CFP Regulatory Frameworks & Compliance 2 — Questions and Answers
Question 1: Under the Investment Advisers Act of 1940, which AUM threshold generally requires an investment adviser to register with the SEC rather than state regulators?
- $25 million
- $50 million
- $100 million (Correct answer)
- $150 million
Correct answer: $100 million
Advisers managing $100 million or more in AUM are generally required to register with the SEC rather than state securities regulators.
Question 2: The Employee Retirement Income Security Act (ERISA) Section 404(c) protects plan fiduciaries from liability when which condition is met?
- The plan offers at least three diversified investment options and participants exercise control (Correct answer)
- The plan sponsor selects only index funds
- All plan assets are invested in employer stock
- The plan fiduciary personally approves each participant's allocation
Correct answer: The plan offers at least three diversified investment options and participants exercise control
ERISA 404(c) shields fiduciaries when the plan offers at least three diversified options, provides sufficient information, and participants exercise independent control over their accounts.
Question 3: A CFP® professional who becomes aware that a client's tax return contains a material error is required to do which of the following under CFP Board's Code of Ethics?
- Immediately notify the IRS on the client's behalf
- Inform the client of the error and recommend they take corrective action (Correct answer)
- Withdraw from the engagement without explanation
- Correct the error unilaterally on the next filing
Correct answer: Inform the client of the error and recommend they take corrective action
CFP Board's Standards require the professional to promptly notify the client of the error and recommend corrective action, while respecting client confidentiality.
Question 4: Which rule under the Securities Exchange Act of 1934 prohibits corporate insiders from profiting on short-swing transactions in their company's securities?
- Rule 10b-5
- Section 16(b) (Correct answer)
- Section 13(d)
- Rule 144
Correct answer: Section 16(b)
Section 16(b) requires insiders to disgorge profits from any purchase and sale (or sale and purchase) of their company's equity securities within a six-month period.
Question 5: Under Regulation Best Interest (Reg BI), a broker-dealer must act in the best interest of a retail customer at the time of a recommendation without primarily considering:
- The customer's investment profile
- The financial interests of the broker-dealer or its associated persons (Correct answer)
- The risks and costs of the recommended security
- Alternative products that could achieve the same objective
Correct answer: The financial interests of the broker-dealer or its associated persons
Reg BI requires broker-dealers to put retail customer interests first and prohibits placing the firm's or associated person's financial interests ahead of the customer's.
Question 6: The USA PATRIOT Act requires financial institutions to implement Customer Identification Programs (CIP) primarily to combat which risk?
- Securities fraud
- Money laundering and terrorist financing (Correct answer)
- Identity theft of minors
- Insider trading
Correct answer: Money laundering and terrorist financing
CIP requirements under the USA PATRIOT Act were enacted to help detect and deter money laundering and the financing of terrorist activities.
Question 7: Under FINRA Rule 4512, member firms must update customer account information for non-institutional customers at a minimum of how often?
- Every 12 months
- Every 24 months
- Every 36 months (Correct answer)
- Every 48 months
Correct answer: Every 36 months
FINRA Rule 4512 requires member firms to review and update essential customer account information at least every 36 months.
CFP Regulatory Frameworks & Compliance 2
Under the Investment Advisers Act of 1940, which AUM threshold generally requires an investment adviser to register with the SEC rather than state regulators?