Compliance Programs & Risk Management Flashcards

FINRA Rule 3120 requires broker-dealers to establish a system to supervise activities of associated persons. What document must the supervisory system be memorialized in?

Answer: Written Supervisory Procedures (WSP)

FINRA Rule 3120 requires firms to establish, maintain, and enforce Written Supervisory Procedures (WSPs) that detail the firm's supervisory system for each applicable regulation.

Which of the following best describes a 'key risk indicator' (KRI) in securities compliance?

Answer: A forward-looking metric that signals potential compliance risk

KRIs are forward-looking metrics that provide early warning signals of increasing compliance risk, allowing firms to take proactive corrective action before violations occur.

Under the USA PATRIOT Act, which federal agency primarily administers the anti-money laundering (AML) requirements applicable to broker-dealers?

Answer: FinCEN

The Financial Crimes Enforcement Network (FinCEN) administers the Bank Secrecy Act and USA PATRIOT Act AML requirements, including those applicable to broker-dealers as 'financial institutions.'

A compliance officer discovers that a firm's AML policy has not been updated to reflect a recent FinCEN rule change. The best immediate action is to:

Answer: Update the policy and conduct targeted training for affected staff

The most appropriate response is to promptly update the policy to reflect the regulatory change and then provide targeted training to ensure staff are aware of and can implement the new requirements.

What is the purpose of a compliance 'gap analysis' in a securities firm?

Answer: To identify differences between current practices and required regulatory standards

A gap analysis compares a firm's existing compliance policies, procedures, and practices against applicable regulatory requirements to identify areas where the firm falls short.

Which supervisory control is most effective for detecting unauthorized trading by a registered representative?

Answer: Real-time trade blotter review by a designated supervisor

Real-time or daily trade blotter review by a designated supervisor is the most effective control for detecting unauthorized trades as they occur, rather than discovering them after extended periods.

The concept of 'three lines of defense' in securities compliance assigns primary responsibility for risk management to which line?

Answer: Business units and front-line staff (first line)

In the three lines of defense model, business units and front-line staff constitute the first line of defense and bear primary responsibility for identifying, managing, and mitigating risks in their daily activities.