Financial Advisor Financial Advisor Ethics and Compliance 4 — Questions and Answers
Question 1: A client gifts a financial advisor tickets to a major sporting event worth $350. Under FINRA rules, what is the gift limit per person per year?
- $100 (Correct answer)
- $250
- $500
- $1,000
Correct answer: $100
FINRA Rule 3220 limits gifts to $100 per person per year to prevent conflicts of interest.
Question 2: Which of the following best describes a 'churning' violation?
- Recommending unsuitable investments to clients
- Excessive trading in a client's account to generate commissions (Correct answer)
- Failing to disclose a conflict of interest
- Selling unregistered securities to retail investors
Correct answer: Excessive trading in a client's account to generate commissions
Churning occurs when a broker excessively trades a client's account primarily to generate commissions rather than to benefit the client.
Question 3: Under SEC Regulation Best Interest (Reg BI), broker-dealers must act in the 'best interest' of retail customers primarily at what point?
- At account opening only
- At the time the recommendation is made (Correct answer)
- Annually during account review
- Only when the client requests advice
Correct answer: At the time the recommendation is made
Reg BI requires broker-dealers to act in the retail customer's best interest at the time a recommendation is made.
Question 4: A financial advisor learns that a publicly traded company is about to announce a major acquisition through a conversation with a corporate insider. Trading on this information would violate:
- The Investment Advisers Act of 1940
- Insider trading laws under the Securities Exchange Act of 1934 (Correct answer)
- FINRA Rule 4512 on customer account information
- The Bank Secrecy Act
Correct answer: Insider trading laws under the Securities Exchange Act of 1934
Trading on material non-public information obtained from a corporate insider violates insider trading provisions of the Securities Exchange Act of 1934.
Question 5: When an investment adviser has a conflict of interest that could affect their advice, the primary ethical obligation is to:
- Avoid the conflict entirely in all cases
- Disclose the conflict to the client (Correct answer)
- Refer the client to another adviser
- Obtain written approval from their compliance department only
Correct answer: Disclose the conflict to the client
Investment advisers must disclose material conflicts of interest to clients so they can make informed decisions.
Question 6: A client's elderly parent contacts an advisor claiming to be the client and requests a large wire transfer. The advisor should:
- Process the transfer as long as the account information matches
- Verify the identity of the caller through established protocols before proceeding (Correct answer)
- Refuse all wire transfers for elderly clients
- Immediately report the call to FINRA
Correct answer: Verify the identity of the caller through established protocols before proceeding
Advisors must follow identity verification protocols before processing transactions to protect clients from fraud and elder financial exploitation.
Question 7: Under the Investment Advisers Act, which of the following is considered a 'scalping' violation?
- Charging excessive management fees
- An adviser recommending securities they secretly plan to sell after the client buys (Correct answer)
- Selling securities at artificially inflated prices
- Front-running a large client order
Correct answer: An adviser recommending securities they secretly plan to sell after the client buys
Scalping occurs when an adviser recommends a security while secretly planning to sell their own holdings once the client's purchase drives up the price.
Financial Advisor Financial Advisor Ethics and Compliance 4
A client gifts a financial advisor tickets to a major sporting event worth $350.
Under FINRA rules, what is the gift limit per person per year?