CAIA - 34 - Regulation and Compliance

Question 1

The 3 key principles of financial regulations are:

1.

2.

3.

Answer 1

The 3 key principles of financial regulations are:

1. Transparency

2. Integrity and fairness

3. Social and Economic Protection through Law

Question 2

The ___ ___ ___ ___ ___ ___ ___ governs trading of securities on the secondary market and regulates exchanges and broker-dealers in order to protect the investing public.

Answer 2

The U.S. Securities Exchange Act of 1934 governs trading of securities on the secondary market and regulates exchanges and broker-dealers in order to protect the investing public.

Question 3

The Securities Exchange Act of 1934 created the ___ and ___ ___ to enforce federal securities laws and industry regulation.

Answer 3

The Securities Exchange Act of 1934 created the Securities and Exchange Commission to enforce federal securities laws and industry regulation.

Question 4

After the 1929 stock market crash, Congress enacted the ___ ___of ___ to regulate the offer and sale of securities to the U.S. public in the primary market.

Answer 4

After the 1929 stock market crash, Congress enacted the Securities Act of 1933 to regulate the offer and sale of securities to the U.S. public in the primary market.

Question 5

The Securities Act of 1933 has two basic objectives:

1. Ensure ___ of ___ ___
2. Establish laws against ___ and ___ activities

Answer 5

The Securities Act of 1933 has two basic objectives:

1. Ensure transparency of financial statements
2. Establish laws against misrepresentation and fraudulent activities

Question 6

The ___ ___ ___ of ___defines the role and responsibilities of investment advisers.

Answer 6

The Investment Advisers Act of 1940 defines the role and responsibilities of investment advisers.

Question 7

Until ___, most investment advisors were subject to regulation by the SEC and at least one state regulatory agency. The Investment Advisors Act was amended in ___and ___so that small and mid-sized advisors are regulated by the ___and large advisers are regulated by the ___.

Answer 7

Until 1996, most investment advisors were subject to regulation by the SEC and at least one state regulatory agency. The Investment Advisors Act was amended in 1996 and 2010 so that small and mid-sized advisors are regulated by the state and large advisers are regulated by the SEC.

Question 8

The ___-___Act was passed in ___to attempt to lower risk in parts of the U.S. financial system after the global financial crisis.

Answer 8

The Dodd-Frank Act was passed in 2010 to attempt to lower risk in parts of the U.S. financial system after the global financial crisis.

Question 9

The ___ ___ ___ ___ monitors the performance of “too big to fail” companies.

Answer 9

The Financial Stability Oversight Council monitors the performance of “too big to fail” companies.

Question 10

The ___ ___ ___ facilitates liquidation of large, complex financial institutions that are close to failing.

Answer 10

The Orderly Liquidation Authority facilitates liquidation of large, complex financial institutions that are close to failing.

Question 11

The ___ ___ ___ provides money to assist with liquidation of large financial companies placed in receivership.

Answer 11

The Orderly Liquidation Fund provides money to assist with liquidation of large financial companies placed in receivership.

Question 12

The ___ ___restricts commercial banks’ investments in hedge funds, private equity funds, and proprietary trading strategies; and regulates derivatives trading.

Answer 12

The Volcker Rule restricts commercial banks’ investments in hedge funds, private equity funds, and proprietary trading strategies; and regulates derivatives trading.

Question 13

All 50 state securities commissions have ___ ___ ___ designed to protect state interests and prevent fraudulent activities within a state.

Answer 13

All 50 state securities commissions have blue sky laws designed to protect state interests and prevent fraudulent activities within a state.

Question 14

Regulation of alternative investments focuses more on monitoring and controlling ___ ___than on ___ ___.

Answer 14

Regulation of alternative investments focuses more on monitoring and controlling systemic risks than on protecting investors.

Question 15

Two core principles embody the U.S. regulatory scheme:

1. Eliminate or control ___
2. Discourage ___ ___

Answer 15

Two core principles embody the U.S. regulatory scheme:

1. Eliminate or control fraud
2. Discourage insider trading

Question 16

Investors in 3c1 hedge funds should be an ___ ___with a net worth of $___ million or income of $___in each of the past two years or $___jointly with a spouse.

Answer 16

Investors in 3c1 hedge funds should be an accredited investor with a net worth of $1 million or income of $200,000 in each of the past two years or $300,000 jointly with a spouse.

Question 17

Investors in 3c7 hedge funds should be a ___ ___, who is an individual investor with minimum investments of $___ million or an institutional investor with minimum investments of $___ million

Answer 17

Investors in 3c7 hedge funds should be a qualified purchaser, who is an individual investor with minimum investments of $5 million or an institutional investor with minimum investments of $25 million

Question 18

Prior to Dodd-Frank, convicting an individual of aiding or abetting required the SEC to establish ___ and substantial ___. Now it merely has to show ___.

Answer 18

Prior to Dodd-Frank, convicting an individual of aiding or abetting required the SEC to establish knowledge and substantial assistance. Now it merely has to show recklessness.

Question 19

Asset size for regulatory purposes is calculated as ___ ___ ___ ___.

Answer 19

Asset size for regulatory purposes is calculated as regulatory assets under management.

Question 20

A hedge fund may register with only the state if it is between $___-___million, is located in a state that ___ ___and is subject to ___by the state.

Answer 20

A hedge fund may register with only the state if it is between $25-100 million, is located in a state that requires registration and is subject to examinations by the state.

Question 21

Non-U.S. based hedge funds with more than ___ U.S. clients and investors with AUM of more than $___million must register with the SEC.

Answer 21

Non-U.S. based hedge funds with more than 15 U.S. clients and investors with AUM of more than $25 million must register with the SEC.

Question 22

Once a hedge fund determines that it must register with the SEC, it completes and files ___ ___

Answer 22

Once a hedge fund determines that it must register with the SEC, it completes and files Form ADV

Question 23

___ ___ of Form ADV provides information about the hedge fund, its manager, and all associated persons.

Answer 23

Part 1 of Form ADV provides information about the hedge fund, its manager, and all associated persons.

Question 24

___ ___ of Form ADV requires information for the hedge fund’s clients

Answer 24

Part 2 of Form ADV requires information for the hedge fund’s clients

Question 25

Rule ___ requires registered advisers to establish internal compliance programs, which includes having a chief compliance officer who develops compliance procedures and whose primary responsibility is overseeing and managing compliance issues.

Answer 25

Rule 206(4)-7 requires registered advisers to establish internal compliance programs, which includes having a chief compliance officer who develops compliance procedures and whose primary responsibility is overseeing and managing compliance issues.

Question 26

The CCO is responsible for the following:

1. ___ and ___
2. Review of ___ ___
3. ___ ___
4. ___ ___
5. ___of ___

Answer 26

The CCO is responsible for the following:

1. Testing and reporting
2. Review of marketing materials
3. Record keeping
4. Annual review
5. Code of Ethics

Question 27

There are 2 important compliance issues regarding marketing materials:

1. No ___ or ___
2. ___must be ___-___

Answer 27

There are 2 important compliance issues regarding marketing materials:

1. No testimonials or endorsements
2. Performance must be long-term

Question 28

Marketing materials must include the following:

1. ___ or ___ ___ affecting performance
2. Performance ___-of-___

Answer 28

Marketing materials must include the following:

1. Market or economic conditions affecting performance
2. Performance net-of-fees

Question 29

Gross performance (may/may not) be presented be presented with net figures.

Answer 29

Gross performance may be presented be presented with net figures.

Question 30

Custodial fees (do/do not) need to be netted out of marketing materials.

Answer 30

Custodial fees do not need to be netted out of marketing materials.

Question 31

Performance results (may/may not) deduct the highest fee charged to a client.

Answer 31

Performance results may deduct the highest fee charged to a client.

Question 32

Gross performance (may/may not) be presented one-on-one to investors and institutions.

Answer 32

Gross performance may be presented one-on-one to investors and institutions.

Question 33

There are 3 types of SEC inspections:

1.

2.

3.

Answer 33

There are 3 types of SEC inspections:

1. Regular

2. Cause

3. Sweep

Question 34

High-risk managers have inspections ___, whereas low-risk managers are ___ ___.

Answer 34

High-risk managers have inspections frequently, whereas low-risk managers are randomly selected.

Question 35

___ inspections occur when the SEC focuses on a number of advisers located in a specific region or engaged in certain activities.

Answer 35

Sweep inspections occur when the SEC focuses on a number of advisers located in a specific region or engaged in certain activities.

Question 36

Section ___ must be filed by advisers who beneficially own more than 5% of a class of publicly traded equity securities within ___ days.

Answer 36

Section 13(d) must be filed by advisers who beneficially own more than 5% of a class of publicly traded equity securities within 10 days.

Question 37

Section ___ must be filed quarterly by fund managers with investment discretion of $100 million or more.

Answer 37

Section 13(f) must be filed quarterly by fund managers with investment discretion of $100 million or more.

Question 38

Section ___ must is a short form of section 13(d) and can be filed by institutional investors or passive investors that own more than 5% of a publicly traded stock.

Answer 38

Section 13(g) must is a short form of section 13(d) and can be filed by institutional investors or passive investors that own more than 5% of a publicly traded stock.

Question 39

Section ___ must be filed by fund managers that own more than 10% of outstanding publicly traded stock.

Answer 39

Section 16 must be filed by fund managers that own more than 10% of outstanding publicly traded stock.

Question 40

Registered investment advisers with at least $150 million in AUM are required to file Form ___.

Answer 40

Registered investment advisers with at least $150 million in AUM are required to file Form PF.

Question 41

Large hedge fund advisers have at least $___ billion in AUM and must file Form PF within ___ days of the end of each fiscal quarter.

Answer 41

Large hedge fund advisers have at least $1.5 billion in AUM and must file Form PF within 60 days of the end of each fiscal quarter.

Question 42

Large liquidity fund advisers have at least $___ billion in AUM and must file Form PF within ___ days of the end of each fiscal quarter.

Answer 42

Large liquidity fund advisers have at least $1 billion in AUM and must file Form PF within 15 days of the end of each fiscal quarter.

Question 43

Large private equity fund advisers have at least $___ billion in private equity funds and must file form PF within ___ days of each fiscal quarter.

Answer 43

Large private equity fund advisers have at least $2 billion in private equity funds and must file form PF within 120 days of each fiscal quarter.

Question 44

Private equity fund advisers are exposed to ___ conflicts of interest

Answer 44

Private equity fund advisers are exposed to more conflicts of interest

Question 45

Private equity funds ___ required to register with the SEC.

Answer 45

Private equity funds are required to register with the SEC.

Question 46

The ___ model was established by the EU in response to the 2007-2008 GFC. It places emphasis on:

1. ___
2. ___ risk
3. ___Risk
4. ___

Answer 46

The AIFMD model was established by the EU in response to the 2007-2008 GFC. It places emphasis on:

1. Valuation

2. Counterparty risk

3. Operational Risk

4. Liquidity

Question 47

The ___ for ___ ___ in ___ ___ is a set of EU directives that provide a uniform regulatory regime for creating, managing, and marketing collective investment vehicles in EU countries.

Answer 47

The Undertakings for Collective Investment in Transferable Securities (UCITS) is a set of EU directives that provide a uniform regulatory regime for creating, managing, and marketing collective investment vehicles in EU countries.

Question 48

UCITS requires all positions to be marked to market ___ and requires due diligence on ___ ___.

Answer 48

UCITS requires all positions to be marked to market daily and requires due diligence on service providers.

Question 49

The EU considered UCITS a way to expand its influence into ___ and ___ ___ and has urged these regions to adopt the standards. The ___is a companion directive and applies to non-UCITS (alternative) investments.

Answer 49

The EU considered UCITS a way to expand its influence into Asia and South America and has urged these regions to adopt the standards. The AIFMD is a companion directive and applies to non-UCITS (alternative) investments.

Question 50

Several entities are exempt from AIFMD regulation:

1.

2.

3.

Answer 50

Several entities are exempt from AIFMD regulation:

1. Family offices

2. Non-marketed funds

3. Sub-threshold funds

Question 51

AIFs that acquire control of non-listed companies are subject to ___ ___ ___, which impose restrictions on AIFMs’ abilities to extract assets from the companies in the form of distributions.

Answer 51

AIFs that acquire control of non-listed companies are subject to asset stripping rules, which impose restrictions on AIFMs’ abilities to extract assets from the companies in the form of distributions.

Question 52

In Hong Kong, hedge funds are regulated by the ___ and ___ ___.

Answer 52

In Hong Kong, hedge funds are regulated by the Securities and Futures Commission.

Question 53

In Singapore, the primary hedge fund regulator is the ___ ___of ___.

Answer 53

In Singapore, the primary hedge fund regulator is the Monetary Authority of Singapore.

Question 54

In South Korea the regulatory body is the ___ ___ ___.

Answer 54

In South Korea the regulatory body is the Financial Supervisory Service.

Question 55

In Japan, hedge funds are regulated by the ___ and ___ ___ ___.

Answer 55

In Japan, hedge funds are regulated by the Securities and Exchange Surveillance Commission.