FIA Financial Regulation & Supervision 4 — Questions and Answers
Question 1: The SEC's Regulation Best Interest (Reg BI) requires broker-dealers to act in whose best interest when making a recommendation?
- The broker-dealer firm
- The retail customer (Correct answer)
- The issuer of securities
- The clearinghouse
Correct answer: The retail customer
Reg BI requires broker-dealers to act in the best interest of the retail customer and not place their own financial interests ahead of the customer's.
Question 2: What is the key distinction between a bank's 'Tier 1' and 'Tier 2' capital?
- Tier 1 is debt-based; Tier 2 is equity-based
- Tier 1 is core capital (highest quality); Tier 2 is supplementary capital (Correct answer)
- Tier 1 covers market risk; Tier 2 covers credit risk
- Tier 1 is for retail banks; Tier 2 is for investment banks
Correct answer: Tier 1 is core capital (highest quality); Tier 2 is supplementary capital
Tier 1 capital consists of the highest-quality, most loss-absorbing capital (common equity), while Tier 2 is supplementary capital with lower loss-absorbing capacity (e.g., subordinated debt).
Question 3: Which regulatory requirement obligates financial institutions to have plans for their own orderly resolution in the event of failure?
- Living wills (resolution plans) (Correct answer)
- Capital conservation buffers
- Liquidity coverage ratios
- Stress test disclosures
Correct answer: Living wills (resolution plans)
Living wills, or resolution plans, are required by Dodd-Frank for large financial institutions to outline how they could be wound down without taxpayer bailouts.
Question 4: The Liquidity Coverage Ratio (LCR) requires banks to hold enough high-quality liquid assets to cover:
- 30 days of net cash outflows under a stress scenario (Correct answer)
- 12 months of operating expenses
- 100% of uninsured deposits
- 50% of total short-term borrowings
Correct answer: 30 days of net cash outflows under a stress scenario
The LCR mandates that banks maintain sufficient high-quality liquid assets (HQLA) to survive a 30-day liquidity stress scenario.
Question 5: Under anti-money laundering (AML) rules, what is a 'Suspicious Activity Report' (SAR)?
- A document filed when a customer opens a new account
- A report filed with FinCEN when a financial institution suspects illegal activity (Correct answer)
- A quarterly compliance certification submitted to the OCC
- A list of high-risk countries maintained by OFAC
Correct answer: A report filed with FinCEN when a financial institution suspects illegal activity
SARs are confidential reports filed by financial institutions with FinCEN when they detect transactions that may indicate money laundering, fraud, or other illegal activity.
Question 6: The 'Know Your Customer' (KYC) requirement primarily helps financial institutions:
- Increase cross-selling of financial products
- Verify customer identity and assess money laundering risks (Correct answer)
- Evaluate customer creditworthiness for loan approvals
- Determine appropriate margin levels for trading accounts
Correct answer: Verify customer identity and assess money laundering risks
KYC procedures require institutions to verify customer identities and understand the nature of their relationships to detect and prevent financial crimes.
Question 7: Which agency administers the Bank Secrecy Act (BSA) and receives Suspicious Activity Reports?
- SEC
- FDIC
- FinCEN (Correct answer)
- OCC
Correct answer: FinCEN
The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury, administers the BSA and collects financial intelligence including SARs and Currency Transaction Reports.
FIA Financial Regulation & Supervision 4
The SEC's Regulation Best Interest (Reg BI) requires broker-dealers to act in whose best interest when making a recommendation?