CSCP Ethics & Professional Responsibilities 5 — Questions and Answers
Question 1: A compliance officer who suspects ongoing securities fraud within their firm but fails to escalate the matter to senior leadership or regulators may be found liable under the theory of:
- Respondeat superior, because the firm is always liable for employee conduct
- Aiding and abetting or supervisory liability for failing to prevent or stop the violation (Correct answer)
- Negligent hiring if the fraudster was improperly vetted
- Strict liability regardless of the compliance officer's knowledge or intent
Correct answer: Aiding and abetting or supervisory liability for failing to prevent or stop the violation
Compliance professionals with supervisory responsibilities can face liability for failing to take reasonable steps to detect and prevent violations they are aware of or should have been aware of.
Question 2: A broker-dealer's written supervisory procedures (WSPs) are BEST described as:
- A marketing document that describes the firm's services to prospective clients
- Internal controls that describe how the firm will supervise registered persons and ensure compliance with applicable rules (Correct answer)
- A regulatory filing submitted annually to FINRA detailing all compliance violations
- A client-facing agreement that sets out the firm's obligations under Regulation Best Interest
Correct answer: Internal controls that describe how the firm will supervise registered persons and ensure compliance with applicable rules
WSPs are the firm's documented framework for supervising registered persons and activities, and are a core regulatory requirement under FINRA Rule 3110.
Question 3: An analyst at a sell-side firm owns shares in a company they cover. They are about to publish a favorable research report. Under ethical standards, the analyst must:
- Sell the shares before publishing the report to eliminate the conflict
- Disclose the ownership interest prominently in the research report (Correct answer)
- Obtain written permission from three independent directors before publishing
- Transfer coverage to a colleague without disclosing the reason
Correct answer: Disclose the ownership interest prominently in the research report
Disclosure of the analyst's ownership interest in covered securities is required so that readers can assess potential conflicts of interest in the research.
Question 4: The 'three lines of defense' model in compliance assigns which role to the compliance function?
- First line: owning and managing risk directly through day-to-day controls
- Second line: providing oversight, monitoring, and guidance on risk and compliance matters (Correct answer)
- Third line: providing independent assurance through internal audit
- Fourth line: external oversight by regulators and external auditors
Correct answer: Second line: providing oversight, monitoring, and guidance on risk and compliance matters
In the three lines of defense model, compliance functions as the second line by providing independent oversight, policy guidance, and monitoring of the first line (business operations).
Question 5: A securities professional who makes materially false statements to an auditor during a regulatory examination could face charges under which statute?
- Section 11 of the Securities Act of 1933
- Section 1001 of Title 18 (false statements to federal investigators) and potentially Section 1512 (obstruction) (Correct answer)
- Section 12(b) of the Securities Exchange Act of 1934
- Rule 144 of the Securities Act governing resale of restricted securities
Correct answer: Section 1001 of Title 18 (false statements to federal investigators) and potentially Section 1512 (obstruction)
Making false statements to federal investigators is a criminal offense under 18 U.S.C. § 1001, and obstruction of a federal proceeding is prohibited under § 1512, both of which can apply during regulatory examinations.
Question 6: Which of the following is the most important characteristic of an effective ethics hotline in a securities firm?
- It must be operated by senior management to ensure prompt action
- It must allow for anonymous reporting and protect reporters from retaliation (Correct answer)
- It should only accept written complaints to create an auditable record
- Reports submitted to the hotline should be reviewed by the business unit involved
Correct answer: It must allow for anonymous reporting and protect reporters from retaliation
An effective ethics hotline must allow anonymous submissions and provide robust non-retaliation protections to encourage employees to report misconduct without fear.
Question 7: A compliance professional who intentionally helps structure client transactions to avoid Currency Transaction Report (CTR) filing requirements may be charged with:
- A civil violation of Regulation T governing margin accounts
- Structuring, a federal crime under the Bank Secrecy Act regardless of the underlying funds' legitimacy (Correct answer)
- A FINRA Rule 2010 violation only, with no criminal exposure
- Excessive trading violations under Section 10(b) of the Exchange Act
Correct answer: Structuring, a federal crime under the Bank Secrecy Act regardless of the underlying funds' legitimacy
Structuring transactions to evade CTR filing thresholds is a federal crime under 31 U.S.C. § 5324 even if the underlying money is legitimate.
CSCP Ethics & Professional Responsibilities 5
A compliance officer who suspects ongoing securities fraud within their firm but fails to escalate the matter to senior leadership or regulators may be found liable under the theory of: