Function 2: Supervision of General Broker-Dealer Activities (21% Exam Weight)

Series 24 — Function 2: Supervision of General Broker-Dealer Activities

Master the Series 24 — Function 2: Supervision of General Broker-Dealer Activities function of the Series 24 (General Securities Principal) exam with official regulatory rules, quantitative formulas, and targeted practice drills.

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Authoritative Series 24 Study Notes

Key Concepts & Regulatory Highlights

Covers broker-dealer financial responsibility and operations supervision, including SEC Rule 15c3-1 (Net Capital and Aggregate Indebtedness ratios), SEC Rule 17a-11 Early Warning notifications, SEC Rule 15c3-3 (Customer Protection Rule & Special Reserve Bank Account), SEC Rules 17a-3 and 17a-4 record retention schedules, and SEC Rule 17a-5 FOCUS and annual audit filings.

📐 Essential Calculation Formulas

Aggregate Indebtedness (AI) to Net Capital Ratios

First Year Max = 8:1 | Established Max = 15:1 | Early Warning = 12:1

Early warning also triggers if Net Capital falls below 120% of the firm's minimum dollar requirement.

SEC Rule 17a-4 Record Retention Tiers

Lifetime (Charters/Minutes) | 6 Years (Blotters/Ledgers) | 3 Years (Confirmations/Tickets)

FINRA Rule 4513 separately requires retaining written customer complaints for 4 years.

📜 Core Regulatory Rules & Requirements

✓SEC Rule 15c3-1 Net Capital & Aggregate Indebtedness (AI): Carrying broker-dealers cannot allow Aggregate Indebtedness to exceed 800% (8:1) of Net Capital during their first 12 months of operation, or 1500% (15:1) thereafter.

✓SEC Rule 17a-11 Early Warning Thresholds: Immediate telegraphic/electronic notice within 24 hours to the SEC and FINRA is required if Net Capital falls below minimum, or if Early Warning thresholds are breached (AI > 12:1, or Net Capital < 120% of minimum dollar requirement, or 5% of debit items under the alternative standard).

✓SEC Rule 15c3-3 Customer Reserve Account: Carrying firms must compute the Customer Reserve Formula weekly as of Friday's close and deposit any required funds into the Special Reserve Bank Account for the Exclusive Benefit of Customers no later than 1 hour after banks open on the second business day (Tuesday morning).

✓SEC Rules 17a-3 & 17a-4 Record Retention: Corporate charters, partnership articles, and minute books are kept for the LIFE of the firm; blotters, general ledgers, and customer ledgers for 6 YEARS; order tickets, trade confirmations, trial balances, and communications for 3 YEARS (first 2 years easily accessible).

✓SEC Rule 17a-5 Financial Filings: FOCUS Part II/IIA reports are due within 17 business days after period end; the annual audited financial statement (by an independent PCAOB accountant) is due within 60 calendar days after fiscal year-end.

💡 High-Yield Exam Watchouts

•Subordinated loans used to boost a broker-dealer's Net Capital must have a minimum term of 1 year (or at least 90 days for a temporary subordinated loan used for underwriting, capped at 3 times per 12 months).
•If a carrying firm discovers a possession-or-control deficit in fully paid or excess margin securities resulting from a buy-in or recall failure, it must resolve the deficit within prescribed SEC Rule 15c3-3(d) timeframes (typically 10 to 30 calendar days depending on cause).

Why Study Series 24 — Function 2: Supervision of General Broker-Dealer Activities?

The Series 24 — Function 2: Supervision of General Broker-Dealer Activities portion of the General Securities Principal (Series 24) exam is critical for passing on your first attempt. Understanding these concepts builds both test-day precision and practical regulatory fluency.

Our practice questions and formulas are engineered to mirror the official Series 24 blueprint and statutory complexity you'll encounter at Prometric.

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