CFP Regulatory Frameworks & Compliance 5 ā Questions and Answers
Question 1: Under FINRA Rule 3110, a member firm's supervisory system must include which of the following as a minimum requirement?
- At least two supervisors for every registered representative
- Written supervisory procedures (WSPs) tailored to the firm's business (Correct answer)
- A dedicated compliance officer with CPA credentials
- Quarterly third-party audits of all customer accounts
Correct answer: Written supervisory procedures (WSPs) tailored to the firm's business
FINRA Rule 3110 requires each member to establish and maintain written supervisory procedures reasonably designed to achieve compliance with applicable securities laws and regulations.
Question 2: A client wishes to roll over funds from an employer 401(k) plan to a traditional IRA. Under Reg BI and DOL PTE 2020-02, the adviser's recommendation to roll over must consider all of the following EXCEPT:
- Investment options and associated costs in the IRA vs. the plan
- Available services, including advisory services
- The adviser's interest in increasing AUM-based fees (Correct answer)
- The client's need for the specific features of the plan
Correct answer: The adviser's interest in increasing AUM-based fees
Reg BI and PTE 2020-02 require rollover recommendations to be based on the client's best interest; the adviser's self-interest in growing AUM cannot drive the recommendation.
Question 3: The '40 Act (Investment Company Act of 1940) requires registered investment companies to have a board of directors where at least what percentage of directors must be independent (non-interested)?
- 25%
- 40%
- 50% (Correct answer)
- 75%
Correct answer: 50%
The Investment Company Act of 1940 requires that at least 40% of an investment company's board consist of independent (non-interested) directors, though SEC rules effectively require 50% for certain relief.
Question 4: Under Regulation S-P (Privacy of Consumer Financial Information), a financial institution must provide customers with an opt-out notice when the institution intends to share nonpublic personal information with:
- Affiliates that perform services on the institution's behalf
- Nonaffiliated third parties for joint marketing under a written agreement
- Nonaffiliated third parties for purposes outside permitted exceptions (Correct answer)
- Law enforcement agencies pursuant to a subpoena
Correct answer: Nonaffiliated third parties for purposes outside permitted exceptions
Reg S-P requires opt-out notices before sharing customer NPI with nonaffiliated third parties for non-excepted purposes; sharing with affiliates or for legal compliance does not require opt-out rights.
Question 5: Which provision of the Tax Cuts and Jobs Act of 2017 most directly affects financial planners advising clients who pay significant state and local taxes?
- Elimination of the alternative minimum tax for individuals
- The $10,000 cap on the state and local tax (SALT) deduction (Correct answer)
- Repeal of the estate tax exemption
- Reduction of the standard deduction to pre-2018 levels
Correct answer: The $10,000 cap on the state and local tax (SALT) deduction
The TCJA capped the SALT deduction at $10,000 per year, significantly limiting the tax benefit for high-income clients in high-tax states.
Question 6: Under SEC Rule 206(4)-7 (the Compliance Rule), registered investment advisers must adopt and implement a written compliance program that includes annual review of the program's adequacy and effectiveness, to be overseen by a designated:
- Board of directors majority
- Chief compliance officer (CCO) (Correct answer)
- Independent auditor
- FINRA examiner
Correct answer: Chief compliance officer (CCO)
Rule 206(4)-7 requires each RIA to designate a chief compliance officer responsible for administering the firm's written compliance policies and procedures.
Question 7: A CFPĀ® professional who simultaneously holds a securities license and charges fee-only planning fees must ensure that the receipt of commissions on product sales is handled in accordance with which CFP Board requirement?
- Immediately surrender the securities license to maintain the fee-only designation
- Disclose the conflict and obtain informed consent before making any product recommendations (Correct answer)
- Segregate commission and fee revenue into separate legal entities
- Receive written approval from CFP Board before selling any commission-based product
Correct answer: Disclose the conflict and obtain informed consent before making any product recommendations
CFP Board requires full disclosure of conflicts of interestāincluding commission arrangementsāand obtaining informed client consent prior to making recommendations in a dual-compensation scenario.
CFP Regulatory Frameworks & Compliance 5
Under FINRA Rule 3110, a member firm's supervisory system must include which of the following as a minimum requirement?