SEC Phase 1 flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Regulated activity

An activity specified by law (for example dealing, arranging, managing investments, advising) that may only be carried out by an authorized or licensed firm or person.

Authorization requirement

A firm must obtain permission from the relevant regulator before performing regulated activity; performing it without authorization is an offence subject to enforcement.

Fit and proper test

Assessment of honesty, competence, financial soundness, and disciplinary history applied to approved persons, directors, and key function holders before and during appointment.

Approved person

An individual approved by the regulator to perform a designated function or controlled role for an authorized firm, subject to ongoing conduct and fitness standards.

Regulatory sanction

A disciplinary measure imposed by a regulator, such as a fine, public censure, restriction of business, suspension, or prohibition of an individual from regulated activity.

Territorial scope

The geographic reach of regulation, covering activities carried out in the jurisdiction and, in defined cases, marketing into or from it by overseas firms.

Breach notification duty

The obligation to report material breaches, fraud, or client money shortfalls to the regulator within prescribed timeframes and in the required format.

Rule hierarchy

The ordering of legal instruments: statute prevails over regulation, which prevails over regulator rulebooks, exchange rules, and internal firm policies.

Know your client

The onboarding rule requiring collection and verification of client identity, beneficial ownership, objectives, risk tolerance, and financial position before providing services.

Suitability

The requirement that a recommendation or discretionary decision match the client's objectives, risk profile, and circumstances, with the basis recorded.

Best execution

The duty to take all reasonable steps to obtain the best available result for a client order, weighing price, cost, speed, execution likelihood, and settlement.

Client order priority

The rule that client orders are executed promptly and fairly and take precedence over proprietary orders of the firm or its staff.

Client money segregation

Holding client money and assets separately from firm assets in designated accounts or registries, with regular reconciliation and no use for firm purposes.

Record retention period

The prescribed period, commonly five to seven years, for keeping orders, trades, communications, and suitability records and producing them to the regulator.

Insider dealing prohibition

A rule banning trading on inside information, disclosing it improperly, or encouraging others to trade on it, backed by criminal and administrative sanctions.

Market manipulation

Conduct such as false or misleading statements, wash trades, or price distortion intended to deceive market participants about supply, demand, or price.

Integrity principle

The conduct standard requiring honesty and observance of good market practice, applied to behavior inside and outside work where relevant to fitness.

Client fair treatment

The conduct principle that firms must act fairly, communicate clearly, and avoid causing foreseeable harm to clients through products, charges, or advice.

Conflicts of interest

Situations where firm or staff interests may harm a client or market; they must be identified, prevented or managed, and material ones disclosed.

Personal account dealing

Staff trading for their own account, subject to pre-clearance, bans on front-running client orders, short-term profit trading restrictions, and periodic disclosure.

Gifts and entertainment

Payments or hospitality received or given that must be logged against threshold limits and must not be intended to influence business decisions.

Information barrier

A physical or procedural separation preventing the flow of inside information between business units, supported by restricted lists and wall-crossing records.

Whistleblowing protection

Legal and policy protection for staff who report breaches in good faith, including confidential channels and a ban on retaliation or detrimental treatment.

Fitness disclosure duty

The obligation of staff and candidates to disclose criminal records, disciplinary history, and regulatory references relevant to their approved role.

Regulatory guidance status

Guidance is not binding law but states the regulator's expected standard; departing from it requires a documented rationale and equivalent alternative controls.

Policy hierarchy

The ordering of internal documents from board-approved policy through business procedures to desk instructions, each traceable to a specific rule requirement.

Policy lifecycle

The sequence of risk assessment, drafting, approval, training, monitoring, review, and revision applied to every firm policy at least annually.

Three lines of defence

A control model where the business owns risk, compliance and risk functions oversee it, and internal audit gives independent assurance to the board.

Compliance monitoring plan

A risk-based schedule of control testing, with findings logged, remediation assigned to owners with deadlines, and results reported to the board.

Outsourcing policy

Requirements for provider due diligence, written agreements, regulatory notification, exit planning, and retention of accountability for outsourced functions.

Training and competence

The framework ensuring role-appropriate training at induction and annually, with records kept and competence assessed before staff perform regulated activity.

Breach management process

The procedure to log incidents, assess impact, remediate, report internally and to the regulator when required, and update policies from lessons learned.