FIA Regulatory Compliance & Ethics 2 — Questions and Answers
Question 1: Under FINRA Rule 2010, a registered representative who submits falsified customer account documents is violating the standard of:
- Commercial honor and just and equitable principles of trade (Correct answer)
- Best execution obligations
- Suitability requirements under Rule 2111
- Anti-money laundering reporting duties
Correct answer: Commercial honor and just and equitable principles of trade
FINRA Rule 2010 requires members to observe high standards of commercial honor and just and equitable principles of trade, which falsifying documents directly violates.
Question 2: The SEC's Regulation S-P primarily governs:
- Insider trading disclosures
- Privacy of consumer financial information held by broker-dealers (Correct answer)
- Short-selling restrictions during market volatility
- Proxy voting procedures for institutional investors
Correct answer: Privacy of consumer financial information held by broker-dealers
Regulation S-P requires broker-dealers and investment advisers to protect the privacy of nonpublic personal information of their customers.
Question 3: Which of the following best describes a 'know your customer' (KYC) obligation under FINRA Rule 2090?
- Verifying a customer's identity using government-issued photo ID only
- Using reasonable diligence to know the essential facts about every customer and account (Correct answer)
- Requiring customers to disclose all prior investment losses before opening an account
- Conducting annual in-person interviews with all active clients
Correct answer: Using reasonable diligence to know the essential facts about every customer and account
FINRA Rule 2090 requires firms to use reasonable diligence to know the essential facts about each customer necessary to service the account effectively.
Question 4: A financial professional learns that a colleague is front-running customer orders. The ethical obligation under industry standards is to:
- Ignore the activity if it does not directly affect the professional's own clients
- Report the activity through appropriate internal compliance channels (Correct answer)
- Warn the affected customers directly without involving compliance
- Document the activity and disclose it only upon regulatory request
Correct answer: Report the activity through appropriate internal compliance channels
Industry ethics require reporting observed misconduct through proper internal compliance channels to protect clients and the integrity of the market.
Question 5: Under the Bank Secrecy Act (BSA), a Currency Transaction Report (CTR) must be filed for cash transactions exceeding:
- $5,000 in a single day
- $10,000 in a single day (Correct answer)
- $25,000 in a single day
- $50,000 in a single day
Correct answer: $10,000 in a single day
The BSA requires financial institutions to file a CTR for any cash transaction exceeding $10,000 in a single business day.
Question 6: The concept of 'churning' in securities accounts refers to:
- Rapidly rotating sector exposures to capture momentum
- Excessive trading in a customer's account primarily to generate commissions (Correct answer)
- Rebalancing a portfolio to maintain its original asset allocation
- Liquidating positions ahead of anticipated market downturns
Correct answer: Excessive trading in a customer's account primarily to generate commissions
Churning is excessive trading in a customer's account that primarily benefits the broker through commissions rather than the customer.
Question 7: Which regulatory body is primarily responsible for overseeing the conduct of broker-dealers and their registered representatives in the US?
- The Federal Reserve Board
- The Office of the Comptroller of the Currency (OCC)
- The Financial Industry Regulatory Authority (FINRA) (Correct answer)
- The Commodity Futures Trading Commission (CFTC)
Correct answer: The Financial Industry Regulatory Authority (FINRA)
FINRA is the self-regulatory organization (SRO) responsible for overseeing broker-dealers and their registered representatives in the United States.
FIA Regulatory Compliance & Ethics 2
Under FINRA Rule 2010, a registered representative who submits falsified customer account documents is violating the standard of: