Trading Jobs Trading Compliance and Regulations 2 — Questions and Answers
Question 1: What does 'AML' stand for in financial compliance?
- Automated Market Liquidity
- Anti-Money Laundering (Correct answer)
- Alternative Market Listing
- Advanced Margin Lending
Correct answer: Anti-Money Laundering
AML stands for Anti-Money Laundering — a set of laws, regulations, and procedures that prevent criminals from disguising illegally obtained funds as legitimate income.
Question 2: What is 'know your customer' (KYC) in financial services?
- A requirement to memorize all client investment preferences
- The process of verifying a client's identity and understanding their financial situation (Correct answer)
- A FINRA test for client relationship managers
- A requirement to monitor client accounts for trading activity
Correct answer: The process of verifying a client's identity and understanding their financial situation
KYC is a regulatory requirement for financial institutions to verify customer identity, assess their risk profile, and understand the source of their funds to prevent fraud and money laundering.
Question 3: What is 'wash trading' and why is it prohibited?
- Canceling and re-entering orders repeatedly
- Simultaneously buying and selling the same security to create artificial trading volume (Correct answer)
- Shorting a stock you already own
- Trading the same stock in multiple accounts
Correct answer: Simultaneously buying and selling the same security to create artificial trading volume
Wash trading involves entering offsetting buy and sell orders in the same security to create the appearance of active trading without actual change in ownership, which manipulates market data.
Question 4: What are 'restricted securities' under SEC Rule 144?
- Securities that cannot be traded by retail investors
- Unregistered securities acquired from issuers in private transactions (Correct answer)
- Penny stocks trading below $1
- Securities under investigation by the SEC
Correct answer: Unregistered securities acquired from issuers in private transactions
Restricted securities are unregistered shares acquired directly from the issuer or an affiliate in a private transaction, subject to holding period and resale limitations under Rule 144.
Question 5: What is 'churning' in a brokerage account context?
- High volatility in a trading account
- Excessive trading by a broker in a client's account to generate commissions (Correct answer)
- A trading strategy that rebalances frequently
- Rotating between asset classes based on market conditions
Correct answer: Excessive trading by a broker in a client's account to generate commissions
Churning refers to a broker excessively trading in a client's account primarily to generate commissions rather than to benefit the client, which is prohibited under FINRA rules.
Question 6: What does 'Regulation SHO' govern in US securities markets?
- Options position reporting
- Short selling practices including locate requirements and close-out obligations (Correct answer)
- Margin requirements for short positions
- SEC registration of short sellers
Correct answer: Short selling practices including locate requirements and close-out obligations
Regulation SHO governs short selling, requiring broker-dealers to locate securities before executing a short sale and to close out 'fail to deliver' positions within specified timeframes.
Trading Jobs Trading Compliance and Regulations 2
What does 'AML' stand for in financial compliance?