Uniform Securities Agent State Law (Series 63) Practice Exam

Why might a broker/dealer be exempt from the fidelity bond requirement?

1. If they have net capital of $50,000 or more

2. If they exceed a certain number of transactions annually

3. When their net capital is $35,000 or more

4. If they are registered in multiple states

The correct answer is: When their net capital is $35,000 or more

A broker/dealer may be exempt from the fidelity bond requirement if their net capital is $35,000 or more. In the context of securities regulation, the fidelity bond serves as a financial safeguard against potential losses due to employee theft or fraud. Regulatory bodies recognize that firms with sufficient net capital are better positioned to absorb such losses and thus may be granted an exemption. The rationale behind this rule is to balance the need for investor protection with the operational realities of brokerage firms. Lower capital thresholds, such as $35,000, suggest a level of operational stability that reduces risk exposure, allowing firms to operate without the additional necessity of a fidelity bond. In contrast, options relating to net capital amounts that are either too high, an arbitrary volume of transactions, or registration in multiple states do not inherently meet the criteria for exemption based on industry standards. The threshold of $35,000 is specifically set to ensure adequate safeguards while also recognizing the financial positioning of smaller firms.