WMS Regulatory Framework & Compliance 2 — Questions and Answers
Question 1: Under Regulation Best Interest (Reg BI), broker-dealers must act in a client's best interest at the time of a recommendation. Which disclosure document is required to summarize this obligation?
- Form ADV Part 2
- Form CRS (Client Relationship Summary) (Correct answer)
- Form U4
- Schedule 13D
Correct answer: Form CRS (Client Relationship Summary)
Form CRS is the mandated disclosure document that broker-dealers and investment advisers must provide to retail investors under Reg BI and related SEC rules.
Question 2: Which federal act requires wealth managers who custody client assets to undergo an annual surprise examination by an independent public accountant?
- Securities Act of 1933
- Investment Advisers Act of 1940 (Correct answer)
- Securities Exchange Act of 1934
- Gramm-Leach-Bliley Act
Correct answer: Investment Advisers Act of 1940
The Investment Advisers Act of 1940 and its custody rule (Rule 206(4)-2) require RIAs that have custody of client assets to arrange for annual surprise examinations.
Question 3: A client asks their wealth manager to move funds into an account held by a third party they have never met. Under BSA/AML rules, the most appropriate first step is to:
- Execute the transfer immediately as the client directs
- File a Currency Transaction Report (CTR) regardless of amount
- Conduct enhanced due diligence and assess for suspicious activity (Correct answer)
- Refuse the transaction and close the account
Correct answer: Conduct enhanced due diligence and assess for suspicious activity
Unusual instructions involving unknown third parties are red flags; the adviser must conduct enhanced due diligence and potentially file a Suspicious Activity Report (SAR) if warranted.
Question 4: FINRA Rule 4512 requires member firms to make reasonable efforts to obtain which information for each customer account?
- Client's Social Security number and net worth only
- Essential facts including investment objectives, financial situation, and risk tolerance (Correct answer)
- Client's tax return for the prior three years
- A signed arbitration waiver before opening the account
Correct answer: Essential facts including investment objectives, financial situation, and risk tolerance
FINRA Rule 4512 mandates that firms collect essential customer information such as investment objectives, financial situation, and risk tolerance to know their customers.
Question 5: Which of the following best describes a 'material non-public information' (MNPI) breach in the context of wealth management compliance?
- Sharing a client's portfolio performance with a prospective client
- Trading on information about a merger obtained from a corporate insider before public announcement (Correct answer)
- Discussing general market trends in a client meeting
- Recommending a publicly traded security without prior research
Correct answer: Trading on information about a merger obtained from a corporate insider before public announcement
Trading on MNPI obtained from insiders constitutes insider trading and violates Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5.
Question 6: The USA PATRIOT Act imposed new obligations on financial institutions primarily to combat:
- Excessive fee disclosure gaps
- Tax evasion by high-net-worth individuals
- Money laundering and terrorist financing (Correct answer)
- Unsolicited investment solicitations
Correct answer: Money laundering and terrorist financing
The USA PATRIOT Act of 2001 strengthened BSA requirements to combat money laundering and the financing of terrorism, requiring enhanced customer identification and monitoring.
Question 7: Under the SEC's Pay-to-Play Rule (Rule 206(4)-5), investment advisers are generally prohibited from receiving advisory compensation for how long after a covered political contribution?
- 6 months
- 1 year
- 2 years (Correct answer)
- 5 years
Correct answer: 2 years
Rule 206(4)-5 imposes a two-year 'time out' on receiving compensation from a government client after a covered political contribution by the adviser or certain covered associates.
WMS Regulatory Framework & Compliance 2
Under Regulation Best Interest (Reg BI), broker-dealers must act in a client's best interest at the time of a recommendation.
Which disclosure document is required to summarize this obligation?