FINRA Rule 4120

A firm's net capital falls below its required minimum. What must the principal ensure happens under FINRA Rule 4120?

1. A.Notify only the firm's clearing firm, since FINRA notification is not required for net capital deficienciesWrong. Rule 4120 specifically requires notification to FINRA of net capital deficiencies.
2. B.Resolve the deficiency internally first, notifying FINRA only if the firm cannot fix it within a reasonable timeWrong. Rule 4120 requires prompt notification of the deficiency itself, not notification deferred until internal remediation efforts are exhausted.
3. C.Ensure the firm promptly notifies FINRA of the deficiency, which may also trigger required business curtailmentCorrect. Rule 4120 requires prompt regulatory notification upon falling below required net capital, independent of the firm's remediation plans.
4. D.Notify FINRA only if the deficiency persists for more than one full reporting quarterWrong. This invents a quarterly grace period that has no basis in the prompt-notification standard.

Why: Rule 4120 requires prompt regulatory notification to FINRA when a firm falls below required net capital levels, and may result in required business curtailment. The principal must ensure prompt notification occurs, not delay or conceal the deficiency while attempting to resolve it internally.

The firm's CFO wants to delay notifying FINRA of a net capital deficiency until after quarter-end, reasoning that the numbers may improve by then. What should the principal advise?

1. A.Advise that notification is only required if the deficiency is publicly disclosed by a third party firstWrong. The notification obligation is self-executing and does not depend on outside disclosure.
2. B.Advise that notification can wait until the firm's annual audited financial statements are filedWrong. Prompt notification is required upon the deficiency, not deferred to the annual audit filing cycle.
3. C.Advise that the delay is reasonable given the possibility the numbers will improve by quarter-endWrong. This adopts the CFO's flawed reasoning; an anticipated future improvement does not excuse delaying the required prompt notification.
4. D.Advise that notification must occur promptly based on the current deficiency, regardless of anticipated future improvementCorrect. Rule 4120's notification trigger is the current deficiency, not a forecast of how it might change.

Why: Rule 4120's notification obligation is triggered promptly by the deficiency itself, not deferred based on an expectation that the numbers might later improve. The principal should advise that notification must occur promptly regardless of anticipated future improvement.

After self-identifying a capital strain, firm leadership voluntarily curtails part of the business but does not formally notify FINRA, reasoning that the curtailment itself resolves the underlying concern. What is the problem with this approach?

1. A.Nothing is wrong, since curtailing the business addresses the underlying capital strain directlyWrong. This is the exact flawed reasoning the question describes -- addressing the condition operationally does not eliminate the separate notification obligation.
2. B.Voluntary curtailment does not substitute for the required Rule 4120 notification to FINRA of the underlying conditionCorrect. Notification and operational remediation are separate obligations; one does not satisfy the other.
3. C.Nothing is wrong, since Rule 4120 only applies to firms that do not take any corrective actionWrong. Rule 4120's notification requirement is not conditioned on whether the firm has independently taken corrective action.
4. D.Nothing is wrong, but the firm should notify its customers before notifying FINRAWrong. This misorders the obligation; FINRA notification is the specific regulatory requirement at issue here.

Why: Voluntary business curtailment does not substitute for the required regulatory notification under Rule 4120 when a firm's net capital condition triggers that obligation. The principal must ensure FINRA is notified of the underlying condition, not treat a self-directed operational response as satisfying the reporting requirement.