FINRA SIE Securities Industry Essentials Exam (SIE) Exam Practice Test

Step by Step Explanation:

Temporary Hold Period: Under FINRA Rule 2165, a firm can initially place a hold on disbursements for up to 10 business days if financial exploitation is suspected.

Additional Holds: The period may be extended by an additional 10 business days if warranted and allowed by state law.

Incorrect Options:

A & B: These are shorter than the permissible period.

D: The initial hold period is capped at 10 business days.

References:

FINRA Rule 2165 (Financial Exploitation of Specified Adults): FINRA Rule 2165.

529 savings plans are state-sponsored education savings accounts that offer tax-advantaged growth. Key features include:

Contributions are not federally tax deductible (some states offer state-level deductions).

No income limitations for contributions.

The account owner, not the beneficiary, controls the plan.

Assets can be transferred tax-free to another family member’s 529 plan.

D is correctbecause tax-free rollovers are allowed for family members of the current beneficiary.

Ais incorrect as contributions are not universally tax deductible.

Bis incorrect as there are no income limitations for contributing.

Cis incorrect because the account owner, not the beneficiary, controls the assets.

Step by Step Explanation:

Penny Stocks: These are low-priced, highly speculative stocks often issued by small or distressed companies. They generally have low liquidity, meaning they can be difficult to buy or sell without significantly impacting the price.

Incorrect Options:

Dividends: Penny stocks rarely pay dividends, unlike blue-chip stocks.

Price Stability: Penny stocks are highly volatile compared to blue-chip stocks.

Capitalization: Blue-chip companies are far better capitalized.

References:

SEC Bulletin on Penny Stocks: SEC Penny Stocks.

FINRA Rule 3220 prohibits member firms from giving gifts exceeding $100 per individual per year to ensure that gifts do not influence business conduct. The rule applies to gifts given in connection with the firm’s business.

C is correctbecause it adheres to FINRA’s $100 annual limit.

Ais incorrect because the total value of gifts must also not exceed $100 annually.

Bis incorrect as there is no $200 limit.

Dis incorrect as gifts are allowed within the $100 limit.

Step by Step Explanation:

SEC Rule 10b-10: Requires trade confirmations to disclose the capacity in which the firm acted (e.g., as agent or principal) and details like trade price, quantity, and commissions.

Incorrect Options:

A: Cost basis is not disclosed on trade confirmations.

B: Inventory levels are not part of the required disclosures.

C: Market maker status is not explicitly required in the confirmation.

References:

SEC Rule 10b-10 (Confirmation Requirements): SEC Rule 10b-10.

The Securities Investor Protection Corporation (SIPC) protects customers if a broker-dealer fails due to insolvency. Coverage applies to cash and securities in customer accounts, up to $500,000total, including $250,000 for cash.

A is correctbecause SIPC’s purpose is to protect against losses arising from a broker-dealer’s insolvency.

Bis incorrect because SIPC does not guarantee investment performance.

Cis incorrect because SIPC does not cover market losses.

Dis incorrect because futures contracts are not covered under SIPC.

Step by Step Explanation:

MSRB Rule G-37: Requires municipal securities dealers to report contributions to the MSRB, even if the amount is below the $1,000 threshold that would trigger a two-year prohibition on municipal business.

Incorrect Options:

SEC and FINRA: Not involved in reporting political contributions for municipal securities.

References:

MSRB Rule G-37 (Political Contributions): MSRB Rule G-37.

Step by Step Explanation:

Low Liquidity: Hedge funds often impose lock-up periods and restrict redemptions, leading to low liquidity for investors.

Incorrect Options:

B: Hedge funds typically have high minimum investment requirements, often $1 million or more.

C: Hedge funds employ diverse strategies, not just fixed income.

D: Hedge funds are generally opaque about their strategies and holdings to protect their competitive advantage.

References:

SEC Investor Bulletin on Hedge Funds: SEC Hedge Funds.

Step by Step Explanation:

FINRA Rule 3150: Permits firms to hold customer mail only with written instructions specifying the duration, which cannot exceed three months unless there are exceptionalcircumstances.

Incorrect Options:

A: Holding mail is not prohibited if done in compliance with FINRA rules.

C & D: Oral instructions or RR discretion are not sufficient; written authorization is mandatory.

References:

FINRA Rule 3150 (Holding of Customer Mail): FINRA Rule 3150.

The cooling-off period begins after the registration statement is filed with the SEC and lasts for at least 20 days. During this time, the issuer and underwriters can market the securities but cannot finalize sales.

D is correctbecause marketing (e.g., roadshows) is permitted during the cooling-off period.

Ais incorrect because the final prospectus is distributed after the offering is effective.

BandCare incorrect because sales and deliveries are prohibited until the registration becomes effective.

Step by Step Explanation:

Dividend Reinvestment Plans (DRIPs): These allow investors to automatically reinvest income distributed by the mutual fund to purchase additional shares.

Dollar Cost Averaging: Refers to systematic investments over time, not directly tied to income distributions.

Capital Gains Reinvestment: Involves reinvesting profits from the sale of fund holdings, which is distinct from dividend reinvestment.

References:

FINRA Mutual Fund Features: FINRA Mutual Funds.

FINRA prohibits the payment of referral fees or splitting of commissions with individuals who are not registered with a broker-dealer. However, taking a friend out to dinner as a gesture of gratitude is allowed, as it does not involve cash or monetary compensation directly tied to the referral.

C is correctbecause non-monetary expressions of gratitude (like a dinner) are permitted under FINRA rules.

Ais incorrect because commission splitting with unregistered individuals is prohibited.

Bis incorrect because paying referral fees is also prohibited without registration.

Dis incorrect because giving prepaid credit cards tied to commission income violates compensation rules.

Step by Step Explanation:

DVP Process: Ensures that payment occurs simultaneously with the delivery of securities, mitigating counterparty risk. Cash payment is made before or at the time of delivery.

Incorrect Options:

A: The T+5 timeline is not standard for DVP.

C: Payment must occur at delivery, not after.

D: Settlement date agreements with the issuer are irrelevant for DVP.

References:

FINRA Guidelines on DVP/RVP Transactions: FINRA DVP Info.

Treasury stock refers to shares that were issued by a company and subsequently repurchased by the company. These shares are held in the company’s treasury and are not considered outstanding.

C is correctbecause treasury stock is stock reacquired by the issuer.

Ais incorrect because authorized but unissued stock has never been issued.

Bis incorrect because restricted stock refers to shares issued with restrictions on transferability, not reacquired stock.

Dis incorrect because it incorrectly refers to government securities, not corporate stock.

FINRA Rule 4511 requires member firms to retain records, including electronic communications, in anon-rewriteable, non-erasable format(often referred to as WORM: Write Once, Read Many). This ensures that records cannot be altered or deleted once stored.

D is correctbecause firms must store records in a tamper-proof format.

A,B, andCare incorrect because these formats do not guarantee compliance with the tamper-proof requirements set forth by FINRA and the SEC.

Step by Step Explanation:

Rebalancing: Ensures that a portfolio remains aligned with its target allocation. Without rebalancing, outperforming assets can become overweighted, increasing exposure to specific risks.

Incorrect Options:

Inflation: Impacts purchasing power but isn’t tied to rebalancing.

Marketability: Refers to liquidity and isn’t linked to allocation models.

Interest Rate Risk: Relates to fixed-income investments and isn’t directly addressed by allocation models.

References:

SEC Investor Bulletin on Asset Allocation: SEC Asset Allocation.

Step by Step Explanation:

Open-End Mutual Funds: Shares are purchased directly from the fund or its underwriter at the current Net Asset Value (NAV), plus any applicable sales charges.

Custodian: Holds the fund's assets but does not sell shares.

NYSE and Shareholders: Open-end funds do not trade on exchanges or between individual shareholders.

References:

SEC Mutual Fund Basics: SEC Mutual Funds.

When interest rates rise, the price of fixed-rate corporate bonds falls because the bond's coupon payments become less attractive compared to new bonds issued at higher rates.

D is correctas bond prices move inversely to interest rates.

Ais incorrect because bond prices fluctuate with interest rate changes.

Bis incorrect because bond prices revert to par only at maturity.

Cis incorrect because prices do not appreciate when rates rise.

Step by Step Explanation:

403(b) Accounts: These tax-advantaged retirement plans are specifically for employees of public schools, tax-exempt organizations, and certain other nonprofit employers, such ashospitals.

Incorrect Options:

Volunteer Workers: Ineligible unless they are also employees.

Small Business Owners and Military Personnel: These groups typically qualify for other retirement plans, not 403(b).

References:

IRS Publication 571 (403(b) Plans): IRS 403(b) Guidance.

High-income bond mutual funds typically invest in lower-rated (junk) bonds that offer higher yields. These bonds are exposed to significant credit risk, as issuers may default on their payments.

A is correctbecause credit risk is the primary concern with high-yield bonds.

Bis incorrect as political risk is more relevant for international investments.

Cis incorrect because taxability risk is not specific to bond mutual funds.

Dis incorrect because purchasing power risk is more relevant for fixed-income investments during inflationary periods but is not the primary risk here.

SEC Regulation A provides a registration exemption for smaller public offerings but includes a "bad actor" disqualification. If certain key parties, such as the issuer, underwriter, or affiliates, have been involved in securities violations, the exemption is forfeited.

B is correctbecause underwriters are considered essential participants, and their status as bad actors disqualifies the offering.

A,C, andDare incorrect because custodians, transfer agents, and clearing corporations are not included in the "bad actor" provisions of Regulation A.

Step by Step Explanation:

Regulatory Element Requirement: Newly registered persons must complete the Continuing Education (CE) Regulatory Element on the second anniversary of their initial registration and every three years thereafter.

Incorrect Options:

A: The requirement begins on the second anniversary, not the following calendar year.

D: The cycle is every three years, not five.

References:

FINRA Rule 1240 (Continuing Education): FINRA Rule 1240.

Step by Step Explanation:

Hypothecation Agreement: Required for margin accounts, it authorizes the broker-dealer to use the customer's margin securities as collateral to secure loans for funding customer transactions.

Incorrect Options:

A: Sharing customer information is regulated under privacy rules (Regulation S-P).

B: Unauthorized trading violates securities laws.

C: Selling unpaid securities in cash accounts pertains to Regulation T, not hypothecation agreements.

References:

FINRA Margin Account Rules: FINRA Rule 4210.

An unrealized gain occurs when the value of an asset increases but has not yet been sold. If the customer sells the stock, the unrealized gain becomes a realized gain.

B is correctbecause the increase in value without selling the stock is an unrealized gain.

Ais incorrect because interest income refers to earnings from fixed-income securities.

Cis incorrect because operating profit relates to a company’s earnings, not an investor’s portfolio.

Dis incorrect because "out of the money" is a term used for options, not stocks.

Step by Step Explanation:

Interest Rate Risk: Treasury securities are sensitive to changes in interest rates. When rates rise, Treasury prices fall, exposing investors to price risk.

Incorrect Options:

Credit Risk: Virtually nonexistent for Treasuries, as they are backed by the U.S. government.

Liquidity Risk: Treasuries are highly liquid.

Prepayment Risk: Applies to mortgage-backed securities, not Treasuries.

References:

SEC Bond Risk Disclosures: SEC Treasury Risks.

Step by Step Explanation:

Balance Sheet Definition: Shows a company’s financial position at a specific point in time, listing assets, liabilities, and shareholders' equity (net worth).

Other Financial Statements:

Profit and Loss Statement: Summarizes revenues and expenses over a period.

Cash Flow Statement: Tracks cash inflows and outflows.

References:

SEC Guide to Financial Statements: SEC Financials.

When bond yields rise, the price of existing bonds falls. This inverse relationship exists because the fixed coupon payments of the bonds become less attractive compared to new bonds issued at higher yields.

B is correctbecause the bond’s market value decreases as its yield increases.

Ais incorrect because bond values decrease, not increase, with rising yields.

Cis incorrect because the face value (par value) remains unchanged.

Dis incorrect because changes in yield directly affect the bond’s market price.

Step by Step Explanation:

Equity Index Options: These are cash-settled because the underlying asset is not a physical security but a theoretical value representing the index.

Incorrect Options:

Preferred Stock, Master Limited Partnerships, and ETFs: These involve physical delivery of the underlying asset upon exercise.

References:

Options Clearing Corporation (OCC) Guidelines:OCC Cash-Settled Options.

Passive ETFs track an index and require minimal management, leading to lower expenses compared to actively managed ETFs.

D is correctbecause passive ETFs are cost-efficient and have lower fees.

Ais incorrect because index ETFs have low turnover since they replicate an index.

Bis incorrect because ETFs are priced continuously throughout the trading day.

Cis incorrect as ETFs aim to match, not outperform, the index.

During the "quiet period" after filing the registration statement, issuers are restricted in what they can communicate to the public to avoid influencing the market.

C is correctbecause promotional statements, such as those supporting the company’s valuation, are prohibited during this time.

A,B, andDare factual, non-promotional statements and are permitted.

Step by Step Explanation:

Escalation Requirement: The RR must promptly notify their supervisor or compliance department about the customer’s complaint as required by FINRA rules. Supervisors handle customer complaints according to firm procedures.

Incorrect Options:

B: Reimbursing the customer is not permissible without firm approval and may create compliance issues.

C: Complaints requiring Form U4 updates involve specific allegations such as fraud, not general dissatisfaction.

D: The RR should not contact FINRA directly; the firm will handle communications.

References:

FINRA Rule 4530 (Reporting Requirements): FINRA Rule 4530.

Step by Step Explanation:

Cost Basis in Reverse Split: The total cost basis remains unchanged in a reverse stock split. Only the number of shares and price per share adjust.

Pre-Split: 1,000 shares at $5 each = $5,000.

Post-Split: 200 shares at $25 each = $5,000.

Incorrect Options:

A, B, and D: Do not reflect the unchanged total cost basis.

References:

IRS Guidance on Stock Splits: IRS Stock Split Info.

Step by Step Explanation:

Definition of Accredited Investor: As perSEC Regulation D, Rule 501, an accredited investor includes:

Individuals with a net worth exceeding $1 million (excluding primary residence equity).

Individuals with an annual income exceeding $200,000 (or $300,000 jointly with a spouse) for the past two years.

Elimination of Incorrect Answers:

$500,000 threshold (option B) is too low to qualify under Regulation D.

Option D is incorrect as it requires assets of $5 million, not $2.5 million.

References:

SEC Regulation D, Rule 501 (Accredited Investor Definition): SEC Regulation D.

In a UTMA account, the minor is the legal owner of the account. The custodian (in this case, the attorney) manages the account until the minor reaches the age of majority specified by state law.

C is correctbecause the grandson (the minor) is the account’s legal owner.

Ais incorrect because the attorney is the custodian, not the owner.

Bis incorrect because the grandfather established the account but does not own it.

Dis incorrect because the parent does not have ownership unless explicitly named as the custodian.

Step by Step Explanation:

FINRA Rule 3210: Requires registered representatives to obtain written consent from their employing broker-dealer before opening accounts at other financial institutions if securities transactions will occur.

Incorrect Options:

A, B, and C: These accounts are exempt because they do not involve direct securities transactions requiring monitoring.

References:

FINRA Rule 3210 (Accounts at Other Institutions): FINRA Rule 3210.

A FINRA member is a broker-dealer that is registered with FINRA and regulated by a national securities association. Individuals employed by the member firm (e.g., registered representatives) are associated persons, not members themselves.

D is correctbecause FINRA membership applies to broker-dealers, not individuals.

A,B, andCare incorrect because they refer to individuals or roles within member firms, not the firms themselves.

Under FINRA Rule 2150, registered representatives may share in profits and losses in a customer’s account if:

The customer provides written consent.

The arrangement is approved by the RR’s firm.

The sharing is proportional to the RR's financial contribution.

C is correctbecause it aligns with FINRA requirements.

A,B, andDare incorrect because they do not meet the necessary conditions for sharing.

Currency devaluation reduces the value of a country’s currency relative to others, making its exports cheaper and more competitive internationally. This stimulates demand for the country’s goods and services.

D is correctbecause devaluation reduces export costs, encouraging foreign buyers.

Ais incorrect because devaluation can increase inflation by raising the cost of imported goods.

Bis incorrect because GDP often rises due to increased export demand.

Cis incorrect because imports become more expensive after devaluation, reducing demand.

Step by Step Explanation:

FINRA Rule 2210: Firms are prohibited from suggesting or implying FINRA's endorsement or approval in any advertising materials.

Approvals: Even if a principal or FINRA approves the content, such a statement remains impermissible.

Key Point: FINRA's role is to regulate, not to endorse firms or their marketing.

References:

FINRA Rule 2210 (Communications with the Public): FINRA Rule 2210.

Buying a put option gives the investor the right to sell a stock at a specific strike price, effectively setting a floor for potential losses if the stock price declines. This is a common risk-management strategy.

A is correctbecause buying puts limits downside risk while retaining the potential for upside gains.

Bis incorrect as buying puts is a bearish strategy, not one used during upward momentum.

Cis incorrect because selling call options does not hedge losses; it is a speculative or income-generating strategy.

Dis incorrect because buying calls is a bullish strategy, used during upward momentum, not downward.

FINRA’s Continuing Education (CE) requirements include the Regulatory Element, which must be completed:

Within 120 days of the second anniversary of a registered representative’s initialregistration.

Every three years thereafter (changed to every two years as of 2023).

C is correctbecause registered persons must complete the CE Regulatory Element after their initial requirement and then every two years.

AandBare incorrect because CE is not required annually or semiannually.

Dis incorrect because CE is not tied to customer complaints.

The federal funds rate, which is the interest rate banks charge each other for overnight loans, changes frequently due to daily fluctuations in bank reserves and market conditions.

D is correctas it is the most sensitive to short-term market forces.

A,B, andCchange less frequently.

Step by Step Explanation:

Discount Bonds: These are issued or traded below par value. Over time, their price moves closer to par as they approach maturity, assuming yields remain constant.

Other Options:

Par Value Changes: The par value of a bond does not change over time; only its price fluctuates.

References:

SEC and FINRA Bond Basics: SEC Discount Bonds.

Step by Step Explanation:

Right of Accumulation: Allows an investor to combine the value of existing investments within the same fund family to qualify for a breakpoint (reduced sales charge) on new purchases.

Current Holdings: $80,000

New Purchase: $50,000

Total: $130,000, qualifying for the $100,000 breakpoint.

Incorrect Options:

B: Contributions from all funds within the same family can be aggregated.

C: A new letter of intent is unnecessary; right of accumulation applies automatically.

D: Discounts apply immediately, not retroactively.

References:

FINRA Guidance on Breakpoints: FINRA Breakpoints.

The announcement of negative regulatory changes introducesunsystematic risk, specific to the technology sector. Diversification into unrelated sectors can reduce exposure to this risk.

A is correctbecause uncorrelated holdings reduce portfolio risk.

Bis incorrect because adding more microchip companies increases exposure to sector-specific risk.

Cdoes not address the core issue of over-concentration.

Dis the opposite of mitigating risk.

Step by Step Explanation:

ADRs: Represent foreign securities but are issued in the U.S. and quoted in U.S. dollars, making them easier for American investors to trade.

Incorrect Options:

B: ADRs are quoted in U.S. dollars, not foreign currencies.

C & D: ADRs represent foreign securities held by U.S. banks, not foreign banks.

References:

SEC Bulletin on ADRs: SEC ADR Overview.

FINRA Rule 3270 requires registered representatives to disclose all outside business activities that involve compensation or could reasonably be perceived as a conflict of interest.

C is correctbecause serving as a board member for a publicly traded company is a business activity requiring disclosure, even if compensation is indirect.

Ais incorrect because volunteer work for charities does not require disclosure.

Bis incorrect because acting as a trustee for a personal or family estate is generally not considered an OBA.

Dis incorrect because unpaid board membership for a not-for-profit entity does not typically require disclosure.

Federal Reserve Regulation T mandates that customers must pay for purchases in a cash account within two business days of settlement (T+4). If payment is not made, the brokerage firm must liquidate the securities and place the account on a 90-day restriction.

C is correctbecause the customer’s account is frozen for 90 days, during which all trades must be paid for in advance.

Ais incorrect as closing transactions are still permitted but require prepayment.

Bis incorrect because the restriction lasts for 90 days, not 30.

Dis incorrect as only the delinquent account, not related accounts, is frozen.

Equity securities represent ownership in a company, and preferred stock is a type of equity security that pays dividends and has priority over common stock in liquidation.

A is correctbecause preferred stock is an equity security.

Bis incorrect because commercial paper is a short-term debt security.

Cis incorrect because certificates of deposit (CDs) are fixed-income banking products.

Dis incorrect because exchange-traded notes (ETNs) are unsecured debt securities.