Stock Trading Regulatory Frameworks & Compliance 3 — Questions and Answers
Question 1: Which provision of Dodd-Frank established the SEC's whistleblower program, offering awards of 10-30% of sanctions exceeding $1 million?
- Section 929A
- Section 748
- Section 922 (Correct answer)
- Section 1502
Correct answer: Section 922
Section 922 of Dodd-Frank created the SEC's whistleblower program, incentivizing individuals to report securities law violations.
Question 2: Under SEC Regulation S-P, broker-dealers must provide customers with a privacy notice describing their information sharing practices. When must the initial notice be delivered?
- Within 30 days of account opening
- Annually on the account anniversary
- At the time of establishing the customer relationship (Correct answer)
- Before any securities transaction is executed
Correct answer: At the time of establishing the customer relationship
Regulation S-P requires initial privacy notices to be delivered at the time of establishing a customer relationship, not after.
Question 3: FINRA's suitability rule (Rule 2111) was largely replaced in 2020 by which SEC standard that imposes a higher 'best interest' obligation on broker-dealers?
- Regulation BI (Best Interest) (Correct answer)
- Regulation D
- Regulation FD
- Regulation AC
Correct answer: Regulation BI (Best Interest)
Regulation Best Interest (Reg BI), effective June 2020, raised the standard for broker-dealers recommending securities to retail customers above the prior suitability standard.
Question 4: What is the primary purpose of SEC Rule 144 in the context of stock trading?
- Setting margin requirements for volatile stocks
- Governing the public resale of restricted and control securities (Correct answer)
- Requiring disclosure of short positions above 5%
- Establishing lock-up periods for IPO underwriters
Correct answer: Governing the public resale of restricted and control securities
Rule 144 provides a safe harbor for affiliates and holders of restricted securities to sell shares publicly under specified conditions including holding periods and volume limits.
Question 5: A company's CEO sells 50,000 shares of company stock without filing a Form 4 with the SEC. Which reporting requirement did the CEO violate?
- Section 13(d) beneficial ownership reporting
- Section 16(a) insider reporting (Correct answer)
- Regulation FD disclosure rules
- Schedule 13G filing requirements
Correct answer: Section 16(a) insider reporting
Section 16(a) of the Securities Exchange Act requires corporate insiders to report changes in their holdings on Form 4 within two business days.
Question 6: Regulation FD (Fair Disclosure) was enacted to prevent companies from selectively disclosing material information to which group?
- Retail investors before institutional investors
- Certain analysts or investors before the general public (Correct answer)
- Foreign investors before domestic investors
- Market makers before the public
Correct answer: Certain analysts or investors before the general public
Reg FD requires that when a company discloses material non-public information to securities professionals, it must simultaneously or promptly make that information public.
Question 7: Under FINRA Rule 3110, member firms are required to establish supervisory systems. Which of the following is a key component of this requirement?
- Filing monthly trade reports with the CFTC
- Designating a registered principal to supervise each type of business activity (Correct answer)
- Maintaining a minimum net capital of $250,000
- Conducting quarterly stress tests on trading algorithms
Correct answer: Designating a registered principal to supervise each type of business activity
FINRA Rule 3110 requires firms to designate appropriately registered principals responsible for supervising each business line and registered representative.
Stock Trading Regulatory Frameworks & Compliance 3
Which provision of Dodd-Frank established the SEC's whistleblower program, offering awards of 10-30% of sanctions exceeding $1 million?