FIA Regulatory Compliance & Ethics 4 — Questions and Answers
Question 1: Under the USA PATRIOT Act, financial institutions must implement a Customer Identification Program (CIP) to verify the identity of customers when:
- A customer requests a wire transfer exceeding $3,000
- Opening a new account for an individual or entity (Correct answer)
- A customer's account shows unusual transaction patterns
- Renewing an existing account relationship annually
Correct answer: Opening a new account for an individual or entity
The CIP requirement under the USA PATRIOT Act is triggered when a new account is opened, requiring identity verification of the customer.
Question 2: The Employee Retirement Income Security Act (ERISA) imposes which of the following duties on plan fiduciaries?
- Maximizing short-term investment returns regardless of risk
- Acting solely in the interest of plan participants and beneficiaries (Correct answer)
- Following employer directives on investment selection without independent review
- Maintaining 100% of assets in US government securities
Correct answer: Acting solely in the interest of plan participants and beneficiaries
ERISA's duty of loyalty requires fiduciaries to act solely in the interest of plan participants and beneficiaries when managing plan assets.
Question 3: A financial information professional who discovers an error in a previously distributed research report is ethically obligated to:
- Correct the error only if it affects the report's final recommendation
- Promptly issue a correction to all recipients of the original report (Correct answer)
- Delete all digital copies of the erroneous report from firm systems
- Notify only the clients who traded based on the incorrect information
Correct answer: Promptly issue a correction to all recipients of the original report
Ethical standards require prompt, complete correction to all recipients when errors are discovered in distributed research to prevent ongoing harm from inaccurate information.
Question 4: The SEC's Market Access Rule (Rule 15c3-5) requires broker-dealers to implement risk management controls before providing customers with:
- Access to margin accounts with leverage exceeding 2:1
- Direct market access or sponsored access to trade in securities (Correct answer)
- Ability to trade in securities listed on foreign exchanges
- Access to options trading at any level beyond covered calls
Correct answer: Direct market access or sponsored access to trade in securities
Rule 15c3-5 requires broker-dealers to establish risk management controls and supervisory procedures for customers who have direct or sponsored access to trading systems.
Question 5: In the context of financial services ethics, 'window dressing' refers to the practice of:
- Enhancing the visual presentation of client account statements
- Buying high-performing securities at period-end to make a portfolio look better in reports (Correct answer)
- Installing physical security measures at branch office windows
- Updating firm disclosures to reflect recent regulatory changes
Correct answer: Buying high-performing securities at period-end to make a portfolio look better in reports
Window dressing involves purchasing recent high-performers near reporting period-end to make a portfolio appear to have held winning investments, which is a deceptive practice.
Question 6: The CFA Institute's Code of Ethics requires members to place their clients' interests:
- Equal to but not above the interests of their employer
- Ahead of their own personal interests and their employer's interests (Correct answer)
- Below regulatory compliance requirements but above employer directives
- Subject to the profitability needs of the firm they represent
Correct answer: Ahead of their own personal interests and their employer's interests
The CFA Institute Code of Ethics explicitly requires members to place client interests ahead of both personal interests and employer interests.
Question 7: An AML compliance officer at a broker-dealer receives a subpoena from law enforcement requesting customer account records. The correct first step is to:
- Immediately produce all requested records without notifying senior management
- Notify the customer whose records are being sought as required by law
- Contact legal counsel and follow firm procedures before producing any records (Correct answer)
- Destroy any records that might implicate the firm in the investigation
Correct answer: Contact legal counsel and follow firm procedures before producing any records
Upon receiving a legal subpoena, the compliance officer must immediately consult legal counsel and follow established firm procedures to ensure proper legal handling.
FIA Regulatory Compliance & Ethics 4
Under the USA PATRIOT Act, financial institutions must implement a Customer Identification Program (CIP) to verify the identity of customers when: