WMS Regulatory Framework & Compliance 3 — Questions and Answers
Question 1: A wealth manager registered as an RIA with $150 million in AUM is subject to registration with:
- FINRA only
- The SEC only (Correct answer)
- The state securities regulator only
- Both the SEC and state regulator simultaneously
Correct answer: The SEC only
Investment advisers with $100 million or more in AUM generally must register with the SEC rather than state regulators under the Investment Advisers Act of 1940.
Question 2: Which provision of ERISA requires plan fiduciaries to act prudently and solely in the interest of plan participants and beneficiaries?
- Section 404 — Fiduciary Duties (Correct answer)
- Section 302 — Minimum Funding Standards
- Section 601 — Continuation Coverage
- Section 203 — Vesting Standards
Correct answer: Section 404 — Fiduciary Duties
ERISA Section 404 codifies the prudent man standard and the exclusive benefit rule that govern how plan fiduciaries must manage retirement plan assets.
Question 3: Under the Investment Company Act of 1940, a mutual fund that invests primarily in stocks of other companies must generally register as which type of investment company?
- Unit investment trust
- Face-amount certificate company
- Management investment company (open-end fund) (Correct answer)
- Closed-end fund with a fixed share structure
Correct answer: Management investment company (open-end fund)
Most mutual funds are open-end management investment companies under the Investment Company Act of 1940, issuing and redeeming shares on demand at NAV.
Question 4: A client receives a large inheritance and deposits $25,000 in cash at a bank branch. Under the Bank Secrecy Act, the bank must file a:
- Suspicious Activity Report (SAR)
- Currency Transaction Report (CTR) (Correct answer)
- Foreign Bank Account Report (FBAR)
- Form 8300 with the IRS only
Correct answer: Currency Transaction Report (CTR)
Banks must file a CTR for any cash transaction exceeding $10,000 in a single business day, regardless of whether suspicious activity is suspected.
Question 5: When a wealth manager identifies a conflict of interest that cannot be eliminated, the most appropriate compliance action is to:
- Ignore it if it is unlikely to harm the client materially
- Disclose it fully to the affected client and obtain informed consent (Correct answer)
- Transfer the client to a different adviser within the firm
- Report it to FINRA within 30 days
Correct answer: Disclose it fully to the affected client and obtain informed consent
The fiduciary standard under the Investment Advisers Act requires full and fair disclosure of conflicts so clients can make informed decisions.
Question 6: Which regulatory body has primary authority over the supervision of broker-dealers operating in the United States?
- CFTC
- OCC
- FINRA (Correct answer)
- FDIC
Correct answer: FINRA
FINRA is the self-regulatory organization (SRO) with primary responsibility for supervising broker-dealer conduct and examining for regulatory compliance.
Question 7: The 'three-part test' for determining whether a person is an investment adviser under the Investment Advisers Act of 1940 requires that the person must:
- Manage assets, charge a fee, and employ at least two advisers
- Be in the business of giving advice, for compensation, about securities (Correct answer)
- Have $25 million AUM, a Series 65 license, and a written advisory agreement
- Provide financial planning, custody services, and investment execution
Correct answer: Be in the business of giving advice, for compensation, about securities
The SEC's three-part test requires (1) providing advice or analysis about securities, (2) as part of a regular business, and (3) for compensation.
WMS Regulatory Framework & Compliance 3
A wealth manager registered as an RIA with $150 million in AUM is subject to registration with: