Stock Trading Regulatory Frameworks & Compliance 2 — Questions and Answers
Question 1: Which SEC rule requires broker-dealers to disclose payment for order flow arrangements to customers?
- Rule 10b-5
- Rule 606 (Correct answer)
- Regulation SHO
- Rule 15c3-1
Correct answer: Rule 606
SEC Rule 606 mandates quarterly disclosure of order routing practices, including payment for order flow received from market makers.
Question 2: Under FINRA Rule 4370, member firms must establish and maintain which of the following?
- An anti-money laundering program
- A business continuity plan (Correct answer)
- A margin lending policy
- A best execution committee
Correct answer: A business continuity plan
FINRA Rule 4370 requires member firms to create and maintain a written Business Continuity Plan (BCP) addressing various business disruptions.
Question 3: The Volcker Rule, enacted as part of Dodd-Frank, primarily restricts banks from engaging in which activity?
- Underwriting municipal bonds
- Proprietary trading for their own account (Correct answer)
- Offering margin accounts to retail clients
- Acting as transfer agents
Correct answer: Proprietary trading for their own account
The Volcker Rule prohibits banks from engaging in short-term proprietary trading of securities for their own profit.
Question 4: A trader who uses material non-public information about a pending merger to profit in the options market violates which primary rule?
- SEC Rule 144
- SEC Rule 10b-5 (Correct answer)
- Regulation T
- FINRA Rule 2111
Correct answer: SEC Rule 10b-5
SEC Rule 10b-5 broadly prohibits fraud and insider trading, including trading on material non-public information in any security.
Question 5: Under Regulation NMS, the Order Protection Rule (Rule 611) prohibits trade-throughs except in certain exemptions. Which scenario qualifies as an exemption?
- Large-block trades executed manually at a broker's discretion
- Intermarket sweep orders (ISOs) sent to multiple venues simultaneously (Correct answer)
- All odd-lot transactions under 100 shares
- Trades placed during the pre-market session
Correct answer: Intermarket sweep orders (ISOs) sent to multiple venues simultaneously
Intermarket sweep orders are an explicit Rule 611 exemption, allowing traders to execute at multiple price levels across exchanges simultaneously.
Question 6: A pattern day trader (PDT) in the US must maintain a minimum equity of how much in their margin account?
- $10,000
- $15,000
- $25,000 (Correct answer)
- $50,000
Correct answer: $25,000
FINRA rules require pattern day traders to maintain at least $25,000 in their margin account on any day they day trade.
Question 7: Which regulatory body oversees the National Futures Association (NFA) and commodity futures trading in the US?
- SEC
- FINRA
- CFTC (Correct answer)
- OCC
Correct answer: CFTC
The Commodity Futures Trading Commission (CFTC) is the federal agency that oversees futures and options markets, with the NFA acting as its self-regulatory organization.
Stock Trading Regulatory Frameworks & Compliance 2
Which SEC rule requires broker-dealers to disclose payment for order flow arrangements to customers?