CSCP Compliance Programs & Risk Management 4 — Questions and Answers
Question 1: An investment adviser's compliance program must be 'reasonably designed' under Rule 206(4)-7. Which factor is least relevant in assessing this standard?
- Nature and complexity of the adviser's business
- Adviser's assets under management
- Number of compliance staff employed by competitors (Correct answer)
- Types of clients served
Correct answer: Number of compliance staff employed by competitors
The reasonably designed standard is assessed based on the firm's own characteristics — its business model, AUM, client types, and conflicts — not benchmarked against competitors' staffing levels.
Question 2: Which of the following is an example of 'inherent risk' in a compliance risk assessment for a broker-dealer?
- The residual exposure after applying controls to high-volume trading desks
- The risk of market manipulation on a proprietary trading desk before any supervisory controls are applied (Correct answer)
- A gap identified in the firm's WSPs during an annual review
- A FINRA inquiry letter received about a specific transaction
Correct answer: The risk of market manipulation on a proprietary trading desk before any supervisory controls are applied
Inherent risk is the raw level of risk in an activity or process before any mitigating controls are applied; market manipulation risk on a proprietary desk absent any supervision is a classic example.
Question 3: Under SEC Regulation S-P, broker-dealers and investment advisers must provide customers with a privacy notice at what frequency at minimum?
- Monthly
- Quarterly
- Annually (Correct answer)
- Only at account opening
Correct answer: Annually
Regulation S-P requires covered firms to provide customers with an annual privacy notice describing the firm's information-sharing practices and customers' opt-out rights.
Question 4: A firm's compliance testing program reveals that 15% of sampled customer accounts lack required know-your-customer (KYC) documentation. The compliance officer should FIRST:
- Self-report the finding to FINRA immediately
- Conduct a root cause analysis to understand why documentation is missing (Correct answer)
- Place trading holds on all 15% of affected accounts
- Terminate the registered representatives responsible
Correct answer: Conduct a root cause analysis to understand why documentation is missing
Root cause analysis should come first to understand whether the gap is due to process failure, technology error, or training deficiency — this informs the most effective corrective action.
Question 5: Which of the following best describes the purpose of a compliance 'look-back review'?
- Projecting future compliance resource needs based on historical data
- Reviewing past transactions or activities to detect violations that may have occurred (Correct answer)
- Evaluating employee performance against compliance metrics
- Assessing a prospective hire's regulatory history
Correct answer: Reviewing past transactions or activities to detect violations that may have occurred
A look-back review examines historical transactions, communications, or activities to identify potential violations or suspicious patterns that were not caught at the time they occurred.
Question 6: FINRA's suitability rule (Rule 2111) was largely superseded by Regulation Best Interest (Reg BI) for recommendations to retail customers. Reg BI imposes which standard on broker-dealers?
- Fiduciary duty identical to that of investment advisers
- Best interest standard that considers costs and reasonably available alternatives (Correct answer)
- Suitability standard focused solely on client risk tolerance
- Know-your-customer standard limited to investment objectives
Correct answer: Best interest standard that considers costs and reasonably available alternatives
Reg BI requires broker-dealers to act in the best interest of retail customers at the time of a recommendation, considering costs and reasonably available alternatives — a higher bar than suitability but distinct from the investment adviser fiduciary standard.
Question 7: Which component of an effective compliance program ensures that employees understand their obligations under firm policies and regulations?
- Compensation structure tied to compliance metrics
- Ongoing training and education program (Correct answer)
- Third-party vendor due diligence process
- Annual financial audit by external accountants
Correct answer: Ongoing training and education program
Ongoing training and education ensures employees understand regulatory requirements and firm policies, which is a core pillar of an effective compliance program alongside written procedures, supervision, and testing.
CSCP Compliance Programs & Risk Management 4
An investment adviser's compliance program must be 'reasonably designed' under Rule 206(4)-7.
Which factor is least relevant in assessing this standard?