FINRA FINRA-SIE Online Practice Questions and Exam Preparation

FINRA FINRA-SIE Online Questions & Answers

• Question 131:

  SIPC provides investor protection for its members' customers in which of the following situations?

  A. Failure of a brokerage firm in the event of insolvency
  B. Failure of a brokerage firm to meet customers' investment expectations
  C. Losses greater than 10% due to systemic market decline
  D. Losses incurred on futures contracts due to fraud or negligence
  A. Failure of a brokerage firm in the event of insolvency

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  Explanation

  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 $500,000 total, including $250,000 for cash. A is correct because SIPC's purpose is to protect against losses arising from a broker-dealer's insolvency. B is incorrect because SIPC does not guarantee investment performance. C is incorrect because SIPC does not cover market losses. D is incorrect because futures contracts are not covered under SIPC.

  References:

  Securities Investor Protection Act of 1970

  SIPC FAQs

• Question 132:

  Which of the following risks is most prevalent in callable bonds?

  A. Market risk
  B. Political risk
  C. Liquidity risk
  D. Reinvestment risk
  D. Reinvestment risk

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  Explanation

  The correct answer is D, Reinvestment risk. Callable bonds give the issuer the right to redeem (call) the bond before maturity, typically when interest rates decline. This feature creates a specific risk for investors. Step-by-step, when interest rates fall, issuers are more likely to call their bonds and refinance at lower rates. When this happens, investors receive their principal back earlier than expected. The problem is that they must then reinvest those funds at lower prevailing interest rates, which reduces their overall return. This is known as reinvestment risk. Callable bonds are particularly exposed to this risk because they are often called precisely when it is least favorable for investors-when yields in the market are lower than the bond's original coupon rate. Choice A, market risk, affects all securities and is not unique to callable bonds.

  Choice B, political risk, applies mainly to foreign investments.

  Choice C, liquidity risk, relates to the ease of buying or selling a bond and is not the defining risk of callable bonds. Thus, the most significant and characteristic risk associated with callable bonds is reinvestment risk, making Answer D correct.

• Question 133:

  Which of the following responses describes a FINRA member?

  A. An associated person of a registered brokerage firm
  B. A natural person who is employed by a broker-dealer (BD)
  C. A registered representative with a national securities exchange
  D. A BD regulated by a national securities association
  D. A BD regulated by a national securities association

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  Explanation

  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 correct because FINRA membership applies to broker-dealers, not individuals. A, B, and C are incorrect because they refer to individuals or roles within member firms, not the firms themselves.

  References:

  FINRA Rule 0140 (Membership)

• Question 134:

  A registered representative constructs a portfolio of stocks that replicates the S&P 500 Index (SPX). He then regularly buys and sells SPX options to profit off changes in implied volatility. This is an example of:

  A. day trading.
  B. Index rebalancing.
  C. active management.
  D. passive management.
  C. active management.

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  Explanation

• Question 135:

  Offering 403(b) tax-sheltered annuity accounts to which of the following groups is permissible?

  A. Volunteer workers
  B. Small business owners
  C. Active duty military personnel
  D. Employees of a nonprofit hospital
  D. Employees of a nonprofit hospital

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  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 as hospitals.

  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).

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

• Question 136:

  Which of the following assets is not covered under the SEC ' s Customer Protection Rule?

  A. Bonds in the customer ' s account
  B. Stocks in the customer ' s account
  C. $250,000 in cash in the customer ' s savings account
  D. $20,000 excess margin on $250,000 in securities in a customer ' s account
  C. $250,000 in cash in the customer ' s savings account

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  Explanation

  The correct answer is C, $250,000 in cash in the customer ' s savings account. The SEC's Customer Protection Rule (Rule 15c3-3 under the Securities Exchange Act of 1934) is designed to protect customer funds and securities held by broker-dealers, not assets held at banks. Step-by-step, the rule requires broker-dealers to segregate customer securities and maintain a reserve of cash or qualified securities to safeguard customer assets in case the firm fails. This includes securities like stocks and bonds (Choices A and B), which are held in brokerage accounts and therefore fall under the rule's protection. Choice D, excess margin, is also covered because it represents customer funds held by the broker-dealer beyond what is required for margin purposes. These funds must be included in the reserve computation and are protected under the rule. However, Choice C refers to cash held in a bank savings account, which is not under the custody of a broker-dealer. Instead, such deposits are typically protected by FDIC insurance, not the SEC's Customer Protection Rule. Therefore, assets held outside a brokerage relationship-like bank savings-are not covered by the Customer Protection Rule, making Answer C correct.

• Question 137:

  How does an individual acquire restricted stock?

  A. By participating in an SEC Regulation D offering
  B. By participating in an initial public offering (IPO)
  C. By exercising publicly traded warrants
  D. By exercising an option for exchange-traded calls
  A. By participating in an SEC Regulation D offering

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  Explanation

  Restricted stock refers to securities acquired through private placements, such as those offered under Regulation D. These securities are not registered with the SEC and are subject to holding period restrictions before resale. A is correct because Regulation D offerings involve private placements, resulting in restricted stock. B is incorrect because IPOs involve publicly traded shares, not restricted stock. C and D are incorrect because restricted stock is not obtained through warrants or exchange-traded options.

  References:

  SEC Regulation D, Rule 144 (Restricted and Control Securities)

• Question 138:

  An investor decides to use a registered representative to make investment decisions for his account, as well as decide when to place any trades.

  Which of the following types of accounts should the investor open?

  A. Margin
  B. Options
  C. Custodial
  D. Discretionary
  D. Discretionary

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  Explanation

  The correct answer is D, Discretionary. A discretionary account allows a registered representative (RR) to make investment decisions and execute trades on behalf of the client without obtaining prior approval for each transaction. This directly matches the scenario described in the question. Step-by-step, discretionary authority must be granted in writing by the customer and approved by the firm's principal before it can be exercised. Once approved, the RR can determine what securities to buy or sell and when to execute trades, although the account must still be managed in accordance with the customer's investment objectives and suitability requirements. Choice A, margin, refers to borrowing money to purchase securities and does not grant trading authority to the RR.

  Choice B, options, is a type of account used for trading options contracts and also does not provide discretionary authority.

  Choice C, custodial accounts are established for minors and managed by an adult custodian, not applicable in this situation. Thus, when an investor wants the RR to control investment decisions and timing of trades, a discretionary account is required, making Answer D correct.

• Question 139:

  An investor owns 100 shares of a company's stock and is very interested in electing a particular individual to the board of directors of the corporation. There are 20 individuals running to fill 10 board seats.

  If the corporation uses the cumulative voting method, what is the maximum number of votes the investor is permitted to cast for this particular director?

  A. 50 votes
  B. 100 votes
  C. 1,000 votes
  D. 2,000 votes
  C. 1,000 votes

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  Explanation

  In cumulative voting, shareholders can allocate all their votes to a single candidate. The total number of votes is calculated by multiplying the number of shares owned by the number of seats available: Total votes = 100 shares ?10 seats = 1,000 votes.

  The investor can allocate all votes to one candidate.

  C is correct because cumulative voting allows all votes to be concentrated.

• Question 140:

  Which of the following functions is generally associated with an introducing broker-dealer?

  A. Accepting customer orders
  B. Maintaining custody of customer accounts
  C. Helping to ensure that trades are settled appropriately
  D. Operating under a higher net capital requirement than clearing brokers
  A. Accepting customer orders

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  Explanation

  An introducing broker-dealer is primarily responsible for customer-facing activities, which includes opening accounts, communicating with customers, and accepting customer orders. Introducing firms "introduce" the business to a clearing firm, which provides the back-office infrastructure. The clearing firm typically handles functions like trade confirmation processing, clearance and settlement mechanics, custody of customer securities and funds, margin processing, and issuance of account statements and confirmations. That division of responsibilities is why "accepting customer orders" is the best match for an introducing broker. Choice B is generally associated with a clearing broker, not an introducing broker. Custody and safeguarding customer assets is a key clearing function, supported by recordkeeping, possession-or-control requirements, and operational systems that most introducing firms do not maintain independently.

  Choice C also aligns more with a clearing firm's role, since "helping ensure trades are settled appropriately" describes the clearing /settlement process (e.g., reconciliation, delivery versus payment mechanics, coordination with clearing agencies). Introducing firms may interact with customers about trade status, but the operational responsibility for settlement is typically the clearing broker's domain.

  Choice D is incorrect because clearing brokers generally have higher net capital requirements than introducing brokers due to their greater financial and operational responsibilities (e.g., carrying customer accounts, maintaining custody, financing margin). Introducing brokers typically operate with lower net capital requirements relative to clearing firms because they outsource many back-office and custody functions through a fully disclosed or omnibus clearing arrangement.

  This distinction fits the SIE focus on market participants and their roles, including broker-dealer business models (introducing vs. clearing) and how customer orders flow through the marketplace.