PAB Reserve Computation

PAB reserve computation questions test whether you can separate proprietary accounts of broker-dealers from customer accounts and then apply the same reserve discipline to a different balance category. A PAB balance may look operationally similar to a customer-related balance, but Series 27 expects the FINOP to classify it correctly before deciding how it affects the reserve computation.

The exam-safe approach is to classify the account, identify included and excluded items, review collateral and concentration issues, and correct misclassifications before the reserve bank account decision is made.

Learning objectives

After this lesson, you should be able to:

• explain how PAB reserve computation fits the Series 27 FINOP workflow
• identify the records, calculations, agreements, or approvals that support the regulatory treatment
• recognize when a classification error affects customer protection, net capital, reporting, or books and records
• select the response that reconciles the item, escalates the risk, and preserves a defensible audit trail

What the exam is really testing

Series 27 questions usually test control judgment. A fact pattern may look like accounting, operations, custody, or financing, but the stronger answer asks whether the firm can prove the classification and whether the issue affects customer assets or regulatory capital. For PAB reserve computation, that means connecting the detail to filing accuracy, reserve protection, net capital reliability, or supervisory escalation.

Control workflow

    flowchart TD
	  A["Balance appears in reserve support"] --> B{"Customer, PAB, or noncustomer?"}
	  B -->|"PAB"| C["Classify included and excluded PAB items"]
	  C --> D["Review collateral, concentration, aging, and stock-record allocation"]
	  D --> E["Compute, fund, and retain PAB reserve support"]
	  B -->|"Not PAB"| F["Route to the correct computation or exclusion analysis"]

How to answer fact patterns

1. Classify the item before doing anything else.
2. Decide whether the item affects customer assets, reserve requirements, net capital, or regulatory reporting.
3. Look for missing evidence: schedules, agreements, confirmations, reconciliations, approvals, or valuation support.
4. Choose the answer that corrects the record, escalates the risk, and treats unresolved items conservatively.

Common exam traps

• Mixing PAB balances into the customer reserve computation.
• Assuming correspondent balances are harmless because another broker-dealer is involved.
• Ignoring excluded-item support.
• Missing concentration or collateral issues in margin debits.
• Letting aged PAB suspense items remain unresolved without escalation.

Key concepts

• PAB: know what it changes in the computation, record, filing, or escalation decision.
• Correspondent balance: know what it changes in the computation, record, filing, or escalation decision.
• Included item: know what it changes in the computation, record, filing, or escalation decision.
• Excluded item: know what it changes in the computation, record, filing, or escalation decision.
• Stock-record allocation: know what it changes in the computation, record, filing, or escalation decision.
• PAB reserve account: know what it changes in the computation, record, filing, or escalation decision.

Key takeaways

• Series 27 rewards conservative classification and documented support.
• Operational convenience is not enough when customer assets, capital, or regulatory filings are affected.
• The FINOP answer should preserve the audit trail and escalate unresolved or material issues before relying on the treatment.