Body of Knowledge

The Monitoring and Surveillance Curriculum will provide an overview of monitoring and surveillance systems of investment advisory and broker dealer firms relating to portfolio management and sales practices, trade allocations, trading practices, code of ethics oversight, advertising, marketing and corporate communications, exception reports, audits and inspections, supervisory control systems, conflicts of interest and customer complaints.

The readings and course materials are designed to familiarize candidates with the general requirements for monitoring and surveillance systems in these areas, specific matters to be monitored in each area and tests and considerations useful when determining how to engage in monitoring and surveillance in these areas.

Readings

1.
"How to Conduct an Annual Compliance Review” Richard D. Marshall
  
2.
“Questions Advisers Should Ask While Establishing or Reviewing Their Compliance Programs” U.S. Securities and Exchange Commission (May 2006)
  
3.
Money Manager’s Compliance Guide, Clifford J. Alexander and Arthur C. Delibert, Thompson Publishing Company (1995)
 tab500 tab630
4.
“Assessing the Adequacy and Effectiveness of a Fund’s Compliance Policies and Procedures” Investment Company Institute (December 2005)
 
5.
“More on Mutual Fund Breakpoints” NSCP Currents March/April 2003, Susan Krawczyk
  
6.
Gifts and Gratuities NASD Notice to Members 06-69, December 2006
  
7.
“Risk Management and Internal Controls” NSCP Currents May/June 2006, Lisa Roth
  
8.
“Developments Under NASD Rule 3012 – Supervisory Control Systems” NSCP Currents May/June 2006, Michelle L. Jacko and Michael K. Wolensky
 
9.
"Investment Adviser Trading Desk Activities" NSCP 1999 National Membership Meeting; Cliff J. Alexander
 
10.
“An Investment Company Director’s Guide to Oversight of Codes of Ethics and Personal Investing” Investment Company Institute (July 2000)
 
11.
“2006 CCOutreach Regional Seminars: Investment Adviser Case Study Discussion Guide” U.S. Securities and Exchange Commission
  
12.
“Developments in Trading Desk Activities” NSCP 2005 National Membership Meeting, J. Craig Long and Anders W. Franzon
  
13.
“BD Supervision” NSCP Currents December/November 2004, James F. McGuire, Charles V. Senatore and Ben A. Indek
 

14.
“How Conflicted Are You? BD Conflict Reviews” NSCP Currents, January/February 2006, Kerry E. Cunningham
  
15.
“Broker Dealer Red Flag Review” NSCP 2005 National Membership Meeting, Richard C. Szuch and Kenneth L. Wagner
 

Every test question on NSCP's certification examination must be referenced to a valid, credible, and current resource. In addition to the aforementioned resources noted by the CDC, the Test Development Committee, during the item writing process, also referenced the following:

  • NASD NOTICE TO MEMBERS 99-57
  • NASD NOTICE TO MEMBERS 98-96
  • NASD Rule 3011; NOTICE TO MEMBERS 06-07
  • “Trading and Brokerage,” Thomas S. Harman, Morgan, Lewis & Bockius, LLP; Investment Company Institute’s Mutual Funds and Investment Management Conference
  • NASD Rule 2210
  • NASD NOTICE TO MEMBERS 98-38

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Learning Objective

The candidate should be able to demonstrate a thorough knowledge of matters requiring monitoring and surveillance in portfolio management and sales practices, trade allocations, trading practices, code of ethics oversight, advertising, marketing and corporate communications, exception reports, audits and inspections, supervisory control systems, conflicts of interest and customer complaints. The candidate should also be able to demonstrate knowledge regarding specific tests that may be used to test adherence to policies and procedures in each of these areas.

In this section you will occasionally find the same assigned readings referenced in different sections that correspond to the title of that section (e.g., portfolio management and sales practices, trade allocations). We have used this approach to focus on the important themes in the Monitoring and Surveillance Systems area of the curriculum.

Learning Outcomes

Subdomain A. Exception Reports
“Assessing the Adequacy and Effectiveness of a Fund’s Compliance Policies and Procedures”
Investment Company Institute, December 2005

After reading pages 10 and 11 of this document, candidates should be able to:

  • Explain what an exception report is. (Application and Analysis)
  • Describe how exception reports can be used to determine whether policies and procedures are being implemented effectively. (Knowledge and Comprehension)
  • Discuss how exception reports may be used to conduct trend analyses useful when monitoring conformance to a firm’s compliance program. (Knowledge and Comprehension)

Subdomain B. Portfolio Management / Sales Practices
"How to Conduct and Annual Compliance Review”
Richard D. Marshall

After reading Appendix B of this document, candidates should be able to:

  • Describe two transactional tests that may be used to monitor portfolio management processes. (Knowledge and Comprehension)
  • Discuss a forensic test that may be used to monitor portfolio management processes. (Knowledge and Comprehension)
  • Describe a periodic test that may be used to monitor portfolio management processes. (Knowledge and Comprehension)

“Questions Advisers Should Ask While Establishing or Reviewing Their Compliance Programs” U.S.
Securities and Exchange Commission, May 2006

After reading this document, candidates should be able to:

  • Identify client information that should be collected and maintained by investment advisers to provide clients with suitable investment advice. (Knowledge and Comprehension)
  • Describe an investment adviser’s compliance processes, including supervisory procedures, which should reasonably ensure that suitable investment advice is provided to each client. (Knowledge and Comprehension)
  • Describe compliance processes, including supervisory procedures, which should reasonably ensure that an investment adviser’s advice is consistent with disclosures in brochures, marketing materials, and contracts. (Application and Analysis)

“Money Manager’s Compliance Guide” Clifford J. Alexander and Arthur C. Delibert
Thompson Publishing Company, 1995

After reading Tab 511 of this publication, candidates should be able to:

  • Explain the difference between fundamental and nonfundamental investment policies. (Application and Analysis)
  • List the fundamental investment policies required for each investment company pursuant to Section 8(b)(1) of the Investment Company Act. (Knowledge and Comprehension)
  • Recall the test used to determine whether an investment company is concentrated in a particular industry. (Knowledge and Comprehension)
  • Explain the test used to determine whether an investment company is diversified. (Application and Analysis)
  • Describe the Investment Company Name Test. (Knowledge and Comprehension)



“2006 CCOutreach Regional Seminars: Investment Adviser Case Study Discussion Guide”
U.S. Securities and Exchange Commission

After reading Variation One of this discussion guide, candidates should be able to:

  • Discuss examples of review procedures that may be used to determine whether an investment adviser is adhering to client investment restrictions and guidelines. (Knowledge and Comprehension)
  • Describe quality control processes that an investment adviser may use to monitor client investment objectives and restrictions. (Knowledge and Comprehension)

“More On Mutual Fund Breakpoints”
Susan Krawczyk, NSCP Currents March/April 2003

After reading this article, candidates should be able to:

  • Define what “breakpoints” are. (Knowledge and Comprehension)
  • Describe five sales practice issues for firms selling funds offered under breakpoint programs. (Knowledge and Comprehension)
  • Discuss considerations that must be taken into account by selling firms in designing appropriate supervisory procedures and practices related to breakpoints. (Knowledge and Comprehension)

Subdomain C. Trading Practices
“How to Conduct and Annual Compliance Review”
Richard D. Marshall

After reading Appendix B of this document, candidates should be able to:

  • Describe two transactional tests that may be used to monitor trading practices of investment advisers. (Knowledge and Comprehension)
  • Discuss two forensic tests that may be used to monitor trading practices of investment advisers. (Knowledge and Comprehension)
  • Describe a periodic test that may be used to monitor trading practices of investment advisers. (Knowledge and Comprehension)


“Questions Advisers Should Ask While Establishing or Reviewing Their Compliance Programs”
U.S. Securities and Exchange Commission, May 2006

After reading this document, candidates should be able to:

  • Discuss questions useful for confirming whether a firm’s trading practices are consistent with seeking best execution. (Knowledge and Comprehension)
  • Describe a forensic test that may be used to test whether brokerage commissions paid by a firm are consistent with the firm’s status as a fiduciary. (Knowledge and Comprehension)
  • List the regulations that must be complied with when making certain types of trades. (Knowledge and Comprehension)


“Broker Dealer Red Flag Review” NSCP 2005 National Membership Meeting
Richard C. Szuch and Kenneth L. Wagner

After reading page 325 of this document, candidates should be able to:

  • List various red flags that may indicate unauthorized trades. (Knowledge and Comprehension)


“Developments in Trading Desk Activities” NSCP 2005 National Membership Meeting
J. Craig Long and Anders W. Franzon

After reading this document, candidates should be able to:

  • List the nine written supervisory procedures required to be maintained by firms engaging in market making activities. (Knowledge and Comprehension)
  • Identify other trading practice rules that firms engaging in market making activities should discuss in their written supervisory procedures (Knowledge and Comprehension)
  • List various anti-competitive practices that should be addressed in written supervisory procedures of firms engaging in market making activities. (Knowledge and Comprehension)
  • Discuss monitoring methodologies that should be considered when preparing written supervisory procedures for firms engaging in OTC trading and market making activities. (Knowledge and Comprehension)



“2006 CCOutreach Regional Seminars: Investment Adviser Case Study Discussion Guide”
U.S. Securities and Exchange Commission

After reading Variation Four of this discussion guide, candidates should be able to:

  • Discuss quality control processes that may be used to monitor whether a firm is seeking best execution for managed accounts. (Knowledge and Comprehension)
  • Describe examples of review procedures that may be used to determine whether a firm is seeking best execution for its managed accounts. (Knowledge and Comprehension)



Subdomain D. Trade Allocations

After reading Section I of this document, candidates should be able to:

  • Summarize the conditions that should be met if a firm chooses to aggregate or “bunch” orders. (Synthesis and Evaluation)
  • List the features typically found in written allocation procedures of investment advisers. (Knowledge and Comprehension)



“Questions Advisors Should Ask While Establishing or Reviewing Their Compliance Programs” U.S. Securities and Exchange Commission, May 2006

After reading this document, candidates should be able to:

  • Discuss questions useful for confirming whether an investment adviser’s trade allocations are fair to each of its clients. (Knowledge and Comprehension)
  • Describe forensic tests that may be used to test the fairness of an investment adviser’s actual trade allocations. (Knowledge and Comprehension)

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Subdomain E. Code of Ethics Oversight
“How to Conduct and Annual Compliance Review” by Richard D. Marshall

After reading Appendix B of this document, candidates should be able to:

  • Describe two transactional tests that may be used to monitor proprietary trading on an investment adviser and personal trading activities of supervised persons. (Knowledge and Comprehension)
  • Discuss a forensic test that may be used to monitor proprietary trading on an investment adviser and personal trading activities of supervised persons. (Knowledge and Comprehension)
  • Describe a periodic test that may be used to monitor proprietary trading on an investment adviser and personal trading activities of supervised persons. (Knowledge and Comprehension)



“An Investment Company Director’s Guide to Oversight of Codes of Ethics and Personal Investing”
Investment Company Institute, July 2000

After reading this document, candidates should be able to:

  • Summarize the reporting requirements of Access Persons pursuant to an investment adviser’s Code of Ethics. (Synthesis and Evaluation)
  • Identify who is responsible to review reports prepared pursuant to an investment adviser’s Code of Ethics. (Knowledge and Comprehension)
  • Identify a list required to be maintained by each fund, adviser and principal underwriter pursuant to an investment adviser’s Code of Ethics. (Knowledge and Comprehension)
  • List the ICI Advisory Group’s recommended substantive restrictions on personal investing activities. (Knowledge and Comprehension)



“Questions Advisers Should Ask While Establishing or Reviewing Their Compliance Programs”
U.S. Securities and Exchange Commission, May 2006

After reading this document, candidates should be able to:

  • Describe forensic tests that may be used to test the adequacy of and adherence to an investment adviser’s Code of Ethics. (Knowledge and Comprehension)
  • Discuss questions useful for confirming whether an investment adviser’s Code of Ethics adequately addresses each of its necessary constituent parts. (Knowledge and Comprehension)



“Investment Adviser Trading Desk Activities” NSCP 1999 National Membership Meeting,  Clifford J. Alexander

After reading Section IV of this document, candidates should be able to:

  • Describe the typical provisions in a Code of Ethics. (Knowledge and Comprehension)


“Gifts and Gratuities” NASD Notice to Members 06-69, December 2006

After reading this article, candidates should be able to:

  • Discuss how the NASD interprets Rule 3060 with regard to gift and gratuity practices. (Knowledge and Comprehension)
  • Describe compliance procedures and policies that would satisfy the monitoring and surveillance requirements of Rule 3060. (Knowledge and Comprehension)



“Broker Dealer Red Flag Review” NSCP 2005 National Membership Meeting
Richard C. Szuch and Kenneth L. Wagner

After reading page 327 of this document, candidates should be able to:

  • List various red flags that may indicate a broker dealer representative is selling away. (Knowledge and Comprehension)

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Subdomain F. Advertising, Marketing, and Corporate Communications
“How to Conduct and Annual Compliance Review” Richard D. Marshall

After reading Appendix B of this document, candidates should be able to:

Accuracy of Disclosures

  • Describe a transactional test that may be used to monitor the accuracy of disclosures made to investors, clients and regulators. (Knowledge and Comprehension)
  • Discuss two forensic tests that may be used to monitor the accuracy of disclosures made to investors, clients and regulators. (Knowledge and Comprehension)
  • Describe a periodic test that may be used to monitor the accuracy of disclosures made to investors, clients and regulators. (Knowledge and Comprehension)

Marketing of Advisory Services

  • Describe a transactional test that may be used to monitor the marketing of advisory services. (Knowledge and Comprehension)
  • Discuss a forensic test that may be used to monitor the marketing of advisory services. (Knowledge and Comprehension)
  • Describe a periodic test that may be used to monitor the marketing of advisory services. (Knowledge and Comprehension)



“Money Manager’s Compliance Guide” Clifford J. Alexander and Arthur D. Delibert
Thompson Publishing Company, 1995

After reading Tab 630 of this publication, candidates should be able to:

  • Summarize the requirements regarding the contents of investment company Rule 482 advertisements. (Knowledge and Comprehension)
  • Explain the filing requirements for investment company advertising and sales literature. (Application and Analysis)



“2006 CCOutreach Regional Seminars: Investment Adviser Case Study Discussion Guide”
U.S. Securities and Exchange Commission

After reading Variation Five of this discussion guide, candidates should be able to:

  • Discuss quality control processes that may be used to monitor disclosures required to be made with respect to performance advertisements. (Knowledge and Comprehension)
  • Discuss quality control processes that may be used to monitor performance data included in advertisements. (Knowledge and Comprehension)
  • Describe examples of review procedures that may be used to monitor performance advertising. (Knowledge and Comprehension)

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Subdomain G. Audits and Inspections
“How to Conduct and Annual Compliance Review” Richard D. Marshall

After reading Appendix B of this document, candidates should be able to:

Safeguarding of Client Assets

  • Describe a transactional test that may be used to monitor the safeguarding of client assets from conversion or inappropriate use. (Knowledge and Comprehension)
  • Discuss a forensic test that may be used to monitor the safeguarding of client assets from conversion or inappropriate use. (Knowledge and Comprehension)
  • Describe a periodic test that may be used to monitor the safeguarding of client assets from conversion or inappropriate use. (Knowledge and Comprehension)

Creation and Maintenance of Records

  • Describe a transactional test that may be used to monitor the accurate creation of required records and their maintenance. (Knowledge and Comprehension)
  • Discuss a forensic test that may be used to monitor the accurate creation of required records and their maintenance. (Knowledge and Comprehension)
  • Describe a periodic test that may be used to monitor the accurate creation of required records and their maintenance. (Knowledge and Comprehension)

Privacy Protection of Client Records

  • Describe a transactional test that may be used to monitor safeguards for the protection of client records and information. (Knowledge and Comprehension)
  • Discuss a forensic test that may be used to monitor safeguards for the protection of client records and information. (Knowledge and Comprehension)
  • Describe a periodic test that may be used to monitor safeguards for the protection of client records and information. (Knowledge and Comprehension)

Business Continuity Plans

  • Describe a transactional test that may be used to monitor business continuity plans. (Knowledge and Comprehension)
  • Discuss a forensic test that may be used to monitor business continuity plans. (Knowledge and Comprehension)
  • Describe a periodic test that may be used to monitor business continuity plans. (Knowledge and Comprehension)

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“Assessing the Adequacy and Effectiveness of a Fund’s Compliance Policies and Procedures”
Investment Company Institute, December 2005

After reading this document, candidates should be able to:

  • Discuss how observation testing may play a role in annual reviews of a firm’s compliance program. (Knowledge and Comprehension).
  • Summarize the questions to be considered prior to conducting transactional testing. (Synthesis and Evaluation)
  • Describe the differences between initial testing and retesting data. (Knowledge and Comprehension)
  • Discuss trend analysis and Explain how it may be used to monitor for compliance with a firm’s compliance program. (Knowledge and Comprehension/Application and Analysis)
  • Identify and Explain various reports that may be used by compliance officers in conducting an annual review of a firm’s compliance program. (Knowledge and Comprehension/Application and Analysis)
  • Describe the use of internal audit reports in the review of a firm’s compliance program. (Knowledge and Comprehension)
  • Discuss how ongoing assessments and reports can facilitate future reviews of a firm’s compliance program. (Knowledge and Comprehension)

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“Broker Dealer Red Flag Review” NSCP 2005 National Membership Meeting
Richard C. Szuch and Kenneth L. Wagner

After reading page 323 of this document, candidates should be able to:

  • List various red flags that may indicate a money laundering issue. (Knowledge and Comprehension)

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“Risk Management and Internal Controls”
NSCP Currents May/June 2006
Lisa Roth

After reading this article, candidates should be able to:

  • Explain how an SEC Examination Request List may be used to design a program of internal controls. (Application and Analysis)
  • Discuss a seven step enforcement standard that may be used to design a program of internal controls. (Knowledge and Comprehension)
  • Describe what is meant by the term “risk inventory.” (Knowledge and Comprehension)
  • Explain the next step for a broker dealer once it has created its risk inventory. (Application and Analysis)
  • Discuss considerations that a broker dealer should make when determining periodic testing for internal controls. (Knowledge and Comprehension)

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Subdomain H. Customer Complaints
“BD Supervision (Big Firms)”
NSCP Currents, December/November 2004
James F. McGuire, Charles V. Senatore and Ben A. Indek

After reading this document, candidates should be able to:

  • Discuss various areas that should be considered when developing procedures relating to the receipt of customer complaints. (Knowledge and Comprehension)
  • Describe action steps firms might take when reviewing a customer complaint. (Knowledge and Comprehension)
  • Explain considerations a firm might make when evaluating a customer complaint. (Application and Analysis)
  • Identify actions a firm might consider when determining its response to a customer complaint. (Knowledge and Comprehension)
  • Describe considerations a firm might make when responding to a customer complaint. (Knowledge and Comprehension)
  • Identify various ways a firm might choose to resolve a customer complaint. (Knowledge and Comprehension)
  • Recall a recommendation regarding retaining records of a customer complaint. (Knowledge and Comprehension)

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