Ethics & Professional Responsibilities Flashcards

A compliance officer at a broker-dealer is instructed by senior management to destroy emails that may be relevant to an ongoing SEC investigation. The compliance officer should:

Answer: Refuse to destroy the records and seek legal counsel or escalate to the board

Destroying records subject to a regulatory investigation constitutes obstruction of justice; a compliance officer must refuse and escalate despite management pressure.

The concept of 'tone at the top' in securities compliance refers primarily to:

Answer: Senior management's role in setting an ethical culture that permeates the entire organization

Tone at the top describes how executive leadership's conduct, statements, and priorities shape the ethical culture and compliance behavior throughout an organization.

A compliance officer is aware of a material non-public rumor about a potential merger that was overheard in a restaurant near the firm. Trading on this information would be:

Answer: A violation of insider trading rules if the trader knew or should have known the information was material and non-public

The source of material non-public information does not determine legality; if information is material and non-public, trading on it violates insider trading prohibitions.

Under the ethical duty of 'Fair Dealing,' a firm releasing a new research recommendation must:

Answer: Disseminate the recommendation to all clients simultaneously or in a manner that does not favor any group

Fair dealing requires that material investment information and recommendations be disseminated without preferential treatment based on client size or profitability.

A securities compliance professional discovers that a colleague has been padding expense reports. Although this is not a securities violation, the most appropriate course of action is to:

Answer: Report the conduct through appropriate internal channels such as HR or ethics hotline

Professional ethics require reporting dishonest conduct through proper channels regardless of whether it constitutes a securities law violation.

Which of the following best describes the 'misappropriation theory' of insider trading liability?

Answer: It imposes liability when a person trades on confidential information obtained from a source to whom they owe a duty of trust

The misappropriation theory extends insider trading liability to outsiders who breach a duty of trust owed to the source of confidential information, not necessarily the company whose securities are traded.

A compliance program that relies solely on written policies and annual training without ongoing monitoring or testing is considered:

Answer: A 'paper compliance' program that may not meet the standard of an effective compliance program

Regulators expect compliance programs to include active surveillance, testing, and monitoring — policies and training alone constitute a 'paper' program that will not satisfy effectiveness standards.