Unit 11 Regulatory Issues and Ethics

Question 1

The _____ established the U.S. Treasury Department as the lead agency for developing regulations in connection with anti-money laundering (AML) programs

Answer 1

Bank Secrecy Act

Question 2

The Three Stages of Money Laundering:

Answer 2

Placement
Layering
Intergration

Question 3

the first stage of laundering ____ is when funds or assets are moved
into the laundering system. This stage is recognized as the time when illegal funds are the most susceptible to detection.

Answer 3

placement

Question 4

Layering

Answer 4

This is done through a series of layers of transactions that are generally numerous and can vary in form and complexity. Often, the transactions do not make business or investing sense, but they make perfect sense if you are trying to obscure the original source of the funds.

Question 5

In the final _____ stage, illegal funds are commingled with legitimate funds in what appear to be viable legitimate business concerns. This can be accomplished using front companies operating on a cash basis, import and export companies, and many other types of businesses. At this point, the funds make their way back to the criminals in away that makes the funds appear to be legitimate income.

Answer 5

Integration

Question 6

The _______ is a bureau of the U.S. Treasury Department that collects and analyzes information about financial transactions to combat money laundering, domestic and international terrorist financing, and other financial crimes.

Answer 6

Financial Crimes Enforcement Network (FinCEN)

Question 7

As part of the _____ , FinCEN does not have an enforcement branch. It is best understood as an intelligence agency using the information
available in the financial system to detect illegal activity.

Answer 7

Treasury Department (not the Department of Justice)

Question 8

FinCEN collects information from financial institutions from several reports. The most common reports are the _______ and the _____.

Answer 8

currency transaction report (CT) and suspicious activity report (SAR)

Question 9

The Bank Secrecy Act requires broker-dealers (BDs) to file a _____ if any currency is received in the amount of more than $10,000 on a single day.

Answer 9

currency transaction report (CT)

Question 10

The USA PATRIOT Act requires firms to report and _____ to FinCEN when there is an event, transaction, or series of events or transactions that appears to be questionable.

Answer 10

Suspicious Activities Reports (SARS)

Question 11

The act requires firms to report to FinCEN any transaction that alone or in the aggregate involves at least $5,000 in funds or other assets if the firm suspects that it falls within one of the following four classes:

Answer 11

The transaction involves funds derived from illegal activity.
The transaction is designed to evade the requirements of the Bank Secrecy Act. The transaction appears to serve no business or lawful purpose.
he transaction involves the use of the firm to facilitate criminal activity.

Question 12

Firms must file a SAR within ___ days of becoming aware of the suspicious transaction(s). Copies of each SAR filing and the related documentation must be retained for ______ years from the date of the filing.

Answer 12

30 days
5 years

Question 13

Under the Bank Secrecy Act, firms are required to designate a ______. There is no requirement for this person to be registered as a representative or a principal.

Answer 13

chief Anti-Money Laundering Officer officer

Question 14

The AML officer will establish _____ to detect abuses. There are signs or red flags that might suggest the possibility of money laundering. If a red flag
is detected, it should be reported to the AML officer designated to receive such reports immediately.

Answer 14

internal compliance procedures

Question 15

Money laundering red flags are:

Answer 15

a customerexhibiting alack of concern regarding risks, commissions, or other transaction costs;
a customer attempting to make frequent or large deposits of currency or cashier’s checks;
a customer making a large number of wire transfers to unrelated third parties;
a customer engaging in excessive journal entries between unrelated accounts; and
acustomerdesigning currency deposits or withdrawals to fall under the $10,000 CTR filing threshold (structuring).

Question 16

The ______ requires financial institutions to maintain customer identification programs (CIPs) to prevent financing of terrorist operations and money laundering.

Answer 16

USA PATRIOT Act

Question 17

When individuals or groups appear on the _____ list, their assets are blocked, and U.S. persons and businesses, which include registered representatives (RRs) and BDs, are generally prohibited from dealing with or conducting business with them.

Answer 17

Specially Designated Nationals (SDN)

Question 18

Financial institutions, such as banks and BDs, must keep records of identification information and check customer names against the Specially Designated Nationals (SDN) list maintained by the _____.

Answer 18

Office of Foreign Assets Control (OFAC)

Question 19

The SDN list is designed to identify persons involved in illegal activities, including terrorism. U.S. persons (U.S. citizens and permanent resident aliens regardless of location) and incorporated entities and their foreign branches (and in some circumstances, their subsidiaries) are

Answer 19

prohibited from doing business with anyone on the OFAC SDN list and should check the list to ensure they are not in breach of the law if there is any uncertainty.

Question 20

Types of market manipulation:

Answer 20

Market Rumors
Pump and Dump
Front Running
Churning
Market the open and Marking the Close
Freeriding
Matching Orders

Question 21

The spreading of false information and _____ by industry personnel is expressly prohibited.

Answer 21

market rumors

Question 22

A form of securities fraud commonly known as _____ is the act of inflating
the price of an owned stock by perpetrating false and misleading positive
rumors in order to sell the stock at a higher price later.

Answer 22

pump and dump

Question 23

_____ is the act of placing orders for one’s own account ahead of other orders that are known to be entering the market in an attempt to gain from the price movement that is likely to occur.

Answer 23

Front running

Question 24

Excessive trading in a customer’s account to generate commissions rather than to help achieve the customer’s stated investment objectives is an abuse of fiduciary responsibility known as ____.

Answer 24

churning

Question 25

Entering orders before the opening for a stock or falsely reporting trades that never occurred to influence the opening price of a stock is called _____.

Answer 25

marking the open

Question 26

effecting trades at or near the close of the trading day or falsely reporting trades that never occurred to influence the closing price of a stock is called
_____.

Answer 26

marking the close

Question 27

______ is a term used when securities are purchased and then sold before payment is made
for the purchase.

Answer 27

Freeriding

Question 28

______ is a manipulation that involves one party selling stock to another with the understanding that the stock will be repurchased later (usually the same day) at virtually the same price. The intent of such transactions is to make it appear that far more activity in a stock (share volume) exists than actually does.

Answer 28

Matching orders

Question 29

The possession of inside information is not illegal. It is the use of such information to make a gain or avoid a loss that constitutes ______.

Answer 29

insider trading

Question 30

______, by definition, is any material nonpublic information-that is,
any information that has not been disseminated to, or is not readily available to, the general public.

Answer 30

Inside information

Question 31

The ______ prohibits insiders from trading on or communicating nonpublic information.

Answer 31

Insider Trading Act

Question 32

The Insider Trading Act prohibits both the ____ (the person who relays the information) and the _____ (the person who receives the information) are liable, as is anyone who trades on information that they know or should know is not public or who has control over the misuse of this information.

Answer 32

tipper
tippee

Question 33

If the SEC determines that a insider trading has occured, civil penalties of up to three times the profits made or losses avoided may be levied. A controlling person, such as an RR or BD, could be fined _____ or _____ the profit made or loss avoided, whichever is greater.

Answer 33

$1 million or three times

Question 34

Insider trading violators Violators may also face criminal penalties of up to $___ million and up to ___ years in jail.

Answer 34

5 million
20 years

Question 35

Persons who enter trades at or near the same time (but on the other side of the market) in the same security as a person who has inside information are known as ______ and they may sue persons that have
violated insider trading regulations, and suits may be initiated up to five years after the violation has occurred.

Answer 35

Contemporaneous traders

Question 36

_____ is designed to protect the integrity of the public offering process and to protect public investors.

Answer 36

Rule 5130

Question 37

Restricted persons those not allowed to purchase shares at the POP- are defined as follows:

Answer 37

Member firms (whether or not they are involved in the IPO) Employees of member firms
Finders and fiduciaries acting on behalf of the managing underwriter, including attorneys, accountants, financial consultants, and so on
Portfolio managers, including any person who has the authority to buy or sell securities for a bank, savings and loan association, insurance company, or investment company
Any person owning 10% or more of a member firm

Question 38

restricted persons will be able to have an interest in an account that purchases new equity issues aslong as no more than ____% of the account’s beneficial owners are restricted persons.

Answer 38

10%

Question 39

FINRA defines financial exploitation to be:

Answer 39

the wrongful or unauthorized taking, withholding, appropriation, or use of funds or securities; or
any act or omission of an act taken by a person to obtain control–through deception, intimidation or undue influence over the specified adult’s money, assets, or property or to convert the specified adult’s money, assets, or property.

Question 40

FINRA, along with other regulators, specifically addresses the financial exploitation of seniors and other individual customers who are:

Answer 40

age 65 and older, or
age 18 and older, whom the member reasonably believes has a mental or physical impairment that renders the individual unable to protect her own interests.

Question 41

Essentially, to prevent potential exploitation, the rules regarding the accounts of seniors and other specified adult customers do two things.

Answer 41

• Member firms and associated persons must make reasonable efforts to obtain the name and contact information for a trusted contact person.
• Member firms wil be permitted to, but not required to, place temporary holds on disbursements from customer accounts when there is a reasonable belief of financial
  exploitation.

Question 42

A reasonable effort to obtain the name and contact information for a trusted contact person must be made when:

Answer 42

opening a customer’s account or
updating the account information for an existing account.

Question 43

f the member firm reasonablybelieves that financial exploitation has occurred, si occurring, has been attempted, or will be attempted, it can place a temporary hold on disbursements of funds or securities. If the member firm reasonably believes that financial exploitation has occurred, si occurring, has been attempted, or will be attempted, it can place a temporary hold on disbursements of funds or securities. Note that the rule does not require the member firm to take this action but allows it to do so at its discretion. The hold can be no longer than ___ business days under the rule. A state regulator or agency of jurisdiction, however, can terminate the hold sooner or extend the hold longer.

Answer 43

15

Question 44

FINRA expects member firms to detect and investigate red flags that alert the firm to _____ of customer funds.

Answer 44

improper use

Question 45

Red flags of improper use are:

Answer 45

suspicious activity involving transfers and disbursements incustomer accounts; * activity in the account of a deceased person;
excessive customer complaints; and
exception reports showing discrepancies regarding more than one address, a street address not matching a city or a ZIP code provided, or a telephone area code not matching an address provided.

Question 46

The most common example of improper use of customer assets is ____ or ____ even with consent.

Answer 46

borrowing or lending,

Question 47

____a customer’s securities for the purpose of short sales when no loan consent agreement has been signed by the customer is another way in which improper use might occur.

Answer 47

Lending

Question 48

The Conduct Rules permit the following five types of lending arrangements.

Answer 48

1. There is an immediate family relationship between the representative and the customer (no notice or approval is needed).
2. The customer si ni the business of lending money (e.g., a bank) (no approval si needed).
3. The customer and the representative are both registered persons with the same firm (firm approval required).
4. The customer and the representative have a personal relationship outside the broker-customer relationship (firm approval required).
   5.The customer and the representative have a business relationship outside the broker-customer relationship (firm approval required).

Question 49

Nonregistered employees of BDs have a limited scope of activities. Some of the activities permitted for a nonregistered employee of a BDare as follows:

Answer 49

Responding to general, noninvestment questions (What are your hours of operation? May I leave a message for . ..? Where is the restroom?)
* Providing literature on request, setting appointments, inviting prospects to a seminar, and similar activities

Question 50

______ means any written (including electronic) communication that is distributed or made available only to institutional investors, but it does not include a member’s internal communications (e.g., internal memos).

Answer 50

Institutional communication

Question 51

FINRA mandates that no member may treat a communication as an institutional communication if the member firm has reason to believe that the communication or any part ofi t will be forwarded or made available to any retail investor. These communications are treated as ____.

Answer 51

retail communication

Question 52

_____ means any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any30-calendar-dayperiod.

Answer 52

retail communication

Question 53

A copy of all retail communications must be filed with ____.

Answer 53

FINRA

Question 54

_____ means any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30-calendar-davperiod.

Answer 54

Correspondence

Question 55

types of public communications.

Answer 55

Institutional communications
* Retail communications
* Correspondence

Question 56

Firms are required to monitor the business-related social media presence of all representatives. Most static content, such as a website or a blog, typically must be approved by a registered principal before use and sometimes may be required to be filed with _____.

Answer 56

FINRA

Question 56

IF they are not institutional customers, they are ____.

Answer 56

retail customers

Question 57

The ______ administered by the Federal Communications Commission (FCC), was enacted to protect consumers from unwanted telephone solicitations (telemarketing).

Answer 57

Telephone Consumer Protection Act of 1991 (TCPA),

Question 58

The basic rules under the T C P A seek to ensure that:

Answer 58

anyone making cold calls informs prospects of their name, the company’s name, and the company’s telephone number oraddress;
solicitation occurs only between 8:00 am and 9:00 pm based on the prospect’s time zone; and
no calls are made to numbers on the company or federal do-not-call list.

Question 58

The TCPA requires an organization that does telemarketing (cold-calling in particular) to:

Answer 58

maintain a do-not-call list of prospects who do not want to be called, keep a prospect’s name on the list until the prospect requests its removal;
institute a written policy on maintenance procedures for the do-not-call list; train representatives on using the list;
ensure that representatives acknowledge and immediately record the names and telephone numbers of prospects who ask not to be called again;
ensure that telemarketers do not call a prospect from the time of the prospect’s do-not-call request; and
ensure that the company’s do-not-call list is no more than 30 days old.

Question 59

To ensure that the information obtained from each new customer is accurate, firms must furnish to each customer, within ____ days of opening the account, a copy of the account record.

Answer 59

30

Question 60

A statement shows:

Answer 60

all activity in the account since the previous statement; securities positions, long or short; and
* account balances, debit or credit.

Question 61

Under FINRA rules, members are required to send statements to customers at least _____.

Answer 61

quarterly

Question 62

For each transaction, a customer must be sent or given a written confirmation of the trade at or before the completion of the _____.

Answer 62

transaction–the settlement date

Question 63

The trade confirmation includes the following information:

Answer 63

Trade date.
Account number.
RR internal IDnumber (or AE number).
BOT (bought) or SLD (sold).
Number (or quantity).
Description.- Specific security bought or sold for the customer.
Yield
CUSIP number.
Price.
Amount.
Commission.
Net amount.

Question 64

Firms are required to send_____ in accounts even when the activity is not trade related or is initiated by a third party.

Answer 64

confirmations of activity

Question 65

_____ is designed to protect a customer’s nonpublic, personal information.

Answer 65

Regulation SP

Question 66

____ was enacted by the SEC to protect the privacy of customer information. In particular, the regulation deals with nonpublic personal information. This type ofinformation would include a customer’s Social Security number, account balances, transaction history, and any information collected through an internet cookie.

Answer 66

Regulation SP

Question 67

Regulation SP protects:

Answer 67

Confidentiality of Information
Regulation SP Privacy Notifications
SafeguardRequirements

Question 68

FINRA requires member firms to create and maintain a ____ to deal with the possibility of a significant business disruption. The plan must address certain
points having to do with the consequences of the event, including but not limited to the following:
Data backup and recovery (hard copy and electronic) Alternate communications between the firm and its customers
Alternate communications between the firm and its emplovees Alternate physical location of employees

Answer 68

business continuity plan (BCP)

Question 69

Seacoast Securities is a new FINRA member firm. tI is preparing a new marketing campaign, including a mass mail advertisement. The advertisement must be
A. filed with FINRA within 01 days of first use
B. filed with the SEC within 10 days of first use
C. filed with FINRA at least 10 days before use
D. approved by FINRA before use

Answer 69

C. filed with FINRA at least 10 days before use

Question 70

Solicitations may only occur between

Answer 70

8am to 9pm customer’s time zone

Question 71

The Federal Trade Commission maintains the National Do Not Call Registry. Telemarketers are also required to check numbers against this list. Like a company list, the national list being used may not be more than ___ days old.

Answer 71

30

Question 72

FINRA Rule 2210 on communications with the public would apply for all of the following except

A) a website.
B) a voicemail left for a customer.
C) a flyer sent to 20 prospects.
D) a text message.

Answer 72

B) a voicemail left for a customer.

Question 73

Retail communication must be approved by a principal before use or filing with _____

Answer 73

FINRA