Ethics & Professional Responsibilities Flashcards

A portfolio manager at an investment adviser learns from a company board member (a personal friend) that the company will miss earnings expectations next quarter. The manager tells the firm's compliance officer. What should the compliance officer do first?

Answer: Immediately place the company's securities on the firm's restricted list and prevent any trading

Upon receiving potential MNPI, the compliance officer should immediately restrict trading through a restricted or watch list pending further investigation.

Under FINRA Rule 2010 (Standards of Commercial Honor), registered representatives are held to which standard of conduct?

Answer: High standards of commercial honor and just and equitable principles of trade in all business activities

FINRA Rule 2010 requires registered persons to observe high standards of commercial honor and just and equitable principles of trade, a broad ethical standard beyond mere legal compliance.

A compliance officer at a large broker-dealer has a romantic relationship with a trader in the equities department. This situation most directly creates a concern about:

Answer: The compliance officer's ability to objectively supervise and discipline the trader

A personal relationship between a supervisor and a subordinate they are responsible for overseeing creates an objectivity and independence conflict in the supervisory relationship.

The 'Chinese Wall' (information barrier) in a securities firm is primarily designed to prevent:

Answer: The flow of material non-public information between departments such as investment banking and trading

Information barriers are structural controls that prevent MNPI obtained in one department (e.g., investment banking) from flowing to trading desks where it could be misused.

A registered investment adviser who has discretionary authority over client accounts must obtain client consent before:

Answer: Engaging in cross transactions between two client accounts where the adviser acts as principal

Principal transactions involving an adviser trading from its own account with a client's account require prior written disclosure and client consent under the Investment Advisers Act.

When is a securities compliance professional ethically permitted to reveal confidential client information without client consent?

Answer: When required by applicable law or a valid legal process such as a court order or regulatory subpoena

Confidential client information may be disclosed without consent only when required by law, legal process, or applicable regulatory requirements.

Under the Investment Advisers Act of 1940, a registered investment adviser's fiduciary duty to clients includes which two core obligations?

Answer: A duty of care and a duty of loyalty

The SEC has articulated that an investment adviser's fiduciary duty comprises a duty of care (acting in the client's best interest) and a duty of loyalty (eliminating or disclosing conflicts of interest).