CSCP Ethics & Professional Responsibilities 2 — Questions and Answers
Question 1: A compliance officer discovers that their firm's star portfolio manager has been front-running client orders. The manager generates 40% of the firm's revenue. What is the compliance officer's primary obligation?
- Discuss the issue privately with the manager before escalating
- Report the violation through proper internal channels regardless of the manager's revenue contribution (Correct answer)
- Weigh the financial impact before deciding whether to report
- Notify only the manager's direct supervisor and take no further action
Correct answer: Report the violation through proper internal channels regardless of the manager's revenue contribution
A compliance officer's duty to report violations is not contingent on the economic importance of the violator; client protection and regulatory compliance take precedence.
Question 2: Under the CFA Institute Code of Ethics, which action best demonstrates the standard of 'Loyalty, Prudence, and Care' when managing a client's retirement portfolio?
- Prioritizing investments that generate the highest commissions for the firm
- Placing client interests ahead of personal and employer interests when making investment decisions (Correct answer)
- Focusing exclusively on capital appreciation to maximize the client's long-term wealth
- Following the employer's model portfolio without considering the individual client's risk profile
Correct answer: Placing client interests ahead of personal and employer interests when making investment decisions
Loyalty, Prudence, and Care requires placing client interests above those of the professional's own firm and personal benefit.
Question 3: A registered representative receives a gift worth $150 from a client after completing a complex estate planning transaction. FINRA rules generally cap gifts from clients at which threshold per year?
- $50
- $100 (Correct answer)
- $150
- $200
Correct answer: $100
FINRA Rule 3220 limits gifts to $100 per person per year to prevent conflicts of interest in client relationships.
Question 4: A securities analyst has been asked by their employer to change a 'sell' recommendation to 'hold' because the issuer is a major investment banking client. Which ethical principle is most directly at stake?
- Confidentiality of client information
- Independence and objectivity of research (Correct answer)
- Suitability of investment recommendations
- Fair dealing among all clients
Correct answer: Independence and objectivity of research
Pressure to change research opinions to serve investment banking relationships directly violates the analyst's duty to maintain independent and objective analysis.
Question 5: A compliance professional learns of a potential securities law violation from an anonymous tip but lacks sufficient evidence to confirm it. The most appropriate next step under professional ethics standards is to:
- Discard the tip because anonymous sources are inherently unreliable
- Conduct a reasonable preliminary inquiry to assess the credibility of the allegation (Correct answer)
- Immediately report the allegation to the SEC before conducting any internal review
- Wait until concrete evidence emerges before taking any action
Correct answer: Conduct a reasonable preliminary inquiry to assess the credibility of the allegation
Ethical compliance practice requires a reasonable preliminary investigation to determine whether a credible allegation warrants escalation, rather than dismissing or prematurely escalating tips.
Question 6: Which of the following scenarios best illustrates a conflict of interest that must be disclosed to clients under securities industry ethics standards?
- A broker recommends a mutual fund that charges lower fees than alternatives
- An advisor recommends a fund in which their spouse holds a significant ownership interest (Correct answer)
- A compliance officer enforces a firm policy that limits commissions
- An analyst upgrades a stock after reviewing a company's publicly available earnings report
Correct answer: An advisor recommends a fund in which their spouse holds a significant ownership interest
A family member's financial interest in a recommended security creates a material conflict of interest that must be disclosed to clients.
Question 7: Under SEC whistleblower rules, which statement is accurate regarding retaliation protections for securities compliance professionals?
- Retaliation protections only apply if the whistleblower reported to the SEC first, not internally
- Employees who report potential securities violations internally may still qualify for anti-retaliation protections (Correct answer)
- Retaliation protections apply only to registered representatives, not compliance staff
- Firms may contractually waive employees' rights to whistleblower protections
Correct answer: Employees who report potential securities violations internally may still qualify for anti-retaliation protections
Following the Supreme Court's decision in Digital Realty Trust v. Somers, Dodd-Frank anti-retaliation protections primarily require SEC reporting, but internal reporters may still have protections under specific circumstances and other statutes.
CSCP Ethics & Professional Responsibilities 2
A compliance officer discovers that their firm's star portfolio manager has been front-running client orders.
The manager generates 40% of the firm's revenue.
What is the compliance officer's primary obligation?