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NISM Series III-A (Compliance) study materials
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NISM Series III-A (Compliance) practice questions

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Question 1Securities Intermediaries Compliance (Non-Fund)

Under the SEBI (Intermediaries) Regulations, an application for registration as a stock broker is initially valid for how long before it must be renewed?

  1. Five years Correct answer.
  2. One year
  3. Ten years
  4. Three years

Explanation

Registration granted to a securities intermediary such as a stock broker remains valid for five years from the date of grant unless it is cancelled or surrendered earlier. The intermediary must apply for renewal before expiry to continue operations lawfully.

Question 2Securities Intermediaries Compliance (Non-Fund)

A stock broker's net worth requirement under SEBI regulations is monitored primarily because it reflects which compliance objective?

  1. Adequacy of investor grievance redressal
  2. Financial capacity to meet liabilities and absorb trading losses Correct answer.
  3. Timeliness of trade confirmations
  4. Accuracy of client KYC records

Explanation

Net worth requirements ensure an intermediary has sufficient capital cushion to meet obligations to clients and exchanges and to absorb losses. KYC, confirmations and grievance handling are separate compliance obligations not measured by net worth.

Question 3Securities Intermediaries Compliance (Non-Fund)

Which document must a stock broker obtain from a client before opening a trading account, recording the client's risk profile and investment experience?

  1. Income tax return of the previous year
  2. Board resolution of the client entity
  3. Annual audited financial statement
  4. Client registration form with KYC and risk profiling Correct answer.

Explanation

Account opening requires a client registration form capturing KYC details and, for advisory or product suitability, risk profiling information. Financial statements or tax returns are not mandatory for every client onboarding.

Question 4Securities Intermediaries Compliance (Non-Fund)

A broker receives a client complaint alleging unauthorized trading in the client's account. Under SEBI's grievance redressal framework, what is the broker's first required step?

  1. Ignore the complaint until the client approaches SEBI
  2. Immediately close the client's account
  3. Log the complaint in the prescribed complaint register and resolve within the specified timeline Correct answer.
  4. Refer the matter to the exchange without any internal review

Explanation

Intermediaries must maintain a complaint register, acknowledge complaints and resolve them within prescribed timelines, escalating to the exchange or SEBI only if unresolved. Closing the account or ignoring the complaint would itself be a compliance violation.

Question 5Securities Intermediaries Compliance (Non-Fund)

Under the Prevention of Money Laundering Act framework applicable to securities intermediaries, a broker must report suspicious transactions to which authority?

  1. Securities and Exchange Board of India directly
  2. Ministry of Corporate Affairs
  3. Financial Intelligence Unit-India Correct answer.
  4. Reserve Bank of India

Explanation

Suspicious transaction reports are filed with the Financial Intelligence Unit-India, which is the designated authority under the PMLA. SEBI supervises AML compliance but does not receive the STR itself.

Question 6Securities Intermediaries Compliance (Non-Fund)

A broker's compliance officer discovers that a dealer has been executing trades for a client without a valid power of attorney. What is the most appropriate immediate action?

  1. Suspend the unauthorized arrangement and report the breach through the internal escalation process Correct answer.
  2. Transfer the dealer to another department without recording the breach
  3. Continue until the power of attorney is executed retrospectively
  4. Adjust the trades in the client's favour without disclosure

Explanation

Unauthorized trading without a valid mandate is a serious breach requiring immediate cessation and escalation to senior management and, where required, the regulator. Retrospective documentation or silent internal transfers do not cure the violation.

Question 7Securities Intermediaries Compliance (Non-Fund)

Which of the following best describes the segregation requirement for client securities held by a stock broker?

  1. Client securities may be pledged for the broker's bank borrowings
  2. Client securities must be kept separate from broker-owned securities and not used for the broker's own obligations Correct answer.
  3. Client securities may be lent to other clients without consent
  4. Client securities may be pooled with proprietary holdings as long as records exist

Explanation

Client securities and funds must be segregated from the broker's own assets and cannot be used to meet proprietary obligations. Pooling, pledging for broker borrowings or lending without client consent breaches this duty.

Question 8Securities Intermediaries Compliance (Non-Fund)

A broker's internal audit identifies that margin collections from clients were delayed by two days on several occasions. What is the key regulatory concern?

  1. It is permitted if the client is a high-net-worth individual
  2. It is irrelevant if the trades were profitable
  3. Delayed margin collection can expose the broker and exchange to settlement risk and breaches margin rules Correct answer.
  4. It only affects the broker's marketing performance

Explanation

Margin collection timelines exist to protect the clearing system from counterparty default risk. Delays breach exchange and SEBI margin requirements regardless of client wealth or trade profitability.

Question 9Securities Intermediaries Compliance (Non-Fund)

Under SEBI's know-your-client norms, when must a broker conduct periodic re-verification of a client's KYC records?

  1. Only if the exchange issues a specific notice
  2. Only when the client requests a new product
  3. Only at the time of account closure
  4. At periodic intervals based on the client's risk category and on trigger events Correct answer.

Explanation

KYC norms require periodic updation based on risk categorization, along with event-based re-verification such as changes in identity or address. Waiting for account closure or exchange notices would breach the ongoing due diligence obligation.

Question 10Securities Intermediaries Compliance (Non-Fund)

A broker wishes to appoint an authorized person to solicit business on its behalf. Which compliance step is essential before the authorized person begins operations?

  1. Submission of the authorized person's resume to the client
  2. Verbal approval from the broker's compliance officer
  3. Registration of the authorized person with the exchange and execution of a prescribed agreement Correct answer.
  4. Payment of a fee to SEBI without exchange registration

Explanation

Authorized persons must be registered with the relevant exchange and operate under a prescribed agreement with the broker, who remains responsible for their conduct. Informal approval or resume submission does not satisfy this requirement.

Question 11Securities Intermediaries Compliance (Non-Fund)

A broker's compliance officer notices that research reports are being circulated to clients without the required disclosures about the firm's holdings in the recommended securities. What should be done?

  1. Halt circulation until the mandated disclosures are included and review the research process Correct answer.
  2. Remove the analyst's name from the report and proceed
  3. Circulate with a verbal disclaimer to select clients
  4. Continue circulation and add disclosures in the next quarter

Explanation

Research reports must carry prescribed disclosures about conflicts of interest, including the firm's holdings, before circulation. Verbal or delayed disclaimers do not cure the disclosure deficiency.

Question 12Securities Intermediaries Compliance (Non-Fund)

Which record-keeping obligation applies to a stock broker regarding client orders and trade records under SEBI regulations?

  1. Maintain records only when a dispute arises
  2. Maintain records only for the current financial year
  3. Maintain records only for institutional clients
  4. Maintain records for the prescribed minimum period and produce them on demand to the regulator or exchange Correct answer.

Explanation

Brokers must preserve order and trade records for the prescribed minimum period and make them available to SEBI or the exchange on demand. Limiting records to the current year or to disputes would breach this obligation.

Question 13Securities Intermediaries Compliance (Non-Fund)

A client instructs a broker to execute a trade in a manner that would violate the exchange's position limits. What is the broker's compliant response?

  1. Execute the trade in a related account to avoid detection
  2. Execute the trade and inform the exchange later
  3. Execute the trade and charge an additional fee
  4. Decline to execute the instruction and explain the position limit restriction Correct answer.

Explanation

Position limits are prudential safeguards, and a broker must not execute orders designed to breach them. Splitting trades across related accounts to evade limits is itself a violation.

Question 14Securities Intermediaries Compliance (Non-Fund)

Under SEBI's code of conduct for stock brokers, which practice is specifically prohibited in dealings with clients?

  1. Providing a written contract note for each trade
  2. Explaining the risks of margin trading
  3. Inducing a client to trade excessively to generate brokerage Correct answer.
  4. Maintaining a segregated client bank account

Explanation

The code of conduct prohibits brokers from inducing unnecessary or excessive trading to generate brokerage, known as churning. Written contract notes, risk explanations and segregated accounts are compliant practices.

Question 15Securities Intermediaries Compliance (Non-Fund)

A broker discovers that one of its employees has been front-running client orders. Which action best reflects the required compliance response?

  1. Investigate, take disciplinary action, and report the matter as required to the exchange or SEBI Correct answer.
  2. Reassign the employee to a different client desk
  3. Compensate affected clients without reporting the conduct
  4. Reprimand the employee privately and allow continued trading

Explanation

Front-running is a market abuse that must be investigated, remedied and reported under the applicable regulatory framework. Private reprimands, reassignment or silent compensation leave the misconduct unreported.

Question 16Securities Intermediaries Compliance (Non-Fund)

Which of the following is a required element of a broker's anti-money laundering policy for client accounts?

  1. Ongoing monitoring of transactions and reporting of suspicious activity Correct answer.
  2. Accepting cash deposits above prescribed thresholds without documentation
  3. Guaranteeing profits to clients
  4. Waiving KYC for repeat clients

Explanation

AML policies must include ongoing transaction monitoring and suspicious transaction reporting as part of customer due diligence. Profit guarantees, KYC waivers and undocumented cash acceptance are non-compliant.

Question 17Securities Intermediaries Compliance (Non-Fund)

A broker's client has not submitted the required periodic KYC updation despite reminders. What is the appropriate compliance action?

  1. Permanently close the account without notice
  2. Transfer the account to another broker
  3. Restrict further transactions until KYC is updated, in line with the intermediary's policy Correct answer.
  4. Allow unlimited trading to retain the client

Explanation

Where periodic KYC updation is not completed, the intermediary should restrict transactions in line with its policy and regulatory guidance rather than permitting unmonitored activity. Immediate closure without notice or transferring the account are not the prescribed responses.

Question 18Securities Intermediaries Compliance (Non-Fund)

A broker's compliance officer is reviewing the firm's risk management framework. Which control most directly addresses operational risk arising from a technology failure in the order routing system?

  1. A revised client risk profiling questionnaire
  2. An increase in the number of dealers
  3. A higher brokerage rate for clients
  4. A documented business continuity and disaster recovery plan with periodic testing Correct answer.

Explanation

Operational risk from system failures is managed through business continuity and disaster recovery arrangements that are documented and tested periodically. Pricing, staffing and client profiling do not address technology resilience.

Question 19Securities Intermediaries Compliance (Non-Fund)

An intermediary's compliance officer reports directly to the board and also heads the sales division. Why is this arrangement a governance concern?

  1. Combining compliance oversight with revenue responsibilities creates a conflict that undermines independent supervision Correct answer.
  2. It improves client acquisition
  3. It is required by SEBI for small brokers
  4. It reduces the cost of compliance

Explanation

Compliance functions must be independent of business lines so that oversight is not compromised by revenue targets. Dual roles create conflicts of interest and weaken the control environment.

Question 20Securities Intermediaries Compliance (Non-Fund)

A broker identifies that a client's trading pattern involves rapid circular trades between related accounts with no apparent economic purpose. This pattern most likely indicates which compliance risk?

  1. A routine margin funding arrangement
  2. Wash trades or manipulative trading requiring investigation and reporting Correct answer.
  3. An ordinary tax-loss harvesting strategy
  4. A simple portfolio rebalancing exercise

Explanation

Circular trades between related accounts without economic purpose may constitute wash trades or manipulation, which must be investigated and reported. Ordinary rebalancing, margin funding or tax harvesting have identifiable economic rationale and are not characterized by circular self-dealing.

Question 21Securities Intermediaries Compliance (Non-Fund)

A broker's compliance review finds that contract notes were issued without the unique client code and exchange details. What is the regulatory significance?

  1. Contract notes need only show the brokerage amount
  2. Contract notes must contain prescribed particulars, and omissions impair client protection and audit trails Correct answer.
  3. Contract notes may omit exchange details if the client agrees
  4. Contract notes are optional for small trades

Explanation

Contract notes must include prescribed particulars such as the unique client code and exchange details to preserve the audit trail and protect clients. Client consent cannot waive mandatory contents.

Question 22Securities Intermediaries Compliance (Non-Fund)

A broker is evaluating whether to onboard a politically exposed person as a client. Which approach best reflects enhanced due diligence under AML norms?

  1. Apply enhanced scrutiny of source of funds and senior management approval before onboarding Correct answer.
  2. Reject all politically exposed persons without review
  3. Onboard immediately with standard KYC
  4. Onboard only if the person provides a verbal assurance

Explanation

Politically exposed persons present higher money-laundering risk and require enhanced due diligence, including source-of-funds verification and senior management approval. Blanket rejection or verbal assurances do not satisfy the requirement.

Question 23Securities Intermediaries Compliance (Non-Fund)

A broker's compliance officer must decide whether a client's request to transfer securities to a third-party account without consideration requires additional scrutiny. Which principle governs?

  1. Such transfers need only a verbal request
  2. Such transfers are always prohibited
  3. Such transfers are permitted only for institutional clients
  4. Off-market transfers without consideration require documented justification and diligence to prevent misuse Correct answer.

Explanation

Off-market transfers without consideration carry misuse risk and require documented justification and due diligence under the intermediary's policies. They are not categorically prohibited but cannot rest on a verbal request alone.

Question 24Securities Intermediaries Compliance (Non-Fund)

Which of the following best describes the purpose of the SEBI complaints redressed through SCORES platform for investors dealing with intermediaries?

  1. To set brokerage rates for intermediaries
  2. To adjudicate criminal cases against brokers
  3. To provide a centralized mechanism for lodging and tracking complaints against intermediaries Correct answer.
  4. To replace the broker's internal grievance redressal system entirely

Explanation

SCORES provides a centralized platform for investors to lodge complaints against intermediaries and track their resolution, complementing rather than replacing internal grievance mechanisms. It does not adjudicate criminal matters or fix brokerage rates.

Question 25Securities Intermediaries Compliance (Non-Fund)

A broker's compliance team is reviewing the suitability of a complex derivative product recommended to a retail client. Which factor is most relevant to the suitability assessment?

  1. The client's investment objective, risk tolerance and understanding of the product Correct answer.
  2. The popularity of the product among other clients
  3. The commission earned on the product
  4. The broker's own inventory position in the product

Explanation

Suitability assessments must consider the client's objectives, risk tolerance and understanding of the product. Broker inventory, commissions and popularity are conflicts or irrelevant factors that should not drive recommendations.

Question 26Securities Intermediaries Compliance (Non-Fund)

A SEBI-registered stock broker wants to open a new branch office in another state. Under the intermediary compliance framework, which obligation applies before the branch begins client-facing operations?

  1. The broker must obtain prior approval from SEBI for each new branch and pay a separate registration fee
  2. The broker must intimate the exchange and ensure the branch operates under the same registration and compliance framework, with the compliance officer's oversight extended to it Correct answer.
  3. The broker may operate the branch freely because registration is entity-wide and no intimation to any authority is needed
  4. The broker must register the branch as a separate intermediary with SEBI

Explanation

Broker registration is entity-level, but the compliance framework must cover every branch and business location. Exchanges require intimation of new offices and the designated compliance officer remains responsible for oversight across locations. A separate SEBI registration or per-branch fee is not the rule.

Question 27Securities Intermediaries Compliance (Non-Fund)

Which document primarily governs the contractual relationship between a stock broker and a client and sets out the rights, obligations, and risk disclosures?

  1. The client registration or KYC application form combined with the member-client agreement Correct answer.
  2. The SEBI (Intermediaries) Regulations, 2008 alone
  3. The broker's annual report
  4. The exchange rulebook

Explanation

The member-client agreement, together with the KYC/registration documentation, establishes the contractual terms between broker and client, including risk disclosures and rights. Regulations and exchange rules provide the framework but do not themselves constitute the client contract.

Question 28Securities Intermediaries Compliance (Non-Fund)

A compliance officer at a broker finds that the firm's designated director responsible for compliance has resigned and no replacement has been intimated. What is the most appropriate immediate action?

  1. Continue operations indefinitely until a replacement is found at leisure
  2. Suspend all client onboarding permanently
  3. Ensure a replacement is appointed promptly and the change is intimated to SEBI and the exchanges as required Correct answer.
  4. Transfer compliance duties informally to the sales head without any intimation

Explanation

Intermediaries must maintain a designated compliance officer/director and intimate changes in key personnel to SEBI and the exchanges. A vacancy should be filled promptly with proper intimation, not left open or handled informally.

Question 29Securities Intermediaries Compliance (Non-Fund)

Under the SEBI (Intermediaries) Regulations, 2008, which of the following is a general obligation of an intermediary?

  1. Guaranteeing a minimum return to clients
  2. Sharing confidential client data with competitors on request
  3. Avoiding any communication with the regulator
  4. Maintaining adequate records of its activities and preserving them for the prescribed period Correct answer.

Explanation

Intermediaries must keep proper books, records, and documents of their activities and retain them for the period specified by regulation. They must also cooperate with the regulator, not avoid it.

Question 30Securities Intermediaries Compliance (Non-Fund)

A broker's compliance team is designing controls for handling investor grievances. Which arrangement best meets the regulatory expectation?

  1. Only grievances received through court notices are entertained
  2. Grievances are handled verbally with no record to save time
  3. Grievances are forwarded to the client's bank for resolution
  4. A designated grievance redressal mechanism with tracked resolution, escalation, and reporting to the exchange and SEBI Correct answer.

Explanation

Brokers must maintain an effective grievance redressal mechanism, log and resolve complaints within timelines, and report status to exchanges and SEBI. Complaints escalated to SCORES must also be addressed within the prescribed timelines.

Question 31Securities Intermediaries Compliance (Non-Fund)

A client's account shows a pattern of deposits followed immediately by withdrawals to unrelated third-party bank accounts. Which compliance response is most appropriate?

  1. Ignore the pattern because the amounts are small
  2. Close the account without any documentation
  3. Report the client's details to other brokers as a warning
  4. Treat it as a potential suspicious transaction, conduct enhanced monitoring, and consider a suspicious transaction report Correct answer.

Explanation

Structuring and rapid pass-through of funds to unrelated accounts are red flags under anti-money-laundering norms. The broker should apply enhanced due diligence and, where warranted, file a suspicious transaction report with FIU-IND.

Question 32Securities Intermediaries Compliance (Non-Fund)

Which of the following best describes the role of the compliance officer in a stock broking firm?

  1. To execute client orders on the trading terminal
  2. To market new products to high-net-worth clients
  3. To independently monitor adherence to securities laws, regulations, and internal policies and report to the board Correct answer.
  4. To maximize trading revenue for the firm

Explanation

The compliance officer independently monitors and ensures compliance with applicable laws and internal policies and reports to the board or its committee. The role must be insulated from revenue-generating functions to avoid conflicts.

Question 33Securities Intermediaries Compliance (Non-Fund)

A broker receives a request from a client to open an account in the name of a minor without a guardian. How should the compliance team respond?

  1. Refuse all accounts for minors permanently
  2. Open the account in the minor's name with the minor as sole holder and no guardian
  3. Open the account with a guardian as the natural or legal guardian, as required for minor accounts Correct answer.
  4. Open the account in the name of the minor's school

Explanation

Accounts for minors must be opened through a guardian who operates the account on the minor's behalf. The guardian's KYC is required along with the minor's details.

Question 34Securities Intermediaries Compliance (Non-Fund)

A broker's compliance review finds that the firm has not conducted the mandatory annual inspection of its books by the exchange-designated auditor. What is the consequence?

  1. Automatic cancellation of all client accounts
  2. Non-compliance with regulatory requirements that can attract penalties and adverse action by SEBI or the exchange Correct answer.
  3. No consequence because internal audits substitute for exchange inspections
  4. The broker may self-certify the inspection

Explanation

Stock brokers are subject to periodic inspection by the exchange, and failure to cooperate or comply can lead to penalties and regulatory action. Internal audit does not replace the exchange's inspection.

Question 35Securities Intermediaries Compliance (Non-Fund)

Which of the following is a key element of the code of conduct for stock brokers regarding fair dealing with clients?

  1. Sharing order flow information with selected clients in advance
  2. Executing client orders on a priority determined by the broker's own proprietary positions
  3. Refraining from making misleading statements and ensuring fair treatment of all clients Correct answer.
  4. Guaranteeing profits on advisory recommendations

Explanation

The code of conduct requires brokers to deal fairly and honestly with clients and avoid misleading or deceptive practices. Preferential access to order information or guaranteed profits violates these standards.

Question 36Securities Intermediaries Compliance (Non-Fund)

A broker's compliance officer notices that the firm's risk management policy does not address technology-related outages on the trading platform. Which control should be added?

  1. A plan to outsource compliance entirely to the exchange
  2. A business continuity and disaster recovery plan with periodic testing and incident reporting Correct answer.
  3. A policy to compensate clients for all market losses
  4. An instruction to ignore outages below one hour

Explanation

Intermediaries must maintain robust business continuity and disaster recovery arrangements, periodically test them, and report significant incidents. Technology risk is a core part of the risk management framework.

Question 37Securities Intermediaries Compliance (Non-Fund)

A broker's compliance officer is reviewing the firm's policy on conflicts of interest. Which measure most directly mitigates conflicts between proprietary trading and client order execution?

  1. Removing the compliance officer from the trading floor entirely
  2. Encouraging dealers to share client order information with the proprietary desk
  3. Maintaining separate desks, information barriers, and a documented order-handling policy that prioritizes client orders Correct answer.
  4. Allowing dealers to trade for the firm before executing client orders

Explanation

Conflicts are managed through information barriers, segregation of functions, and documented policies that ensure client orders are not disadvantaged. Front-running client orders is prohibited.

Question 38Securities Intermediaries Compliance (Non-Fund)

A client asks a broker to execute trades on the basis of unpublished price-sensitive information about a listed company. What should the compliance officer do?

  1. Advise the client to split the order to avoid detection
  2. Execute the trade but charge a higher brokerage
  3. Refuse the instruction, document the matter, and consider reporting obligations under insider trading norms Correct answer.
  4. Execute the trade because the client instructed it

Explanation

Trading on unpublished price-sensitive information violates the SEBI (Prohibition of Insider Trading) Regulations. The broker must refuse, maintain records, and follow reporting and surveillance obligations.

Question 39Securities Intermediaries Compliance (Non-Fund)

Which of the following best describes the requirement for a stock broker regarding the maintenance of a register of clients' securities held in custody?

  1. Records may be destroyed after one month
  2. A record identifying each client's securities and the basis of holding must be maintained and reconciled Correct answer.
  3. Only aggregate holdings need to be recorded annually
  4. No register is needed if securities are held in dematerialized form

Explanation

Brokers must maintain accurate records identifying client securities and holdings and reconcile them periodically. Dematerialization does not eliminate the record-keeping obligation.

Question 40Securities Intermediaries Compliance (Non-Fund)

A broker's compliance team is reviewing the firm's advertisement of a new margin trading product. Which statement is most consistent with regulatory requirements?

  1. Advertisements must be fair, not misleading, and consistent with the actual features and risks of the product Correct answer.
  2. Advertisements may promise assured returns if approved by the sales head
  3. Advertisements may omit risk warnings to keep the message short
  4. Advertisements may compare returns with guaranteed bank deposits

Explanation

Marketing communications must be fair, accurate, and not misleading, and must disclose material risks. Promising assured returns or omitting risk warnings violates advertising and conduct norms.

Question 41Securities Intermediaries Compliance (Non-Fund)

Under the SEBI (Intermediaries) Regulations, 2008, an intermediary must inform SEBI of certain events. Which of the following is such an event?

  1. A change in the intermediary's registered address or status Correct answer.
  2. A change in the price of a listed security
  3. A routine change in a client's trading pattern
  4. A change in the exchange's trading hours

Explanation

Intermediaries must intimate SEBI of material changes such as changes in address, status, or constitution. Routine market or client events are not reportable to SEBI by the intermediary.

Question 42Securities Intermediaries Compliance (Non-Fund)

A broker's compliance officer discovers that an employee has been misappropriating client funds. What is the most appropriate sequence of actions?

  1. Immediately safeguard client funds, investigate, report to the exchange and SEBI, and take disciplinary and legal action Correct answer.
  2. Conceal the matter to protect the firm's reputation
  3. Transfer the employee to another branch
  4. Ask the employee to repay quietly without any record

Explanation

Misappropriation of client funds is a serious violation requiring immediate protective action, investigation, regulatory reporting, and legal steps. Concealment or quiet settlement breaches compliance duties.

Question 43Securities Intermediaries Compliance (Non-Fund)

Which of the following best describes the purpose of the annual compliance certificate that a stock broker may be required to submit?

  1. To confirm that the broker has complied with the applicable regulations and internal policies during the period Correct answer.
  2. To certify the broker's profitability
  3. To replace the exchange inspection
  4. To guarantee future returns to clients

Explanation

The compliance certificate confirms adherence to applicable regulations and internal policies for the period. It is a compliance attestation, not a financial performance or return guarantee.

Question 44Securities Intermediaries Compliance (Non-Fund)

A broker's compliance officer is reviewing the firm's outsourcing of its back-office operations to a third-party vendor. Which control is most important?

  1. Allowing the vendor to handle client grievances without broker oversight
  2. Ensuring the vendor has no written agreement to reduce paperwork
  3. Transferring regulatory responsibility entirely to the vendor
  4. A documented service agreement with confidentiality, data security, audit rights, and regulatory access provisions Correct answer.

Explanation

Outsourcing does not transfer regulatory responsibility. The broker must have a proper agreement covering confidentiality, data protection, audit rights, and access for regulators, and must retain oversight.

Question 45Securities Intermediaries Compliance (Non-Fund)

Which of the following is a required element of a stock broker's policy for handling client funds?

  1. Keeping client funds in designated client accounts separate from the broker's own accounts Correct answer.
  2. Using client funds for the broker's proprietary trading
  3. Holding client funds in cash without any records
  4. Mixing client funds with the broker's own funds for operational convenience

Explanation

Client funds must be kept in designated accounts segregated from the broker's own funds, with proper records and reconciliation. Commingling or using client funds for proprietary purposes is prohibited.

Question 46Securities Intermediaries Compliance (Non-Fund)

A broker's compliance officer notices that a dealer is executing trades for a client without a valid power of attorney where one is required. What is the appropriate action?

  1. Ask the dealer to sign the power of attorney on the client's behalf
  2. Ignore the issue if the trades are profitable
  3. Stop the practice, obtain proper authorization or discontinue discretionary trading, and document the remediation Correct answer.
  4. Allow the practice because the client benefits from the trades

Explanation

Discretionary trading requires proper written authorization from the client. Without it, the broker must stop the practice, remediate, and document the action taken.

Question 47Securities Intermediaries Compliance (Non-Fund)

Which of the following best describes the obligation of a stock broker regarding the maintenance of a complaints register?

  1. Complaints may be deleted after resolution
  2. All complaints must be recorded, tracked, and reported with resolution status to the exchange Correct answer.
  3. Complaints need not be recorded if resolved verbally
  4. Only complaints from institutional clients need recording

Explanation

Brokers must maintain a complaints register recording all complaints, their status, and resolution, and report the data to the exchange. Deleting resolved complaints breaks the audit trail.

Question 48Securities Intermediaries Compliance (Non-Fund)

A broker wants to launch a new advisory service. Which regulatory requirement is most relevant before launch?

  1. Compliance with the applicable SEBI investment adviser or research analyst framework, including registration or enrollment where required, and disclosure of conflicts Correct answer.
  2. No requirement applies because advisory is not a regulated activity
  3. Only approval from the sales team is required
  4. Approval from a competitor is required

Explanation

Advisory and research activities are separately regulated and may require registration or enrollment under the relevant SEBI regulations, along with conflict disclosures. Launching without meeting these requirements is non-compliant.

Question 49Securities Intermediaries Compliance (Non-Fund)

Which of the following is the primary purpose of the periodic internal audit of a stock broker?

  1. To independently assess whether internal controls and regulatory requirements are being followed Correct answer.
  2. To replace the role of the compliance officer
  3. To increase brokerage revenue
  4. To market the broker's services to clients

Explanation

Internal audit independently evaluates the adequacy of internal controls and adherence to regulations, providing assurance to management and the board. It complements rather than replaces compliance.

Question 50Securities Intermediaries Compliance (Non-Fund)

A client requests that the broker transfer securities from the client's account to a third party's account. Which compliance check is most appropriate before executing the transfer?

  1. Execute the transfer immediately because the client instructed it
  2. Verify the client's authorization, the legitimacy of the third-party destination, and applicable KYC and anti-money-laundering checks Correct answer.
  3. Transfer without any documentation
  4. Refuse all third-party transfers permanently

Explanation

Transfers to third parties require verified client authorization and due diligence on the destination to prevent fraud and money laundering. Documentation must support the transaction.