SIE Regulatory Framework Practice Questions
Question 1
A new brokerage customer funds the account with several unrelated third-party checks, immediately liquidates the position and requests the proceeds be wired overseas without an economic explanation. What is the firm's appropriate response?
- A. Treat the activity as legitimate because the funds moved through banks, and process the wire without escalation since the bank channel already screened the customer.
- B. Inform the customer that the firm has decided to file a suspicious activity report so the customer can supply an explanation before the filing deadline.
- C. Review the pattern under the firm's AML procedures, escalate suspicious activity and assess any reporting obligation, such as a SAR, while preserving required confidentiality of any filing.
- D. Take no action on the transactions until a criminal conviction is entered, because AML escalation depends on a legal finding of guilt rather than on suspicious patterns.
Show answer and explanation
Correct answer: C. Review the pattern under the firm's AML procedures, escalate suspicious activity and assess any reporting obligation, such as a SAR, while preserving required confidentiality of any filing.
Third-party funding, rapid liquidation and an unexplained overseas wire are AML red flags. The firm should review under its AML program, escalate, assess any SAR obligation and keep any filing confidential.
- A. Bank transfers do not make the activity legitimate, and the red flags still require review.
- B. Disclosing a SAR decision to the customer is prohibited tipping off.
- C. Correct: review, escalate, assess reporting and preserve confidentiality.
- D. AML duties arise from suspicious activity, not from a conviction.
Question 2
Under FINRA's suitability requirements, before recommending a security to a retail customer, a registered representative must consider all of the following EXCEPT:
- A. The customer's investment objectives
- B. The customer's risk tolerance and financial situation
- C. The customer's investment experience
- D. The registered representative's personal compensation on the transaction
Show answer and explanation
Correct answer: D. The registered representative's personal compensation on the transaction
Suitability analysis is customer-focused: it requires considering the customer's investment profile, including objectives, risk tolerance, financial situation, needs, and experience. The representative's own compensation on the transaction is not a suitability factor and, in fact, allowing compensation to influence a recommendation raises conflict-of-interest concerns addressed separately under Regulation Best Interest and FINRA rules.
- A. Incorrect (i.e., IS a suitability factor). Investment objectives are a core part of the customer's investment profile.
- B. Incorrect (i.e., IS a suitability factor). Risk tolerance and financial situation are explicitly part of suitability analysis.
- C. Incorrect (i.e., IS a suitability factor). Investment experience is part of the customer profile considered under suitability.
- D. Correct — this is the one that is NOT a suitability factor. The rep's compensation is not part of assessing whether a recommendation fits the customer.
Question 3
The Municipal Securities Rulemaking Board (MSRB) is primarily responsible for which of the following?
- A. Directly examining and disciplining municipal securities dealers for rule violations
- B. Insuring municipal bondholders against issuer default
- C. Regulating the municipalities and states that issue municipal bonds
- D. Writing rules governing the municipal securities activities of broker-dealers and banks, with enforcement carried out by FINRA and bank regulators
Show answer and explanation
Correct answer: D. Writing rules governing the municipal securities activities of broker-dealers and banks, with enforcement carried out by FINRA and bank regulators
The MSRB is a self-regulatory organization that writes rules governing the municipal securities activities of broker-dealers and banks. It has no examination or enforcement staff of its own; instead, FINRA (for broker-dealers) and federal bank regulators (for bank dealers) examine for and enforce compliance with MSRB rules.
- A. Wrong - the MSRB has no examination or enforcement authority; that role belongs to FINRA and bank regulators.
- B. Wrong - the MSRB does not provide default insurance; that is unrelated to its regulatory function.
- C. Wrong - the MSRB regulates dealers' conduct, not the municipal issuers themselves.
- D. Correct - this accurately splits the MSRB's rulemaking role from FINRA's/bank regulators' enforcement role.
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A customer makes repeated cash-equivalent deposits just below a reporting threshold and refuses to explain source of funds. What does the pattern suggest?
- A. A recognized safe harbor for deposits kept below the reporting amount
- B. Evidence that the funds are legitimate because each deposit stayed under the threshold
- C. Possible structuring that warrants AML investigation and potential reporting
- D. A reason to disclose a future SAR directly to the customer
Show answer and explanation
Correct answer: C. Possible structuring that warrants AML investigation and potential reporting
Repeated deposits just under a reporting threshold, combined with a refusal to explain the funds, are classic structuring red flags. The firm should investigate and consider filing a SAR.
- A. No safe harbor exists; breaking up transactions to avoid reporting is itself unlawful structuring.
- B. Staying under a threshold suggests evasion, not legitimacy.
- C. This pattern indicates possible structuring and calls for AML review and possible SAR filing.
- D. SAR filings are confidential and must not be disclosed to the customer.