Trading Jobs Trading Compliance and Regulations 1 — Questions and Answers
Question 1: What is 'insider trading' as defined by the SEC?
- Trading securities as a professional at a large firm
- Trading securities based on material, non-public information in breach of a duty (Correct answer)
- Trading securities within the first hour of market open
- Buying and selling the same security within a single day
Correct answer: Trading securities based on material, non-public information in breach of a duty
Insider trading involves buying or selling securities while in possession of material, non-public information about the company, violating a fiduciary or other duty of trust.
Question 2: What does 'Regulation NMS' govern in US equity markets?
- Margin requirements for broker-dealers
- Rules for the national market system including order protection and best execution (Correct answer)
- Reporting requirements for large trader positions
- Disclosure requirements for corporate insiders
Correct answer: Rules for the national market system including order protection and best execution
Regulation NMS (National Market System) establishes rules for equity trading, including the Order Protection Rule requiring trades be executed at the best available national price.
Question 3: What is 'best execution' in securities trading?
- Executing trades only on the NYSE
- The obligation to seek the most favorable terms reasonably available for client orders (Correct answer)
- Executing the largest block trades at market open
- Completing all client orders before proprietary trades
Correct answer: The obligation to seek the most favorable terms reasonably available for client orders
Best execution requires broker-dealers to take reasonable steps to obtain the most favorable terms for their clients when executing orders, considering price, speed, likelihood of execution, and costs.
Question 4: What is 'front-running' in trading?
- Trading a security before its IPO
- A broker trading for their own account ahead of executing a client's large pending order (Correct answer)
- Placing limit orders before market open
- Trading in anticipation of positive earnings news
Correct answer: A broker trading for their own account ahead of executing a client's large pending order
Front-running occurs when a broker trades on their own account knowing about a client's pending large order that will likely move the market, which is illegal.
Question 5: Under SEC Rule 10b-5, what constitutes securities fraud?
- Any unprofitable trade
- Any untrue statement or omission of material facts in connection with the purchase or sale of securities (Correct answer)
- Trading without a Series 7 license
- Failure to diversify a client's portfolio
Correct answer: Any untrue statement or omission of material facts in connection with the purchase or sale of securities
Rule 10b-5 prohibits making false statements, omitting material facts, or engaging in any scheme to defraud in connection with securities transactions.
Question 6: What is a 'suspicious activity report' (SAR) required for in trading?
- Reporting any trade over $10,000
- Reporting transactions that may involve money laundering, fraud, or other financial crimes (Correct answer)
- Reporting all short sale transactions
- Reporting suspected insider trading directly to the SEC
Correct answer: Reporting transactions that may involve money laundering, fraud, or other financial crimes
Financial institutions including broker-dealers must file SARs with FinCEN when they detect transactions that may involve illegal activity such as money laundering or fraud.
Trading Jobs Trading Compliance and Regulations 1
What is 'insider trading' as defined by the SEC?