Financial Advisor Financial Advisor Ethics and Compliance 2 — Questions and Answers
Question 1: A financial advisor learns that a corporate client is about to announce a major acquisition. Trading on this information before the announcement is an example of:
- Front-running
- Insider trading (Correct answer)
- Market timing
- Short selling
Correct answer: Insider trading
Trading securities based on material non-public information is insider trading, which is illegal under SEC Rule 10b-5.
Question 2: What is the 'two-year look-back' rule relevant to under ERISA plan advisory compliance?
- A requirement to review client portfolios every two years
- A restriction on pay-to-play contributions before managing government funds (Correct answer)
- The period an adviser must retain client records
- The time limit for amending Form ADV
Correct answer: A restriction on pay-to-play contributions before managing government funds
Pay-to-play rules impose a two-year look-back period during which certain political contributions can disqualify an adviser from compensation for managing government accounts.
Question 3: Which of the following is an example of a prohibited practice under anti-money laundering (AML) rules for financial advisors?
- Recommending diversified portfolios
- Structuring transactions to avoid CTR reporting thresholds (Correct answer)
- Maintaining client records for five years
- Filing Suspicious Activity Reports (SARs)
Correct answer: Structuring transactions to avoid CTR reporting thresholds
Structuring transactions to stay below the $10,000 Currency Transaction Report threshold ('structuring') is illegal under the Bank Secrecy Act.
Question 4: Under the Investment Advisers Act, which of the following advisers is generally required to register with the SEC?
- An adviser managing less than $25 million in assets
- An adviser managing $110 million or more in assets (Correct answer)
- Any adviser with fewer than 15 clients
- An adviser operating in only one state
Correct answer: An adviser managing $110 million or more in assets
Advisers managing $110 million or more in regulatory assets under management are generally required to register with the SEC.
Question 5: What is the purpose of a financial advisor's written compliance policies and procedures under SEC Rule 206(4)-7?
- To market the firm's services
- To prevent, detect, and correct violations of the Advisers Act (Correct answer)
- To establish billing rates for clients
- To document investment performance
Correct answer: To prevent, detect, and correct violations of the Advisers Act
SEC Rule 206(4)-7 requires registered investment advisers to adopt written compliance policies designed to prevent and detect Advisers Act violations.
Question 6: A financial advisor simultaneously represents both the buyer and seller of the same securities transaction. This is known as:
- Agency cross transaction (Correct answer)
- Principal transaction
- Arbitrage
- Soft-dollar arrangement
Correct answer: Agency cross transaction
An agency cross transaction occurs when an adviser acts as agent for both buyer and seller in the same trade, which requires specific disclosure and client consent.
Financial Advisor Financial Advisor Ethics and Compliance 2
A financial advisor learns that a corporate client is about to announce a major acquisition.
Trading on this information before the announcement is an example of: