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ANFI practice questions

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Question 1Regulatory Framework and Compliance

Under the Investment Company Act of 1940, which of the following must register with the SEC before offering its shares to the public?

  1. A private hedge fund with 50 qualified purchasers
  2. A church plan that invests in mutual funds
  3. An insurance company separate account funding variable annuities
  4. A closed-end fund that invests primarily in municipal bonds Correct answer.

Explanation

The Investment Company Act of 1940 requires investment companies, including closed-end funds and mutual funds, to register with the SEC before making a public offering. Private funds relying on exemptions and church plans are not required to register as investment companies.

Question 2Regulatory Framework and Compliance

Which federal statute primarily governs the offer and sale of new securities to the public?

  1. The Securities Act of 1933 Correct answer.
  2. The Sarbanes-Oxley Act of 2002
  3. The Investment Advisers Act of 1940
  4. The Securities Exchange Act of 1934

Explanation

The Securities Act of 1933 regulates the initial offer and sale of securities and requires registration unless an exemption applies. The Exchange Act governs secondary trading and broker-dealer conduct.

Question 3Regulatory Framework and Compliance

A registered representative wishes to open a margin account for a client. Which regulation establishes the initial margin requirement for purchasing securities on margin?

  1. Regulation T Correct answer.
  2. Regulation BI
  3. Regulation D
  4. Regulation S-P

Explanation

Regulation T, issued by the Federal Reserve Board, sets the initial margin requirements for broker-dealers extending credit to customers for securities purchases. Regulation S-P governs privacy, Regulation BI governs broker-dealer conduct standards, and Regulation D governs private placement exemptions.

Question 4Regulatory Framework and Compliance

Which of the following best describes the role of the Financial Industry Regulatory Authority (FINRA)?

  1. It writes federal securities statutes for Congress
  2. It sets monetary policy for the securities industry
  3. It insures customer accounts against broker-dealer insolvency
  4. It is a self-regulatory organization that writes and enforces rules for broker-dealers Correct answer.

Explanation

FINRA is a self-regulatory organization overseen by the SEC that adopts rules and conducts examinations and enforcement for broker-dealers. It does not legislate, insure accounts, or conduct monetary policy.

Question 5Regulatory Framework and Compliance

The Securities Investor Protection Corporation (SIPC) protects customers of a failed broker-dealer up to what maximum total per customer for securities?

  1. $1,000,000
  2. $100,000
  3. $250,000
  4. $500,000 Correct answer.

Explanation

SIPC provides protection of up to $500,000 per customer for securities and cash, with a sublimit of $250,000 for cash claims. The protection applies to missing assets at a failed member firm, not to market losses.

Question 6Regulatory Framework and Compliance

Under FINRA rules, a member firm must deliver which document to a customer at or before the completion of a transaction in a non-exempt security?

  1. A trade confirmation Correct answer.
  2. A prospectus for every secondary market trade
  3. An annual report
  4. A proxy statement

Explanation

FINRA requires a written trade confirmation to be delivered at or before completion of the transaction, disclosing terms such as price, security, and capacity. Prospectuses are required for primary offerings, not every secondary trade.

Question 7Regulatory Framework and Compliance

Which of the following is a primary purpose of the Bank Secrecy Act as applied to broker-dealers?

  1. To establish the maximum commission a firm may charge
  2. To require anti-money-laundering programs and suspicious activity reporting Correct answer.
  3. To set capital reserve requirements for banks
  4. To regulate the interest rates charged on margin loans

Explanation

The Bank Secrecy Act requires financial institutions, including broker-dealers, to maintain anti-money-laundering programs, verify customer identity, and report suspicious activity. It does not set capital, interest, or commission rules.

Question 8Regulatory Framework and Compliance

A customer asks whether a broker-dealer is required to provide a copy of its privacy policy. Under Regulation S-P, when must a firm deliver its privacy notice?

  1. Once every five years
  2. Only after a complaint is filed
  3. Only when the customer requests it in writing
  4. At account opening and annually thereafter Correct answer.

Explanation

Regulation S-P requires covered financial institutions to provide an initial privacy notice at the establishment of the customer relationship and annual notices thereafter. It also governs opt-out rights for sharing nonpublic personal information.

Question 9Regulatory Framework and Compliance

Under the Securities Act of 1933, which exemption is commonly relied upon by a company raising capital from a limited number of accredited investors without general solicitation?

  1. Rule 10b-5
  2. Rule 144
  3. Regulation T
  4. Regulation D Rule 506(b) Correct answer.

Explanation

Regulation D Rule 506(b) permits private placements to an unlimited number of accredited investors and a limited number of non-accredited investors without general solicitation. Rule 144 addresses resale of restricted securities, Rule 10b-5 addresses antifraud liability, and Regulation T addresses margin.

Question 10Regulatory Framework and Compliance

A registered representative learns that a client is using an account to structure cash deposits just below the reporting threshold. What action does anti-money-laundering regulation require?

  1. Notify the client that the activity has been flagged
  2. Report the activity as suspicious to the firm's AML compliance officer Correct answer.
  3. Close the account immediately without documentation
  4. File a Currency Transaction Report for each deposit

Explanation

Structuring transactions to evade reporting requirements is a red flag that should be escalated internally and may require a Suspicious Activity Report. Firms must not tip off the customer that a report has been or may be filed.

Question 11Regulatory Framework and Compliance

A broker-dealer recommends a mutual fund to a retail customer. Under Regulation Best Interest, the firm must do which of the following?

  1. Recommend only the lowest-cost product available
  2. Obtain the customer's written consent for every trade
  3. Act in the customer's best interest without placing its own interest ahead of the customer's Correct answer.
  4. Guarantee a minimum investment return

Explanation

Regulation Best Interest requires broker-dealers to act in the retail customer's best interest and not place their own financial interests ahead of the customer's. It does not mandate the single lowest-cost product or guarantee returns.

Question 12Regulatory Framework and Compliance

An investment adviser manages $150 million in regulatory assets under management and is not eligible for state registration. Which registration path applies?

  1. State registration only
  2. FINRA membership
  3. SEC registration Correct answer.
  4. No registration is required

Explanation

Under the Investment Advisers Act of 1940 as amended by the National Securities Markets Improvement Act, advisers with $100 million or more in regulatory assets under management generally register with the SEC. Smaller advisers typically register with the states.

Question 13Regulatory Framework and Compliance

Which of the following constitutes insider trading under Section 10(b) and Rule 10b-5?

  1. Trading on material nonpublic information in breach of a duty of trust Correct answer.
  2. Trading based on publicly disclosed earnings reports
  3. Trading on a personal belief that the market will rise
  4. Trading after reading a research report available to all clients

Explanation

Insider trading occurs when a person trades on material nonpublic information in breach of a fiduciary or similar duty of trust and confidence. Trading on public information or personal opinion does not violate the rule.

Question 14Regulatory Framework and Compliance

A firm wants to pay a representative a higher commission for selling its own proprietary mutual funds than for comparable third-party funds. What regulatory concern arises?

  1. A potential conflict of interest that must be mitigated under Regulation Best Interest Correct answer.
  2. A breach of the Bank Secrecy Act
  3. No concern, because commissions are always discretionary
  4. A violation of SIPC coverage limits

Explanation

Differential compensation creates a conflict of interest that firms must identify, disclose, and mitigate under Regulation Best Interest. Firms cannot simply ignore the incentive to favor higher-paying products.

Question 15Regulatory Framework and Compliance

Which recordkeeping obligation applies to a broker-dealer under FINRA and SEC rules regarding electronic communications?

  1. Business-related electronic communications must be retained and supervised Correct answer.
  2. Communications may be deleted after 30 days
  3. Retention is required only for customer complaints
  4. Only paper correspondence must be retained

Explanation

Firms must capture, supervise, and retain business-related electronic communications for the required period under SEC and FINRA recordkeeping rules. Electronic messages are treated comparably to written correspondence.

Question 16Regulatory Framework and Compliance

A customer submits a written complaint alleging unauthorized trading. Under FINRA rules, the firm must do which of the following?

  1. Discard the complaint if the customer later withdraws it
  2. Forward the complaint to SIPC for resolution
  3. Require the customer to arbitrate before the firm reviews it
  4. Log and review the complaint as part of its supervisory system Correct answer.

Explanation

FINRA requires firms to capture, acknowledge, and review written customer complaints as part of a supervisory system designed to detect and address misconduct. Complaints must be recorded even if later resolved or withdrawn.

Question 17Regulatory Framework and Compliance

Which of the following best describes the SEC's whistleblower program under Section 21F of the Securities Exchange Act?

  1. It requires employees to report concerns to their supervisor first
  2. It rewards individuals who voluntarily provide original information leading to successful enforcement actions Correct answer.
  3. It applies only to foreign bribery allegations
  4. It guarantees anonymity in all cases

Explanation

Section 21F authorizes awards to whistleblowers who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions. Confidentiality protections exist but absolute anonymity is not guaranteed in every circumstance.

Question 18Regulatory Framework and Compliance

Under the Investment Company Act of 1940, which classification describes a fund that continuously offers redeemable shares and must maintain a stated investment objective and policies?

  1. Face-amount certificate company
  2. Unit investment trust
  3. Closed-end management company
  4. Open-end management company Correct answer.

Explanation

An open-end management company, commonly a mutual fund, continuously issues redeemable shares and must disclose its investment objective and fundamental policies. Closed-end funds issue a fixed number of shares that trade in the market.

Question 19Regulatory Framework and Compliance

A representative wants to use a hypothetical performance illustration in a retail communication. Which regulatory principle applies?

  1. Only institutional clients may see hypothetical results
  2. Hypothetical results are prohibited in all circumstances
  3. Hypothetical results may be presented as if they were actual results
  4. Hypothetical performance must be clearly labeled and not misleading Correct answer.

Explanation

Communications rules require that hypothetical performance be clearly identified as hypothetical and presented fairly so it is not misleading. Presenting hypothetical results as actual results is prohibited.

Question 20Regulatory Framework and Compliance

Which of the following is required of a broker-dealer under the Customer Identification Program rules?

  1. Require all customers to be accredited investors
  2. Verify a customer's identity using reasonable procedures before opening an account Correct answer.
  3. Obtain a credit report for every new customer
  4. Report every new account to FINRA within 24 hours

Explanation

The Customer Identification Program rules require firms to collect identifying information and verify identity using reasonable procedures before opening an account. Credit checks and accreditation are not universal requirements.

Question 21Regulatory Framework and Compliance

An issuer plans a Rule 506(c) offering. Which condition distinguishes it from a Rule 506(b) offering?

  1. It permits general solicitation if the issuer takes reasonable steps to verify accredited investor status Correct answer.
  2. It is limited to $1 million in total
  3. It requires SEC qualification before any sale
  4. It may not include any accredited investors

Explanation

Rule 506(c) permits general solicitation and advertising provided that all purchasers are accredited investors and the issuer takes reasonable steps to verify that status. Rule 506(b) prohibits general solicitation but allows limited non-accredited participation.

Question 22Regulatory Framework and Compliance

A firm's supervisory system fails to detect a pattern of excessive trading in customer accounts. Which regulatory framework is most directly implicated?

  1. FINRA supervision and conduct rules requiring reasonable supervisory systems Correct answer.
  2. The Federal Reserve's margin regulations
  3. SIPC liquidation procedures
  4. Regulation S-P privacy safeguards

Explanation

FINRA rules require member firms to establish and maintain a supervisory system reasonably designed to achieve compliance, including detecting excessive trading and churning. Privacy, SIPC, and margin rules address different concerns.

Question 23Regulatory Framework and Compliance

Which statement correctly describes the fiduciary duty of an investment adviser registered with the SEC?

  1. The duty is identical to the suitability standard for broker-dealers
  2. The duty applies only to institutional clients
  3. The duty is satisfied by disclosing conflicts without any obligation to act in the client's interest
  4. The adviser owes a duty of care and a duty of loyalty, including full and fair disclosure of conflicts Correct answer.

Explanation

SEC-registered advisers owe a fiduciary duty comprising a duty of care and a duty of loyalty, requiring full and fair disclosure of material conflicts and acting in the client's best interest. Disclosure alone does not discharge the duty of care.

Question 24Regulatory Framework and Compliance

A representative receives a subpoena from FINRA requesting documents related to a customer's trading. Which response is most consistent with regulatory obligations?

  1. Preserve and produce responsive documents through the firm's established process Correct answer.
  2. Destroy the documents to protect the customer's privacy
  3. Provide the documents directly to the customer instead of FINRA
  4. Ignore the subpoena because it is not a court order

Explanation

Firms must cooperate with FINRA investigations, preserve responsive records, and produce documents through proper channels. Ignoring or destroying records can constitute obstruction and violate recordkeeping and cooperation rules.

Question 25Regulatory Framework and Compliance

Under the Investment Advisers Act, when must an adviser deliver its Form ADV Part 2 brochure to a new client?

  1. Within 48 hours after signing the advisory contract
  2. Annually, with no initial delivery requirement
  3. Only upon the client's written request
  4. At or before entering into the advisory contract, or within 48 hours if the contract permits termination without penalty Correct answer.

Explanation

The brochure rule requires delivery at or before entering into the advisory contract, or within 48 hours if the client may terminate without penalty within five business days. Annual delivery or a summary of changes is also required.

Question 26Regulatory Framework and Compliance

Under the Securities Exchange Act of 1934, which body is responsible for administering the federal securities laws and overseeing self-regulatory organizations such as FINRA?

  1. The Securities and Exchange Commission Correct answer.
  2. The Federal Reserve Board
  3. The Commodity Futures Trading Commission
  4. The Department of the Treasury

Explanation

The SEC is the federal agency created by the Securities Exchange Act of 1934 to administer the federal securities laws and supervise the securities markets and their self-regulatory organizations. The other bodies regulate banking, futures, or fiscal policy rather than securities markets.

Question 27Regulatory Framework and Compliance

Which law is the primary federal statute governing the registration of broker-dealers and the conduct of securities trading in the secondary market?

  1. The Securities Exchange Act of 1934 Correct answer.
  2. The Investment Company Act of 1940
  3. The Securities Act of 1933
  4. The Investment Advisers Act of 1940

Explanation

The Securities Exchange Act of 1934 governs the secondary market, requiring broker-dealers to register with the SEC and regulating exchanges, SROs, and trading practices. The 1933 Act addresses primary offerings, while the 1940 Acts cover funds and advisers.

Question 28Regulatory Framework and Compliance

A person associated with a FINRA member firm is subject to which of the following regarding outside business activities?

  1. Written notice must be given to the member firm before engaging in the activity Correct answer.
  2. Only activities conducted during business hours require disclosure
  3. Outside activities may be pursued freely if they do not involve securities
  4. Approval is required only if the activity generates more than $10,000 annually

Explanation

FINRA rules require associated persons to provide written notice to their firm before engaging in any outside business activity, so the firm can evaluate conflicts and supervisory concerns. The firm may then approve, restrict, or prohibit the activity.

Question 29Regulatory Framework and Compliance

Which of the following best describes the role of a self-regulatory organization such as FINRA?

  1. It adopts and enforces rules for its members under SEC oversight Correct answer.
  2. It writes federal statutes that Congress enacts into law
  3. It insures customer accounts against broker-dealer insolvency
  4. It sets monetary policy affecting securities prices

Explanation

SROs such as FINRA adopt and enforce rules governing member conduct, subject to SEC oversight and approval. They do not legislate, insure accounts, or set monetary policy.

Question 30Regulatory Framework and Compliance

A registered representative wishes to sell away securities from a customer's account to an outside entity without the knowledge of the employing member firm. Under FINRA rules, this conduct is best characterized as:

  1. Permitted if the representative receives no compensation
  2. Permitted if the transaction occurs outside business hours
  3. Prohibited private securities transactions absent firm approval Correct answer.
  4. Permitted if the customer provides written consent

Explanation

Selling away is a private securities transaction that requires prior written notice to and approval by the member firm. Engaging in such transactions without approval violates FINRA rules regardless of customer consent or compensation.

Question 31Regulatory Framework and Compliance

A firm is preparing retail communications concerning a new bond fund. Under FINRA rules, which of the following is required before the material is used with the public?

  1. Filing with the SEC in every instance
  2. Notarization by a compliance officer
  3. Approval by a registered principal of the member firm Correct answer.
  4. Registration of the material with the state securities administrator

Explanation

FINRA requires that member firms establish supervisory procedures under which a registered principal approves retail communications before use. Filing with FINRA is required only for certain categories, and neither SEC filing nor notarization is a general requirement.

Question 32Regulatory Framework and Compliance

An associated person of a member firm has a customer complaint alleging misrepresentation. Under FINRA rules, the firm generally must:

  1. Record and review the complaint as part of its supervisory system Correct answer.
  2. Discard the complaint if it is received orally
  3. Forward the complaint to the SEC within 24 hours
  4. Require the customer to arbitrate before the complaint is logged

Explanation

FINRA rules require firms to capture, acknowledge, and review customer complaints as part of a supervisory system designed to detect and remedy problems. Complaints are not automatically forwarded to the SEC, and arbitration does not precede logging.

Question 33Regulatory Framework and Compliance

A firm's anti-money-laundering program must include which of the following elements under the Bank Secrecy Act regulations applicable to broker-dealers?

  1. Guaranteed reimbursement of customer fraud losses
  2. Annual audits conducted by the Federal Reserve
  3. A mandatory lie-detector test for all new employees
  4. A customer identification program and ongoing monitoring Correct answer.

Explanation

Broker-dealer AML programs must include a customer identification program, internal controls, a designated compliance officer, ongoing training, and independent testing. Reimbursement guarantees, lie-detector tests, and Federal Reserve audits are not required elements.

Question 34Regulatory Framework and Compliance

An investment adviser registered with the SEC has a disciplinary event that requires disclosure. Under the Investment Advisers Act, the adviser must amend its Form ADV:

  1. Promptly, within 30 days of the event Correct answer.
  2. Only when requested by a client
  3. Within 90 days of the event
  4. Only at the next annual updating amendment

Explanation

Form ADV must be amended promptly, generally within 30 days, when previously reported information becomes materially inaccurate, including certain disciplinary events. Waiting for the annual update would not satisfy this obligation.

Question 35Regulatory Framework and Compliance

A representative wants to hold customer mail at the branch office rather than send it to the customer's address of record. Under FINRA rules, such holding of customer mail requires:

  1. Approval by the SEC regional office
  2. Written customer consent and firm procedures for review Correct answer.
  3. A waiver signed by the firm's clearing broker only
  4. No special steps if the customer is a friend of the representative

Explanation

Holding customer mail is permitted only with the customer's written authorization and under firm procedures that ensure the mail is reviewed and forwarded appropriately, to prevent concealment of misconduct. Informal relationships or third-party approvals do not satisfy the rule.

Question 36Regulatory Framework and Compliance

A member firm plans to compensate a non-registered person for referring prospective customers. Under FINRA rules, payment of such referral fees is:

  1. Prohibited because finders' fees to unregistered persons are not allowed Correct answer.
  2. Permitted only if the person works for the same firm
  3. Permitted if the payment is disclosed to the customer
  4. Permitted if the person passes a limited qualification exam

Explanation

FINRA rules prohibit paying transaction-based compensation to unregistered persons for securities-related referrals, because such payments effectively require registration. Disclosure to the customer does not cure the prohibition.

Question 37Regulatory Framework and Compliance

A firm discovers that a registered representative has been borrowing money from a customer without the firm's knowledge. Under FINRA rules, such borrowing is:

  1. Permitted if the customer is an immediate family member only
  2. Always permitted between consenting adults
  3. Permitted if the loan is documented by a promissory note
  4. Prohibited unless the firm has written procedures permitting it and the loan meets specified conditions Correct answer.

Explanation

FINRA rules restrict borrowing from or lending to customers, permitting such arrangements only when the firm's written procedures allow them and specified conditions (such as a lending institution relationship or family relationship) are met. A promissory note alone does not authorize the loan.

Question 38Regulatory Framework and Compliance

A broker-dealer maintains a margin account for a customer. Under Regulation T, the initial margin requirement for the purchase of common stock is generally:

  1. 75% of the purchase price
  2. 25% of the purchase price
  3. 100% of the purchase price
  4. 50% of the purchase price Correct answer.

Explanation

Regulation T sets the initial margin requirement for purchasing securities at 50% of the purchase price, meaning the customer must deposit at least half. Maintenance requirements set by FINRA are separate and lower.

Question 39Regulatory Framework and Compliance

An issuer conducts a Regulation D offering relying on Rule 506(b). Which statement best describes the applicable resale restriction on the securities sold?

  1. The securities are freely tradable immediately
  2. The securities may be resold only to the issuer
  3. The securities become freely tradable after 30 days
  4. The securities are restricted securities subject to holding-period and registration requirements on resale Correct answer.

Explanation

Securities sold in a Rule 506(b) offering are restricted securities; resales must comply with registration or an exemption such as Rule 144. They do not become freely tradable immediately or after a brief fixed period.

Question 40Regulatory Framework and Compliance

A firm's written supervisory procedures must be reasonably designed to achieve compliance with applicable securities laws. If a supervisor ignores red flags of unsuitable trading, the firm is most likely to be found:

  1. In violation for failing to maintain a reasonable supervisory system Correct answer.
  2. Free of liability because the representative alone executed the trades
  3. Excused because the trades were profitable for the customer
  4. Protected by the absence of customer complaints

Explanation

Firms must establish and enforce a supervisory system reasonably designed to detect and prevent violations; ignoring red flags indicates the system failed and can result in firm liability. Individual execution, profitability, or the absence of complaints does not excuse supervisory failures.

Question 41Client Onboarding and Know Your Customer

Under a risk-based approach, which customer characteristic most commonly raises the initial risk rating during onboarding?

  1. Having a fixed monthly salary deposited electronically
  2. Operating a cash-intensive business in a high-risk jurisdiction Correct answer.
  3. Holding a savings account at a local bank
  4. Being a long-standing resident of the bank's home country

Explanation

Risk-based approaches weight factors such as business type, geography, and delivery channel. Cash-intensive activity combined with a high-risk jurisdiction elevates both inherent and residual risk, triggering enhanced measures.

Question 42Client Onboarding and Know Your Customer

What is the primary purpose of a Customer Identification Program (CIP)?

  1. To assess the customer's investment risk tolerance
  2. To verify the identity of each customer before establishing a relationship Correct answer.
  3. To determine the customer's creditworthiness for lending
  4. To calculate the customer's tax withholding obligations

Explanation

A CIP requires collecting identifying information and verifying it, typically through documentary or non-documentary means, before or shortly after account opening. Its purpose is identity verification, not credit or tax analysis.

Question 43Client Onboarding and Know Your Customer

A customer refuses to provide required identifying information during onboarding. What is the most appropriate action?

  1. Open the account but restrict deposits until documents arrive
  2. Open a joint account with an existing verified customer
  3. Open the account and note the refusal in the file
  4. Decline to open the account and document the decision Correct answer.

Explanation

An institution cannot establish a relationship when it cannot satisfy CIP requirements. The correct response is to decline onboarding and record the rationale for the decision.

Question 44Client Onboarding and Know Your Customer

Which party is the beneficial owner of a legal entity customer under common ownership-prong rules?

  1. An individual owning 25% or more of the equity interests Correct answer.
  2. A bank providing a credit facility to the entity
  3. The entity's external auditor
  4. A nominee director listed on the corporate registry

Explanation

Beneficial ownership typically captures individuals who own or control a specified threshold of equity, commonly 25% or more, plus a control person. Nominee directors, auditors, and lenders are not owners by virtue of those roles.

Question 45Client Onboarding and Know Your Customer

What distinguishes enhanced due diligence (EDD) from standard customer due diligence?

  1. EDD involves deeper scrutiny and additional corroboration of higher-risk customers Correct answer.
  2. EDD is performed only at account closure
  3. EDD replaces the need for identity verification
  4. EDD applies only to corporate customers

Explanation

EDD adds measures such as source-of-funds review, senior management approval, and more frequent monitoring for higher-risk relationships. It supplements rather than replaces baseline CDD and identity verification.

Question 46Client Onboarding and Know Your Customer

Which is a commonly accepted non-documentary method of verifying a customer's identity?

  1. Reviewing a utility bill supplied by the customer
  2. Relying on a colleague's personal knowledge of the customer
  3. Accepting a verbal confirmation from the customer
  4. Checking independent credit bureau or public database records Correct answer.

Explanation

Non-documentary verification uses independent sources such as credit bureaus, public records, or fraud databases to corroborate identity. Customer-supplied documents are documentary methods, and informal assurances are insufficient.

Question 47Client Onboarding and Know Your Customer

What is the role of a Politically Exposed Person (PEP) screening during onboarding?

  1. To determine whether the customer qualifies for preferential pricing
  2. To confirm the customer's employment history for credit purposes
  3. To identify customers holding prominent public functions who pose elevated corruption risk Correct answer.
  4. To verify the customer's residency for tax reporting

Explanation

PEP screening identifies individuals entrusted with prominent public functions, and their relatives and associates, because their positions create elevated bribery and corruption risk. Such customers typically require senior approval and enhanced monitoring.

Question 48Client Onboarding and Know Your Customer

Which record should be retained to evidence that customer due diligence was completed?

  1. The marketing brochure provided at account opening
  2. The branch's staffing schedule for the onboarding day
  3. The identity verification results and risk assessment documentation Correct answer.
  4. The customer's product preference questionnaire

Explanation

Records must demonstrate that identification, verification, and risk assessment were performed. Retaining verification results and the risk rationale supports auditability and regulatory examination.

Question 49Client Onboarding and Know Your Customer

A new customer is a shell company with no apparent operations and an owner located offshore. Which onboarding response best reflects a risk-based approach?

  1. Decline automatically without any assessment
  2. Onboard but waive beneficial ownership identification
  3. Onboard at standard risk because the entity is legally registered
  4. Onboard with enhanced due diligence and senior approval Correct answer.

Explanation

Shell-like entities with opaque offshore ownership present elevated risk and warrant enhanced measures, including identifying beneficial owners and obtaining senior sign-off. Automatic rejection without assessment is not required, and waiving ownership identification is not permissible.

Question 50Client Onboarding and Know Your Customer

When should customer due diligence ideally be completed for a new relationship?

  1. At the time of the first periodic review
  2. Before the account is opened and the relationship is established Correct answer.
  3. Within one year of the first transaction
  4. Only when a transaction exceeds a reporting threshold

Explanation

CDD should be completed before establishing the relationship, with limited permitted exceptions for verification shortly after opening under controlled conditions. Deferring due diligence to a later review leaves the institution exposed.