AIP Risk Assessment & Regulatory Compliance 5 — Questions and Answers
Question 1: Which Basel III regulatory framework metric measures a bank's ability to survive a 30-day liquidity stress scenario by requiring sufficient high-quality liquid assets?
- Net Stable Funding Ratio (NSFR)
- Liquidity Coverage Ratio (LCR) (Correct answer)
- Tier 1 Capital Ratio
- Leverage Ratio
Correct answer: Liquidity Coverage Ratio (LCR)
The Liquidity Coverage Ratio (LCR) requires banks to hold enough high-quality liquid assets to cover 30 days of net cash outflows under a stress scenario.
Question 2: An investor holds a bond portfolio and is concerned about rising interest rates. Which risk metric would best quantify the portfolio's sensitivity to interest rate changes?
- Sharpe ratio
- Modified duration (Correct answer)
- Information ratio
- Treynor ratio
Correct answer: Modified duration
Modified duration measures the percentage change in a bond's price for a 1% change in yield, making it the primary metric for interest rate sensitivity.
Question 3: The SEC's Rule 206(4)-7 under the Investment Advisers Act requires registered investment advisers to adopt and implement written compliance policies and procedures. Who must annually review these policies?
- The SEC examiner assigned to the firm
- The Chief Compliance Officer (Correct answer)
- A FINRA-registered principal
- An independent outside auditor
Correct answer: The Chief Compliance Officer
Rule 206(4)-7 requires RIAs to designate a Chief Compliance Officer who is responsible for administering the compliance program and conducting an annual review of its adequacy.
Question 4: A hedge fund uses leverage by borrowing $50 million to supplement $100 million in equity. If portfolio losses reduce equity to $70 million while debt remains at $50 million, what is the leverage ratio?
- 1.5x
- 2.0x
- 1.71x (Correct answer)
- 2.43x
Correct answer: 1.71x
Leverage ratio = Total Assets / Equity = ($70M + $50M) / $70M = $120M / $70M ≈ 1.71x.
Question 5: Which of the following best describes 'regulatory risk' in the context of investment management?
- The risk of portfolio losses due to poor market timing
- The risk that changes in laws or regulations will adversely affect investment returns or firm operations (Correct answer)
- The risk of fraud by rogue employees
- The risk that inflation erodes real portfolio returns
Correct answer: The risk that changes in laws or regulations will adversely affect investment returns or firm operations
Regulatory risk is the risk that legislative or regulatory changes — such as new capital requirements or trading restrictions — will negatively impact investments or business operations.
Question 6: Under the Employee Retirement Income Security Act (ERISA), plan fiduciaries are held to what standard when making investment decisions for a pension plan?
- The suitability standard applicable to broker-dealers
- The prudent expert standard — acting as a knowledgeable fiduciary would (Correct answer)
- A best-efforts standard with limited liability
- The reasonable investor standard applicable to retail clients
Correct answer: The prudent expert standard — acting as a knowledgeable fiduciary would
ERISA's prudent expert standard requires fiduciaries to act with the care, skill, prudence, and diligence of a knowledgeable person familiar with investment matters.
Question 7: A broker-dealer's anti-money laundering (AML) program must include which of the following elements under the Bank Secrecy Act?
- A dedicated cybersecurity officer and annual penetration testing
- Internal policies, independent testing, designated AML officer, and ongoing employee training (Correct answer)
- Quarterly audits by FINRA and submission of all client trade data to FinCEN
- Mandatory client background checks performed by the FBI
Correct answer: Internal policies, independent testing, designated AML officer, and ongoing employee training
A compliant BSA/AML program for broker-dealers must include written internal policies, independent testing of the program, a designated AML compliance officer, and ongoing training for appropriate personnel.
AIP Risk Assessment & Regulatory Compliance 5
Which Basel III regulatory framework metric measures a bank's ability to survive a 30-day liquidity stress scenario by requiring sufficient high-quality liquid assets?