AIP Risk Assessment & Regulatory Compliance 2 — Questions and Answers
Question 1: Under the SEC's Regulation Best Interest (Reg BI), broker-dealers must act in the best interest of retail customers at the time of a recommendation. Which element is NOT one of the four component obligations of Reg BI?
- Disclosure Obligation
- Care Obligation
- Conflict of Interest Obligation
- Suitability Obligation (Correct answer)
Correct answer: Suitability Obligation
Reg BI's four obligations are Disclosure, Care, Conflict of Interest, and Compliance — 'Suitability' is a legacy FINRA standard, not a Reg BI component.
Question 2: A portfolio's Value at Risk (VaR) is reported as $500,000 at a 95% confidence level over a 1-day horizon. What does this most accurately mean?
- The portfolio will lose exactly $500,000 tomorrow
- There is a 5% chance losses will exceed $500,000 in a single day (Correct answer)
- The maximum possible loss is $500,000
- There is a 95% chance of losing $500,000 tomorrow
Correct answer: There is a 5% chance losses will exceed $500,000 in a single day
VaR at 95% confidence means there is a 5% probability that losses will exceed the stated amount over the given time horizon.
Question 3: Which of the following best describes 'concentration risk' in an investment portfolio?
- Risk arising from using too many derivatives instruments
- Excessive exposure to a single security, sector, or counterparty (Correct answer)
- The risk that a fund manager concentrates on short-term returns
- Regulatory risk from holding concentrated government bonds
Correct answer: Excessive exposure to a single security, sector, or counterparty
Concentration risk occurs when a portfolio has too large a position in a single asset, sector, geography, or counterparty, making it vulnerable to idiosyncratic events.
Question 4: The Financial Industry Regulatory Authority (FINRA) Rule 2111 requires that a broker have a 'reasonable basis' to believe a recommended strategy is suitable. Which factor is NOT part of the suitability analysis?
- Customer's investment objectives
- Customer's tax identification number (Correct answer)
- Customer's risk tolerance
- Customer's financial situation and needs
Correct answer: Customer's tax identification number
FINRA Rule 2111 suitability analysis considers investment objectives, risk tolerance, financial situation, and needs — tax identification numbers are not a suitability factor.
Question 5: An investment adviser is required to deliver its Form ADV Part 2A (brochure) to prospective clients at what point?
- Within 48 hours after signing the advisory contract
- At least 48 hours before entering into an advisory contract, or at contract signing with a 5-day withdrawal right (Correct answer)
- Only upon the client's written request
- Annually, regardless of when the client joined
Correct answer: At least 48 hours before entering into an advisory contract, or at contract signing with a 5-day withdrawal right
Under the Investment Advisers Act, advisers must deliver the brochure at least 48 hours before contract signing, or at signing if the client has a 5-day right to terminate without penalty.
Question 6: Which risk measure captures the potential loss in a portfolio's worst-case scenarios beyond the VaR threshold, making it a more complete measure of tail risk?
- Beta
- Standard deviation
- Expected Shortfall (CVaR) (Correct answer)
- Sharpe ratio
Correct answer: Expected Shortfall (CVaR)
Expected Shortfall (also called Conditional VaR or CVaR) measures the average loss in scenarios that exceed the VaR threshold, capturing tail risk that VaR ignores.
Question 7: Under the Bank Secrecy Act (BSA), financial institutions must file a Suspicious Activity Report (SAR) within how many calendar days of detecting a suspicious transaction?
- 15 days
- 30 days (Correct answer)
- 45 days
- 60 days
Correct answer: 30 days
Financial institutions are generally required to file a SAR within 30 calendar days of detecting a suspicious transaction, or 60 days if no suspect is identified initially.
AIP Risk Assessment & Regulatory Compliance 2
Under the SEC's Regulation Best Interest (Reg BI), broker-dealers must act in the best interest of retail customers at the time of a recommendation.
Which element is NOT one of the four component obligations of Reg BI?