Compliance Programs & Risk Management Flashcards

An investment adviser's compliance program must be 'reasonably designed' under Rule 206(4)-7. Which factor is least relevant in assessing this standard?

Answer: Number of compliance staff employed by competitors

The reasonably designed standard is assessed based on the firm's own characteristics — its business model, AUM, client types, and conflicts — not benchmarked against competitors' staffing levels.

Which of the following is an example of 'inherent risk' in a compliance risk assessment for a broker-dealer?

Answer: The risk of market manipulation on a proprietary trading desk before any supervisory controls are applied

Inherent risk is the raw level of risk in an activity or process before any mitigating controls are applied; market manipulation risk on a proprietary desk absent any supervision is a classic example.

Under SEC Regulation S-P, broker-dealers and investment advisers must provide customers with a privacy notice at what frequency at minimum?

Answer: Annually

Regulation S-P requires covered firms to provide customers with an annual privacy notice describing the firm's information-sharing practices and customers' opt-out rights.

A firm's compliance testing program reveals that 15% of sampled customer accounts lack required know-your-customer (KYC) documentation. The compliance officer should FIRST:

Answer: Conduct a root cause analysis to understand why documentation is missing

Root cause analysis should come first to understand whether the gap is due to process failure, technology error, or training deficiency — this informs the most effective corrective action.

Which of the following best describes the purpose of a compliance 'look-back review'?

Answer: Reviewing past transactions or activities to detect violations that may have occurred

A look-back review examines historical transactions, communications, or activities to identify potential violations or suspicious patterns that were not caught at the time they occurred.

FINRA's suitability rule (Rule 2111) was largely superseded by Regulation Best Interest (Reg BI) for recommendations to retail customers. Reg BI imposes which standard on broker-dealers?

Answer: Best interest standard that considers costs and reasonably available alternatives

Reg BI requires broker-dealers to act in the best interest of retail customers at the time of a recommendation, considering costs and reasonably available alternatives — a higher bar than suitability but distinct from the investment adviser fiduciary standard.

Which component of an effective compliance program ensures that employees understand their obligations under firm policies and regulations?

Answer: Ongoing training and education program

Ongoing training and education ensures employees understand regulatory requirements and firm policies, which is a core pillar of an effective compliance program alongside written procedures, supervision, and testing.