Ethics & Regulatory Standards Flashcards

A manager's personal trades are executed just before large client orders in the same stock. This practice is known as:

Answer: Front-running

Front-running is trading ahead of client orders to profit from the expected price impact, which breaches the duty of loyalty.

Excessive trading in a client account primarily to generate commissions is called:

Answer: Churning

Churning is excessive trading for the broker's benefit and violates suitability and fiduciary standards.

Under GIPS, which practice is prohibited when presenting composite performance?

Answer: Excluding poorly performing portfolios to improve the composite

GIPS forbids cherry-picking; all actual, fee-paying, discretionary portfolios must be included in at least one composite.

Which regulator is the primary self-regulatory organization overseeing U.S. broker-dealers?

Answer: FINRA

FINRA is the self-regulatory organization that writes and enforces rules for U.S. broker-dealers under SEC oversight.

Investment advisers generally must register with the SEC rather than a state once regulatory assets under management reach at least:

Answer: $110 million

Advisers must generally register with the SEC at $110 million in RAUM, may register from $100 million, and smaller advisers are typically state-regulated.

A manager is offered an all-expenses-paid luxury trip by a broker seeking more of the firm's trading business. The best ethical response is to:

Answer: Decline or disclose and obtain compliance approval per firm gift policy

Lavish gifts from parties seeking business threaten independence and objectivity, so they should be declined or handled under firm policy with disclosure.

The Bank Secrecy Act requires financial institutions to file which report for cash transactions exceeding $10,000?

Answer: Currency Transaction Report (CTR)

A Currency Transaction Report must be filed for cash transactions over $10,000 under the Bank Secrecy Act.