CSCP CSCP Surveillance & Monitoring 2 — Questions and Answers
Question 1: What is 'wash trading' in securities markets?
- Cleaning up erroneous trades
- Entering offsetting buy and sell orders to create artificial volume (Correct answer)
- Settling trades through a central counterparty
- Netting positions at end of day
Correct answer: Entering offsetting buy and sell orders to create artificial volume
Wash trading involves simultaneously buying and selling the same security to generate activity without a real change in ownership, creating misleading volume.
Question 2: Under SEC Rule 17a-8, broker-dealers must file Suspicious Activity Reports (SARs) for transactions that:
- Exceed $50,000 in value
- Involve possible money laundering or securities fraud of $5,000 or more (Correct answer)
- Are executed in foreign currencies
- Involve margin accounts only
Correct answer: Involve possible money laundering or securities fraud of $5,000 or more
SEC Rule 17a-8 requires broker-dealers to file SARs for transactions of $5,000 or more that involve potential money laundering, fraud, or other illegal activity.
Question 3: Which surveillance alert would most directly detect potential 'marking the close' activity?
- Concentration alerts on a single security
- Unusual trading volume in the final minutes of the trading session (Correct answer)
- Options expiration day monitoring
- Pre-open order imbalance alerts
Correct answer: Unusual trading volume in the final minutes of the trading session
Marking the close involves trading at the end of the day to artificially influence closing prices, making end-of-session volume spikes a key surveillance indicator.
Question 4: What is the role of a Chief Compliance Officer (CCO) in a surveillance escalation process?
- To execute trades flagged by surveillance
- To receive escalated alerts and determine whether regulatory reporting or further investigation is required (Correct answer)
- To program the surveillance alert thresholds
- To communicate directly with FINRA about all alerts
Correct answer: To receive escalated alerts and determine whether regulatory reporting or further investigation is required
The CCO serves as the final decision-maker for escalated alerts, determining if the activity warrants regulatory filings, discipline, or further review.
Question 5: A pattern where a broker consistently recommends securities shortly after purchasing them in their personal account is known as:
- Scalping (Correct answer)
- Front-running
- Painting the tape
- Matched orders
Correct answer: Scalping
Scalping occurs when a registered representative recommends securities to customers after personally acquiring them, profiting from the price increase caused by those recommendations.
Question 6: Under FINRA Rule 3110(b)(4), which accounts require heightened supervisory procedures?
- All retirement accounts
- Accounts of registered persons at other firms (Correct answer)
- Accounts with over $1 million in assets
- Institutional accounts only
Correct answer: Accounts of registered persons at other firms
FINRA Rule 3110(b)(4) requires firms to have heightened supervision procedures for accounts held by registered persons employed at other member firms.
CSCP CSCP Surveillance & Monitoring 2
What is 'wash trading' in securities markets?