FIA Regulatory Compliance & Ethics 5 — Questions and Answers
Question 1: Under SEC Rule 10b-5, which element is NOT required to establish a securities fraud claim?
- A material misstatement or omission
- Scienter (intent to deceive or defraud)
- That the defendant profited from the fraudulent activity (Correct answer)
- A connection between the fraud and the purchase or sale of a security
Correct answer: That the defendant profited from the fraudulent activity
Profit by the defendant is not a required element of a Rule 10b-5 claim; the key elements are materiality, scienter, reliance, and connection to a securities transaction.
Question 2: FINRA's Office of Dispute Resolution (ODR) primarily handles disputes through:
- Federal court litigation between investors and broker-dealers
- Arbitration and mediation proceedings (Correct answer)
- Administrative enforcement actions against registered representatives
- Criminal referrals to the Department of Justice
Correct answer: Arbitration and mediation proceedings
FINRA's ODR administers arbitration and mediation proceedings to resolve disputes between investors and broker-dealers outside of court.
Question 3: A financial professional is asked by a colleague to recommend a client's money to invest in a private deal in which the colleague has an undisclosed financial interest. Accepting this arrangement without disclosure would violate:
- The firm's order routing policy
- Anti-kickback and conflict of interest standards (Correct answer)
- Regulation T margin requirements
- Net capital requirements under Rule 15c3-1
Correct answer: Anti-kickback and conflict of interest standards
Recommending an investment where a colleague has an undisclosed financial interest creates an undisclosed conflict that violates anti-kickback rules and conflict of interest ethical standards.
Question 4: The Foreign Corrupt Practices Act (FCPA) prohibits US persons and companies from:
- Trading securities of foreign companies on US exchanges
- Bribing foreign government officials to obtain or retain business (Correct answer)
- Employing foreign nationals in senior financial roles without special registration
- Investing client assets in foreign sovereign debt without disclosure
Correct answer: Bribing foreign government officials to obtain or retain business
The FCPA makes it unlawful for US persons and businesses to bribe foreign government officials for business advantages.
Question 5: Under Regulation Best Interest (Reg BI), which of the following is a required component of a broker-dealer's obligation to retail customers?
- Providing a written guarantee of performance for all recommendations
- Acting in the best interest of the customer without placing the firm's interests ahead (Correct answer)
- Offering the lowest-cost product available in every product category
- Obtaining customer approval before any portfolio rebalancing
Correct answer: Acting in the best interest of the customer without placing the firm's interests ahead
Reg BI requires broker-dealers to act in the best interest of retail customers at the time of a recommendation, without placing their own interests ahead of the customer's.
Question 6: The practice of 'layering' in securities markets, which involves placing and rapidly canceling orders to create a false appearance of market activity, is a form of:
- Legitimate algorithmic trading strategy
- Market manipulation prohibited under securities law (Correct answer)
- Arbitrage strategy permitted under Regulation SHO
- Hedging activity exempt from reporting requirements
Correct answer: Market manipulation prohibited under securities law
Layering is a form of market manipulation that creates a misleading impression of supply or demand by placing orders with no intent to execute them, which is prohibited under securities law.
Question 7: A registered investment adviser that manages assets above the threshold defined by the Investment Advisers Act must register with:
- FINRA and file Form BD
- The SEC and file Form ADV (Correct answer)
- The state securities regulator in each state where clients reside
- The Federal Reserve and file Form FR Y-7
Correct answer: The SEC and file Form ADV
Investment advisers managing assets above the applicable threshold (generally $110 million in regulatory AUM) must register with the SEC by filing Form ADV.
FIA Regulatory Compliance & Ethics 5
Under SEC Rule 10b-5, which element is NOT required to establish a securities fraud claim?