Stock Trading Regulatory Frameworks & Compliance 4 — Questions and Answers
Question 1: The SEC's Market Access Rule (Rule 15c3-5) requires broker-dealers with market access to implement which controls before orders reach an exchange?
- Post-trade surveillance systems only
- Pre-trade risk management controls and supervisory procedures (Correct answer)
- Daily reconciliation with the DTCC
- Customer margin agreements for all accounts
Correct answer: Pre-trade risk management controls and supervisory procedures
Rule 15c3-5 mandates that broker-dealers implement pre-trade financial and regulatory risk controls, such as order size limits, to prevent erroneous or manipulative orders from reaching markets.
Question 2: Under the Bank Secrecy Act (BSA), broker-dealers must file a Suspicious Activity Report (SAR) within how many days of detecting suspicious activity?
- 10 calendar days
- 20 business days
- 30 calendar days (Correct answer)
- 60 calendar days
Correct answer: 30 calendar days
BSA regulations require broker-dealers to file a SAR within 30 calendar days of detecting facts that may constitute suspicious activity.
Question 3: Which of the following best describes the SEC's Regulation SHO locate requirement for short selling?
- Short sellers must deposit 150% of the trade value as collateral before shorting
- Broker-dealers must have reasonable grounds to believe shares can be borrowed before executing a short sale (Correct answer)
- Short sellers must notify the exchange of their position within one business day
- All short positions must be closed out within T+2 settlement
Correct answer: Broker-dealers must have reasonable grounds to believe shares can be borrowed before executing a short sale
Regulation SHO's locate requirement prohibits broker-dealers from accepting short sale orders unless they have first located securities available for borrowing.
Question 4: An investment adviser with $110 million in assets under management must register with which regulatory body?
- FINRA
- State securities regulators
- The SEC (Correct answer)
- The OCC
Correct answer: The SEC
Investment advisers with $110 million or more in AUM are required to register with the SEC rather than with state regulators.
Question 5: What does the term 'Chinese Wall' refer to in the context of securities compliance?
- A firewall blocking foreign investors from accessing US exchanges
- Information barriers between a firm's investment banking and trading departments (Correct answer)
- A restriction preventing analysts from trading IPO shares
- SEC regulations limiting foreign broker-dealers operating in the US
Correct answer: Information barriers between a firm's investment banking and trading departments
A Chinese Wall (information barrier) separates a firm's investment banking division, which handles material non-public information, from its trading and research departments to prevent insider trading.
Question 6: FINRA Rule 2010 (Standards of Commercial Honor) is broadly used to sanction which type of broker-dealer conduct?
- Only conduct explicitly prohibited in other FINRA rules
- Any conduct inconsistent with just and equitable principles of trade (Correct answer)
- Violations of net capital requirements only
- Failures to file required regulatory reports on time
Correct answer: Any conduct inconsistent with just and equitable principles of trade
Rule 2010 is a broad catch-all provision allowing FINRA to discipline members for any conduct that violates ethical standards, even absent a specific rule violation.
Question 7: Under SEC Rule 17a-4, broker-dealers must retain electronic communications (including emails and instant messages) for a minimum of how long?
- 1 year
- 3 years (Correct answer)
- 5 years
- 7 years
Correct answer: 3 years
Rule 17a-4 requires broker-dealers to preserve most business records, including electronic communications, for a minimum of three years.
Stock Trading Regulatory Frameworks & Compliance 4
The SEC's Market Access Rule (Rule 15c3-5) requires broker-dealers with market access to implement which controls before orders reach an exchange?