Investment Jobs Investment Compliance Test 1 — Questions and Answers
Question 1: Under the SEC's Regulation Best Interest (Reg BI), broker-dealers must act in whose best interest when making recommendations?
- The broker-dealer's shareholders
- The retail customer's best interest at the time the recommendation is made (Correct answer)
- The clearing firm's interest
- The issuer of the recommended security
Correct answer: The retail customer's best interest at the time the recommendation is made
Reg BI requires broker-dealers to act in the best interest of retail customers when making security recommendations, not merely recommend 'suitable' products.
Question 2: What is the primary purpose of the Bank Secrecy Act (BSA) in the investment industry?
- To regulate cross-border securities transactions
- To require financial institutions to assist government agencies in detecting and preventing money laundering (Correct answer)
- To protect bank customer deposit information from disclosure
- To regulate bank investment in securities
Correct answer: To require financial institutions to assist government agencies in detecting and preventing money laundering
The Bank Secrecy Act requires financial institutions to maintain records and file reports that help identify, detect, and deter money laundering and other financial crimes.
Question 3: What is 'insider trading' under US securities law?
- Trading by employees of the company whose stock is traded
- Trading securities based on material, non-public information in breach of a duty (Correct answer)
- Trading before market open using pre-market data
- Institutional block trades executed off-exchange
Correct answer: Trading securities based on material, non-public information in breach of a duty
Insider trading is the illegal practice of trading securities based on material information that is not publicly available and was obtained through a breach of fiduciary duty or similar relationship of trust.
Question 4: What is a 'Chinese Wall' (information barrier) in financial services compliance?
- Firewall software protecting trading systems from cyberattacks
- Policies and procedures designed to prevent the flow of material non-public information between departments (Correct answer)
- Physical separation of trading floors
- Regulations limiting foreign investment in US securities
Correct answer: Policies and procedures designed to prevent the flow of material non-public information between departments
A Chinese Wall is a compliance structure with information barriers between departments (e.g., investment banking and equity research) to prevent insider trading and conflicts of interest.
Question 5: Which rule requires investment advisers to adopt a code of ethics that sets standards of conduct and requires reporting of personal securities transactions?
- SEC Rule 10b-5
- SEC Rule 206(4)-7 (Correct answer)
- SEC Rule 17a-4
- FINRA Rule 3110
Correct answer: SEC Rule 206(4)-7
SEC Rule 206(4)-7 (the Compliance Rule) requires registered investment advisers to adopt and implement written compliance policies, including a code of ethics governing personal securities trading.
Question 6: What does AML (Anti-Money Laundering) compliance require investment firms to implement?
- Daily reporting of all transactions to the SEC
- Customer identification programs, transaction monitoring, and suspicious activity reporting (Correct answer)
- Quarterly audits by independent firms
- Annual stress tests of liquidity reserves
Correct answer: Customer identification programs, transaction monitoring, and suspicious activity reporting
AML compliance requires investment firms to implement Customer Identification Programs (CIP), monitor transactions for suspicious activity, and file Suspicious Activity Reports (SARs) with FinCEN.
Investment Jobs Investment Compliance Test 1
Under the SEC's Regulation Best Interest (Reg BI), broker-dealers must act in whose best interest when making recommendations?