Risk Assessment & Regulatory Compliance Flashcards

Under the SEC's Regulation Best Interest (Reg BI), broker-dealers must act in the best interest of retail customers at the time of a recommendation. Which element is NOT one of the four component obligations of Reg BI?

Answer: Suitability Obligation

Reg BI's four obligations are Disclosure, Care, Conflict of Interest, and Compliance — 'Suitability' is a legacy FINRA standard, not a Reg BI component.

A portfolio's Value at Risk (VaR) is reported as $500,000 at a 95% confidence level over a 1-day horizon. What does this most accurately mean?

Answer: There is a 5% chance losses will exceed $500,000 in a single day

VaR at 95% confidence means there is a 5% probability that losses will exceed the stated amount over the given time horizon.

Which of the following best describes 'concentration risk' in an investment portfolio?

Answer: Excessive exposure to a single security, sector, or counterparty

Concentration risk occurs when a portfolio has too large a position in a single asset, sector, geography, or counterparty, making it vulnerable to idiosyncratic events.

The Financial Industry Regulatory Authority (FINRA) Rule 2111 requires that a broker have a 'reasonable basis' to believe a recommended strategy is suitable. Which factor is NOT part of the suitability analysis?

Answer: Customer's tax identification number

FINRA Rule 2111 suitability analysis considers investment objectives, risk tolerance, financial situation, and needs — tax identification numbers are not a suitability factor.

An investment adviser is required to deliver its Form ADV Part 2A (brochure) to prospective clients at what point?

Answer: At least 48 hours before entering into an advisory contract, or at contract signing with a 5-day withdrawal right

Under the Investment Advisers Act, advisers must deliver the brochure at least 48 hours before contract signing, or at signing if the client has a 5-day right to terminate without penalty.

Which risk measure captures the potential loss in a portfolio's worst-case scenarios beyond the VaR threshold, making it a more complete measure of tail risk?

Answer: Expected Shortfall (CVaR)

Expected Shortfall (also called Conditional VaR or CVaR) measures the average loss in scenarios that exceed the VaR threshold, capturing tail risk that VaR ignores.

Under the Bank Secrecy Act (BSA), financial institutions must file a Suspicious Activity Report (SAR) within how many calendar days of detecting a suspicious transaction?

Answer: 30 days

Financial institutions are generally required to file a SAR within 30 calendar days of detecting a suspicious transaction, or 60 days if no suspect is identified initially.