Investment Jobs Investment Compliance Test 2 — Questions and Answers
Question 1: What is 'front-running' in securities markets?
- Executing trades at the beginning of the trading session
- A broker trading for their own account based on advance knowledge of pending client orders (Correct answer)
- Prioritizing institutional orders over retail orders
- Placing orders before earnings announcements
Correct answer: A broker trading for their own account based on advance knowledge of pending client orders
Front-running is the illegal practice of a broker executing trades in their own account (or tipping others) ahead of known pending client orders to profit from the anticipated price movement.
Question 2: Under ERISA, what is the 'prudent expert rule' for plan fiduciaries?
- Fiduciaries must hire outside experts for all investment decisions
- Fiduciaries must act with the care, skill, prudence, and diligence of a knowledgeable person familiar with such matters (Correct answer)
- Only certified financial planners can manage ERISA plan assets
- All ERISA investments must be approved by the Department of Labor
Correct answer: Fiduciaries must act with the care, skill, prudence, and diligence of a knowledgeable person familiar with such matters
ERISA's prudent expert rule requires plan fiduciaries to act with the care, skill, prudence, and diligence that a prudent person familiar with investment management would use under similar circumstances.
Question 3: What is a 'Suspicious Activity Report' (SAR) and when must it be filed?
- A report filed with the SEC when unusual market volatility is detected
- A report filed with FinCEN when a transaction involves $5,000 or more and is suspected to involve illegal activity (Correct answer)
- A quarterly compliance attestation filed with FINRA
- A report filed with the FBI regarding potential securities fraud
Correct answer: A report filed with FinCEN when a transaction involves $5,000 or more and is suspected to involve illegal activity
A SAR must be filed with the Financial Crimes Enforcement Network (FinCEN) when a firm suspects a transaction of $5,000 or more involves funds from illegal activity, money laundering, or structuring.
Question 4: What is the Volcker Rule and which type of activity does it primarily prohibit?
- It prohibits banks from charging excessive fees; targets retail banking practices
- It prohibits banks from proprietary trading and limits investments in hedge/PE funds (Correct answer)
- It prohibits high-frequency trading; targets algorithmic traders
- It prohibits short selling; targets market manipulation
Correct answer: It prohibits banks from proprietary trading and limits investments in hedge/PE funds
The Volcker Rule (part of the Dodd-Frank Act) prohibits banks from engaging in proprietary trading for their own profit and limits their investments in hedge funds and private equity funds.
Question 5: What is 'soft dollar' arrangement in investment management compliance?
- Paying commissions in foreign currency to avoid disclosure requirements
- Using client brokerage commissions to pay for research and services beyond trade execution (Correct answer)
- Reducing management fees in exchange for longer client lock-up periods
- Fee-sharing arrangements between investment advisers and brokers
Correct answer: Using client brokerage commissions to pay for research and services beyond trade execution
Soft dollar arrangements involve investment managers directing client trades to specific brokers in exchange for research and other services, a practice governed by SEC Section 28(e).
Question 6: What is 'best execution' obligation for broker-dealers?
- The requirement to execute all trades at the lowest possible commission
- The duty to seek the most favorable terms reasonably available when executing client orders (Correct answer)
- The requirement to use the fastest available trading technology
- The obligation to execute trades only on registered exchanges
Correct answer: The duty to seek the most favorable terms reasonably available when executing client orders
Best execution requires broker-dealers to seek the most favorable terms for client orders, considering factors like price, speed, likelihood of execution, and overall transaction cost.
Investment Jobs Investment Compliance Test 2
What is 'front-running' in securities markets?