CSCP Compliance Programs & Risk Management 3 — Questions and Answers
Question 1: FINRA Rule 3120 requires broker-dealers to establish a system to supervise activities of associated persons. What document must the supervisory system be memorialized in?
- Form BD
- Written Supervisory Procedures (WSP) (Correct answer)
- Form U4
- Compliance calendar
Correct answer: Written Supervisory Procedures (WSP)
FINRA Rule 3120 requires firms to establish, maintain, and enforce Written Supervisory Procedures (WSPs) that detail the firm's supervisory system for each applicable regulation.
Question 2: Which of the following best describes a 'key risk indicator' (KRI) in securities compliance?
- A regulatory penalty imposed after an examination
- A forward-looking metric that signals potential compliance risk (Correct answer)
- The total number of customer complaints filed in a year
- A list of suspended registered representatives
Correct answer: A forward-looking metric that signals potential compliance risk
KRIs are forward-looking metrics that provide early warning signals of increasing compliance risk, allowing firms to take proactive corrective action before violations occur.
Question 3: Under the USA PATRIOT Act, which federal agency primarily administers the anti-money laundering (AML) requirements applicable to broker-dealers?
- SEC
- CFTC
- FinCEN (Correct answer)
- OCC
Correct answer: FinCEN
The Financial Crimes Enforcement Network (FinCEN) administers the Bank Secrecy Act and USA PATRIOT Act AML requirements, including those applicable to broker-dealers as 'financial institutions.'
Question 4: A compliance officer discovers that a firm's AML policy has not been updated to reflect a recent FinCEN rule change. The best immediate action is to:
- Notify the SEC before updating the policy
- Update the policy and conduct targeted training for affected staff (Correct answer)
- Suspend all new account openings until the policy is revised
- Report the lapse to FINRA within 24 hours
Correct answer: Update the policy and conduct targeted training for affected staff
The most appropriate response is to promptly update the policy to reflect the regulatory change and then provide targeted training to ensure staff are aware of and can implement the new requirements.
Question 5: What is the purpose of a compliance 'gap analysis' in a securities firm?
- To identify differences between current practices and required regulatory standards (Correct answer)
- To calculate the financial penalty exposure from past violations
- To assess trading performance against benchmark indices
- To determine the number of additional compliance staff needed
Correct answer: To identify differences between current practices and required regulatory standards
A gap analysis compares a firm's existing compliance policies, procedures, and practices against applicable regulatory requirements to identify areas where the firm falls short.
Question 6: Which supervisory control is most effective for detecting unauthorized trading by a registered representative?
- Annual branch office inspections
- Real-time trade blotter review by a designated supervisor (Correct answer)
- Customer satisfaction surveys
- Monthly review of registered representative licensing status
Correct answer: Real-time trade blotter review by a designated supervisor
Real-time or daily trade blotter review by a designated supervisor is the most effective control for detecting unauthorized trades as they occur, rather than discovering them after extended periods.
Question 7: The concept of 'three lines of defense' in securities compliance assigns primary responsibility for risk management to which line?
- Internal audit (third line)
- Compliance and risk functions (second line)
- Business units and front-line staff (first line) (Correct answer)
- External auditors (fourth line)
Correct answer: Business units and front-line staff (first line)
In the three lines of defense model, business units and front-line staff constitute the first line of defense and bear primary responsibility for identifying, managing, and mitigating risks in their daily activities.
CSCP Compliance Programs & Risk Management 3
FINRA Rule 3120 requires broker-dealers to establish a system to supervise activities of associated persons.
What document must the supervisory system be memorialized in?