FINRA FINRA-SIE Online Practice Questions and Exam Preparation

FINRA FINRA-SIE Online Questions & Answers

• Question 11:

  Which of the following types of securities is an equity?

  A. Preferred stock
  B. Commercial paper
  C. Certificate of deposit (CD)
  D. Exchange-traded note (ETN)
  A. Preferred stock

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  Explanation

  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 correct because preferred stock is an equity security. B is incorrect because commercial paper is a short-term debt security. C is incorrect because certificates of deposit (CDs) are fixed-income banking products. D is incorrect because exchange-traded notes (ETNs) are unsecured debt securities.

  References:

  SIE Study Guide, Chapter 5: Corporate Securities

• Question 12:

  Callable preferred stock is most likely to be called when interest rates are:

  A. stable.
  B. rising.
  C. falling.
  D. fluctuating.
  C. falling.

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  Explanation

  Callable preferred stock is most likely to be called when interest rates are falling, which makes choice C correct. The "call" feature gives the issuer the right (but not the obligation) to redeem the preferred stock at a stated call price after a certain date. Issuers tend to exercise call provisions when it becomes economically beneficial-most commonly when they can refinance or replace the outstanding security with a new issue that has a lower dividend rate (lower cost of capital).

  When interest rates fall, newly issued preferred stock (and other income-focused securities) can often be sold with lower dividend yields because investors will accept lower yields in a lower-rate environment. If the issuer has older preferred shares outstanding that pay a relatively high dividend, the issuer may choose to call those shares and issue new preferred at a lower rate, reducing financing costs. This is similar to why callable bonds are often redeemed when rates decline: the issuer can refinance at cheaper levels. If interest rates are rising (choice B), calling an existing higher-dividend preferred would usually be disadvantageous because a replacement issue would likely require an even higher dividend to attract investors, increasing costs. If rates are stable or merely fluctuating (choices A and D), there is no consistent incentive that makes calling "most likely." The strongest, most tested driver is a declining rate environment.

  On the SIE, this question targets call risk and reinvestment risk for investors: when a security is called, investors receive principal back and may be forced to reinvest at lower yields. Understanding the issuer's incentive is key: issuers call when it benefits them, typically when rates fall.

• Question 13:

  Which of the following statements is typically true of investors in open-end mutual funds?

  A. Class A share investors do not pay a sales charge when purchasing shares.
  B. Class A share investors do not pay a sales charge when redeeming shares.
  C. Class C share investors purchase shares at the public offering price (POP).
  D. Class C share investors do not pay a sales charge when redeeming shares within the first year.
  B. Class A share investors do not pay a sales charge when redeeming shares.

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  Explanation

  The correct answer is B, Class A share investors do not pay a sales charge when redeeming shares. Class A shares are known as front-end load funds, meaning the sales charge is paid at the time of purchase, not when the shares are sold.

  Step-by-step, Class A shares are purchased at the public offering price (POP), which includes the net asset value (NAV) plus the front-end sales charge. Once the investor has paid this upfront load, there is typically no additional sales charge upon redemption. Choice A is incorrect because Class A shares do have a front-end sales charge when purchased.

  Choice C is incorrect because Class C shares are typically purchased at NAV (no front-end load), not POP.

  Choice D is incorrect because Class C shares often have a contingent deferred sales charge (CDSC) if redeemed within a short period (usually one year), meaning investors may pay a fee if they sell early. Thus, the key distinguishing feature is that Class A shares charge at purchase, not redemption, making Answer B correct.

• Question 14:

  A husband and wife are interested in purchasing unregistered securities in an SEC Regulation D offering for their joint account.

  In order to be considered accredited, they must have had a combined annual income for each of the past two years and current expectations for this year of at least what amount?

  A. $200,000
  B. $300,000
  C. $400,000
  D. $500,000
  B. $300,000

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  Explanation

  The correct answer is B, $300,000. Under SEC Regulation D, an accredited investor is defined, in part, by income thresholds. For a married couple (joint income), the requirement is that they must have earned at least $300,000 in each of the past two years and have a reasonable expectation of earning at least that amount in the current year. For individuals filing alone, the threshold is $200,000, but since this question specifically refers to a husband and wife purchasing jointly, the higher combined income threshold applies. This rule is designed to ensure that investors participating in private placements (which are not registered with the SEC and carry higher risk and less disclosure) have sufficient financial sophistication and resources to bear potential losses. Choices A ($200,000) applies only to individuals, not joint filers. Choices C ($400,000) and D ($500,000) exceed the regulatory requirement and are incorrect. Thus, for a married couple investing jointly in a Regulation D offering, the correct minimum income threshold is $300,000, making choice B correct.

• Question 15:

  Which of the following responses accurately describes a secondary market transaction?

  A. Buying open-end mutual fund shares
  B. Buying securities directly from the issuing company
  C. Buying securities on a registered securities exchange
  D. Buying securities in a private placement from a broker-dealer
  C. Buying securities on a registered securities exchange

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  Explanation

  A secondary market transaction occurs when securities are bought and sold between investors, typically on an exchange. C is correct because securities purchased on a registered exchange are secondary market transactions. A is incorrect as open-end mutual fund shares are purchased directly from the issuer. B refers to the primary market. D is also incorrect as private placements occur in the primary market.

  References:

  SIE Study Guide, Chapter 1: Market Structure

• Question 16:

  Which of the following statements describes a characteristic of Treasury securities?

  A. They are liquid.
  B. They are callable.
  C. They are FDIC-insured.
  D. They are issued by the U.S. government with a high amount of default risk.
  A. They are liquid.

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  Explanation

  Treasury securities are among the most liquid investments, as they are backed by the U.S. government and trade actively in large volumes. A is correct because Treasuries are highly liquid, making them easy to buy and sell. B is incorrect because most Treasury securities are not callable. C is incorrect because FDIC insurance applies to bank deposits, not Treasuries. D is incorrect because U.S. government securities have negligible default risk.

  References:

  SIE Study Guide, Chapter 3: U.S. Government Securities

• Question 17:

  Under the Securities Act of 1933, the SEC is empowered to take which of the following actions?

  A. Approve registration statements
  B. Approve a security based on its investment merits
  C. Require that all pertinent information is disclosed
  D. Pass on the accuracy of statements made in a prospectus
  C. Require that all pertinent information is disclosed

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  Explanation

  The Securities Act of 1933 is built on the principle of full and fair disclosure in the primary (new issue) market. Under this framework, the SEC's core authority is to require that material (pertinent) information be disclosed to investors so they can make informed decisions. That makes C correct. The SEC enforces registration and disclosure requirements by reviewing filings for completeness and compliance, and it can delay effectiveness or take action when disclosure is deficient.

  The key idea tested on the SIE is that U.S. securities regulation is disclosure-based, not merit-based. Choice A is incorrect because the SEC does not "approve" registration statements in the sense of endorsing them; a registration statement becomes effective, but effectiveness is not an SEC "approval" of the offering.

  Choice B is incorrect because the SEC does not approve a security based on its investment merits-meaning the SEC does not judge whether a security is a good investment or safe for investors.

  Choice D is incorrect because the SEC does not "pass on" (vouch for) the accuracy of statements in a prospectus as an investment endorsement; instead, issuers and underwriters are responsible for the truthfulness and completeness of disclosures, and they may face liability for material misstatements or omissions. For SIE purposes, remember the clean distinction: the SEC's role is to ensure that investors receive required disclosures, not to guarantee outcomes. This is why prospectuses carry language indicating that the SEC has not approved or disapproved the securities or passed upon the merits-reinforcing that the investor must evaluate the disclosed risks and information.

• Question 18:

  Which of the following best describes suitability under FINRA rules?

  A. Matching investments to firm inventory
  B. Recommending investments aligned with customer profile
  C. Guaranteeing investment performance
  D. Promoting high-commission products
  B. Recommending investments aligned with customer profile

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  Explanation

  Suitability: Requires recommendations to align with a customer's financial situation, objectives, and risk tolerance.

  Incorrect Options:

  A, C, and D: Violations of FINRA rules.

• Question 19:

  A broker-dealer (BD) is required to ensure a hyperlink to BrokerCheck is Included on which of the following communications?

  A. The BD's homepage intended for retail customers
  B. A registered representative's (RR's) outgoing email
  C. An email response to a complaint from a retail customer
  D. An RR's social media site that Identifies his BD employment
  A. The BD's homepage intended for retail customers

• Question 20:

  A hypothecation agreement gives the broker-dealer the right to engage in which of the following activities?

  A. Sharing customers' nonpublic personal information with nonaffiliated third parties
  B. Entering trades in a customer's account without prior authorization from the customer
  C. Selling a customer's securities when the customer has failed to pay for trades in a cash account
  D. Using securities that a customer has bought on margin as collateral to obtain a loan from a bank
  D. Using securities that a customer has bought on margin as collateral to obtain a loan from a bank

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  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.

  FINRA Margin Account Rules: FINRA Rule 4210.