC does not protect against market losses -- it only covers the loss of securities and cash due to a broker-dealer's financial failure.
5. Which of the following is considered a non-allowable asset in the net capital computation?
Correct: C. Non-allowable assets are items that cannot be readily converted to cash and must be deducted from net worth in the net capital computation. Office furniture and equipment (fixed assets) are non-allowable. Other non-allowable assets include prepaid expenses, goodwill, and unsecured receivables. Cash, Treasury securities, and properly secured customer receivables are allowable assets.
Related Exams
The Series 27 is often held alongside other principal-level registrations at a broker-dealer firm.
General Securities Principal
Covers the supervisory and compliance side of broker-dealer management. Often held in conjunction with the Series 27 by senior firm officers.
General Securities Representative
A typical prerequisite before pursuing the Series 27. The Series 7 provides the foundational securities knowledge upon which FINOP responsibilities are built.