FIA Regulatory Compliance & Ethics 3 — Questions and Answers
Question 1: Under the Investment Advisers Act of 1940, an investment adviser owes a fiduciary duty that includes:
- Guaranteeing minimum returns to all advisory clients
- Disclosing all material conflicts of interest to clients (Correct answer)
- Registering with FINRA as a broker-dealer
- Filing quarterly suitability reports with the SEC
Correct answer: Disclosing all material conflicts of interest to clients
Investment advisers owe a fiduciary duty requiring full disclosure of all material conflicts of interest that could affect the advice given to clients.
Question 2: A 'material non-public information' (MNPI) policy at a financial firm primarily aims to prevent:
- Unauthorized access to client account passwords
- Trading on information not available to the general public that could affect securities prices (Correct answer)
- Sharing client portfolio performance data with competing firms
- Releasing earnings forecasts without board approval
Correct answer: Trading on information not available to the general public that could affect securities prices
MNPI policies are designed to prevent insider trading by prohibiting trades based on information not yet available to the investing public that is likely to affect a security's price.
Question 3: The Dodd-Frank Act's whistleblower program, administered by the SEC, incentivizes individuals to report securities violations by offering:
- Full immunity from prosecution for any related securities violations
- Monetary awards between 10% and 30% of sanctions exceeding $1 million (Correct answer)
- Guaranteed employment protection in all financial industry positions
- A flat fee of $100,000 for each valid tip submitted
Correct answer: Monetary awards between 10% and 30% of sanctions exceeding $1 million
The SEC's whistleblower program offers awards of 10% to 30% of monetary sanctions collected when sanctions exceed $1 million.
Question 4: Under FINRA Rule 3110, member firms are required to establish and maintain a supervisory system that includes:
- Daily audits of all customer communications by the CCO
- Written supervisory procedures (WSPs) reasonably designed to achieve compliance (Correct answer)
- Mandatory third-party audits of all trading activity quarterly
- An independent board committee dedicated solely to compliance oversight
Correct answer: Written supervisory procedures (WSPs) reasonably designed to achieve compliance
FINRA Rule 3110 requires firms to establish WSPs tailored to their business that are reasonably designed to ensure compliance with applicable laws and regulations.
Question 5: The term 'suitability' in the context of FINRA Rule 2111 requires a broker-dealer to have a reasonable basis to believe that a recommendation is suitable based on all EXCEPT:
- The customer's financial situation and needs
- The customer's risk tolerance and investment objectives
- The current market performance of the recommended security (Correct answer)
- The customer's tax status and liquidity needs
Correct answer: The current market performance of the recommended security
Suitability under Rule 2111 is based on customer-specific factors like financial situation, risk tolerance, and objectives, not on the current market performance of the security.
Question 6: A Suspicious Activity Report (SAR) filed under the Bank Secrecy Act must generally be submitted within how many days of detecting the suspicious activity?
- 15 days
- 30 days (Correct answer)
- 60 days
- 90 days
Correct answer: 30 days
Financial institutions are generally required to file a SAR within 30 days of detecting a suspicious transaction, or 60 days if additional investigation is needed.
Question 7: Which of the following actions would most likely constitute a violation of Regulation FD (Fair Disclosure)?
- A CFO discusses publicly available earnings guidance during a conference call open to all investors
- A CEO privately discloses next quarter's revenue projections to a select group of analysts before public announcement (Correct answer)
- A company posts its annual report on its website simultaneously with SEC filing
- An IR officer responds to questions about publicly filed financial statements
Correct answer: A CEO privately discloses next quarter's revenue projections to a select group of analysts before public announcement
Regulation FD prohibits selective disclosure of material nonpublic information to certain market professionals without simultaneous public disclosure.
FIA Regulatory Compliance & Ethics 3
Under the Investment Advisers Act of 1940, an investment adviser owes a fiduciary duty that includes: