Stock Broker Securities Regulations & Compliance 2 — Questions and Answers
Question 1: What is the 'know your customer' (KYC) obligation primarily designed to prevent?
- Excessive trading
- Money laundering and fraud (Correct answer)
- Margin calls
- Short selling
Correct answer: Money laundering and fraud
KYC obligations require broker-dealers to verify customer identities and understand their financial profiles primarily to prevent money laundering, fraud, and terrorist financing.
Question 2: A registered representative who recommends unsuitable investments to a customer may violate which FINRA rule?
- FINRA Rule 2010
- FINRA Rule 4512
- FINRA Rule 2111 (Correct answer)
- FINRA Rule 3110
Correct answer: FINRA Rule 2111
FINRA Rule 2111 (Suitability) requires that recommendations be suitable for the customer based on their investment profile, including risk tolerance and financial situation.
Question 3: What does 'churning' refer to in the context of broker-dealer regulations?
- Excessive trading in a customer account to generate commissions (Correct answer)
- Failing to deliver securities on time
- Trading on insider information
- Unauthorized borrowing of customer funds
Correct answer: Excessive trading in a customer account to generate commissions
Churning is the prohibited practice of excessively trading in a customer's account primarily to generate commissions for the broker, regardless of the customer's investment objectives.
Question 4: Under FINRA rules, what is the maximum annual contribution an employee of a member firm may give to a municipal securities issuer official who can influence the firm's business?
- $100
- $250 (Correct answer)
- $500
- $1,000
Correct answer: $250
MSRB Rule G-37 and FINRA's pay-to-play rules limit contributions to $250 per official per year by individuals who can vote in elections where the official appears.
Question 5: Which act requires broker-dealers to file Suspicious Activity Reports (SARs) for transactions that may involve money laundering?
- Sarbanes-Oxley Act
- Bank Secrecy Act (Correct answer)
- Dodd-Frank Act
- Patriot Act
Correct answer: Bank Secrecy Act
The Bank Secrecy Act (BSA) requires broker-dealers to file SARs for transactions of $5,000 or more that involve potential money laundering or other financial crimes.
Question 6: What is the purpose of FINRA's arbitration forum for disputes between customers and broker-dealers?
- To replace criminal prosecution of brokers
- To provide an alternative to court litigation for resolving disputes (Correct answer)
- To set commission rates
- To issue trading licenses
Correct answer: To provide an alternative to court litigation for resolving disputes
FINRA's arbitration forum provides a faster, less expensive alternative to civil court litigation for resolving disputes between investors and broker-dealers or their registered representatives.
Stock Broker Securities Regulations & Compliance 2
What is the 'know your customer' (KYC) obligation primarily designed to prevent?