FINRA FINRA-SIE Online Practice Questions and Exam Preparation

FINRA FINRA-SIE Online Questions & Answers

• Question 291:

  The process in which the buying firm must pay for the securities and the selling firm must deliver the securities is known as:

  A. A corporate action
  B. Clearing the trade
  C. The settlement of the transaction
  D. A delivery versus payment (DVP) transaction
  C. The settlement of the transaction

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  Explanation

  securities, and the seller delivers them. For most securities, regular-way settlement occurs T+2 (trade date plus two business days).

  Incorrect Options:

  Clearing the Trade: Refers to matching trade details to prepare for settlement.

  DVP Transactions: A specific type of settlement involving simultaneous payment and delivery, often used for institutional clients.

  Corporate Action: Refers to events like stock splits or dividend declarations.

  FINRA and SEC Guidelines on Settlement: SEC Settlement Process.

• Question 292:

  An investor is concerned about erosion of purchasing power over time.

  Which risk is the investor most concerned about?

  A. Credit risk
  B. Inflation risk
  C. Market risk
  D. Liquidity risk
  B. Inflation risk

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  Explanation

  Inflation risk refers to the possibility that investment returns will not keep pace with inflation, reducing purchasing power. This is especially relevant for fixed-income investments.

  References:

  SIE Study Guide, Investment Risks

• Question 293:

  A broker-dealer (BD) signs a selling agreement with the ABC family of mutual funds. To introduce the funds to the BD's sales force, ABC offers a training and education trip at a popular beach resort. The trip expenses will be covered by ABC for the three registered representatives in the BD who have the highest level of production in ABC funds during the month. The BD's branch office managers assess each sale of ABC funds to ensure that the BD's recommendations are aligned with the customers' investment objectives and risk tolerance.

  Which of the following statements best describes the permissibility of this arrangement?

  A. The arrangement is not permissible, since the sales incentive is offered by ABC and not the BD.
  B. The arrangement is not permissible, since the trip incentive creates a prohibited conflict of interest.
  C. The arrangement is permissible, since the sole purpose of the trip offered by ABC is training and education.
  D. The arrangement is permissible, since the BD has an established supervisory process to ensure its recommendations fit the customers' investment objectives and risk tolerance.
  B. The arrangement is not permissible, since the trip incentive creates a prohibited conflict of interest.

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  Explanation

  This arrangement is not permissible because it is a sales contest/incentive tied directly to the sale of a specific investment company's products, and it is funded by the product sponsor (ABC). Even if described as "training and education," the key facts make it a prohibited non-cash compensation practice: the reward is offered only to the top producers of ABC fund sales during the month, and the trip is to a beach resort-creating a strong incentive to recommend ABC funds to maximize eligibility for the reward. This type of incentive can improperly influence recommendations and creates a conflict of interest between the RR's compensation motivations and the customer's best interest. Therefore, B is the best answer. Choice A is not the best reason. The issue is not merely that the incentive is offered by ABC instead of the BD; non-cash compensation rules restrict sales contests and special compensation arrangements regardless of who sponsors them when they are tied to the sale of specific securities. Choice C is incorrect because calling something "training and education" does not make it permissible when the eligibility is driven by production in that sponsor's products. True training meetings may be permitted under tightly defined conditions, but they cannot be structured as a sales contest rewarding top sellers.

  Choice D is also incorrect because even strong supervision does not cure a prohibited compensation structure-supervision is required, but it does not override rules designed to prevent conflicted incentives. The SIE tests recognition that product-specific sales contests and lavish non-cash incentives are problematic because they can lead to biased recommendations and undermine fair dealing and best interest obligations.

• Question 294:

  Pursuant to the Securities Act of 1933, registration is required for which of the following securities?

  A. Private placements
  B. Municipal securities
  C. U.S. government issues
  D. Open-end investment companies
  D. Open-end investment companies

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  Explanation

  The Securities Act of 1933 requires securities offered to the public to be registered with the SEC unless they qualify for an exemption. Open-end investment companies (mutual funds) are not exempt and must register. D is correct because mutual funds are publicly offered and require registration. A is incorrect because private placements are exempt under Regulation D. B is incorrect because municipal securities are exempt under Section 3(a)(2). C is incorrect because U.S. government securities are also exempt under Section 3(a)(2).

  References:

  Securities Act of 1933, Section 5

  SIE Study Guide, Chapter 4

• Question 295:

  Under FINRA rules, which of the following activities is not considered an outside business activity (OBA)?

  A. Selling real estate
  B. Selling health insurance
  C. Professionally refereeing athletic events
  D. Passively investing in a multifamily house for rental purposes
  D. Passively investing in a multifamily house for rental purposes

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  Explanation

  Outside Business Activity Definition: Per FINRA Rule 3270, an OBA involves compensated business activities outside the scope of the RR's role at their firm. Passive investments are excluded because they do not require active involvement.

  Incorrect Options:

  A, B, and C: Selling real estate, selling insurance, and refereeing are considered OBAs as they involve active participation and compensation.

  FINRA Rule 3270 (Outside Business Activities): FINRA Rule 3270.

• Question 296:

  A hedge fund is most suitable for an investor who is seeking:

  A. growth but is highly fee-sensitive.
  B. growth and has a long-term time horizon.
  C. to produce additional income without risking their principal.
  D. diversification but may need access to the funds in the short term.
  B. growth and has a long-term time horizon.

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  Explanation

  The correct answer is B, growth and has a long-term time horizon. Hedge funds are alternative investments that typically pursue aggressive growth strategies, such as leverage, short selling, derivatives, and arbitrage. These strategies can offer higher returns but also involve higher risk and volatility, making them suitable for investors with a long-term investment horizon who can tolerate potential losses. Step-by-step, hedge funds often impose lock-up periods and limited liquidity, meaning investors cannot easily withdraw their funds in the short term. This makes them inappropriate for investors who may need quick access to their money, eliminating Choice D.

  Choice A is incorrect because hedge funds are known for high fees, commonly structured as "2 and 20" (2% management fee and 20% performance fee). Therefore, they are not suitable for fee-sensitive investors.

  Choice C is also incorrect because hedge funds do not guarantee principal protection and can experience significant losses. They are not designed for conservative income-seeking investors. Thus, hedge funds are best suited for investors seeking capital appreciation, who understand the risks, accept high fees, and have a long-term perspective, making Answer B correct.

• Question 297:

  Which of the following security types may contain convertible features allowing the holders to exchange the securities for other issues of the company?

  A. Common stock
  B. Preferred stock
  C. Commercial paper
  D. An exchange-traded fund (ETF)
  B. Preferred stock

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  Explanation

  Preferred stock may include convertible features that allow holders to exchange the preferred shares for another security of the issuing company-most commonly common stock-at a specified conversion ratio. That is why choice B is correct.

  Convertible preferred combines characteristics of equity income (a stated dividend) with the potential upside participation of common stock through the conversion privilege. The conversion feature is set by the issuer and described in the security's terms at issuance. Choice A is not the best answer because "common stock" itself is not typically described as "convertible" into other company issues; conversion features are commonly attached to preferred stock or bonds (convertible debentures), not standard common shares.

  Choice C, commercial paper, is a short-term unsecured corporate money market instrument; it is not typically issued with conversion features-its hallmark is short maturity and credit quality, not embedded equity options.

  Choice D, an ETF, is an investment company product whose shares represent an interest in a portfolio; ETFs are not typically "convertible" into other issues of the company in the way convertible preferred is. This is a product-knowledge question aimed at understanding embedded features and how issuers structure securities. For SIE purposes, remember: convertibility is most commonly associated with preferred stock and certain corporate bonds, and it provides investors with an option-like feature that can change the security's risk /return profile (income plus potential appreciation).

• Question 298:

  A privacy policy opt-out direction provided by a customer is valid:

  A. for one year.
  B. as long as the account has a balance.
  C. until the account is closed.
  D. until the customer rescinds direction.
  D. until the customer rescinds direction.

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  Explanation

  The correct answer is D, until the customer rescinds direction. This question relates to privacy rules under Regulation S-P, which governs how financial institutions handle customers' nonpublic personal information. When a customer exercises their right to opt out of having their personal information shared with nonaffiliated third parties, that decision remains in effect indefinitely. The firm must honor the customer's opt-out instruction continuously, unless the customer later chooses to revoke or rescind that direction. Choice A (for one year) is incorrect because there is no expiration period for an opt-out election. Once made, it does not need to be renewed annually.

  Choice B (as long as the account has a balance) and C (until the account is closed) are also incorrect because the opt-out applies regardless of account status and may even extend beyond account closure in certain recordkeeping contexts.

  Regulation S-P ensures customers maintain control over their personal financial information, and firms are required to provide privacy notices and allow customers the ability to opt out at any time. Thus, the opt-out direction remains valid until the customer changes their mind, making choice D correct.

• Question 299:

  Which of the following statements is true of a tax-free municipal revenue bond?

  A. The bond proceeds are treated as general revenue to the issuer.
  B. The bondholders are entitled to be paid from any revenue received by the issuer.
  C. The bondholders are entitled to be paid only from a specified source of revenue received by the issuer.
  D. The bondholders are entitled to a specified percentage of the revenue received by the issuer each year.
  C. The bondholders are entitled to be paid only from a specified source of revenue received by the issuer.

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  Explanation

  A municipal revenue bond is secured by and payable from a specific source of revenue, such as tolls from a bridge, fares from a transit system, fees from a water/sewer utility, or revenues from an airport authority. Bondholders rely on that pledged revenue stream rather than the issuer's general taxing power. That is why the correct statement is C: bondholders are entitled to be paid only from a specified source of revenue. Choice A is incorrect because revenue bond proceeds are typically earmarked for the project or enterprise, and repayment is not treated as "general revenue" in the GO sense.

  Choice B is incorrect because bondholders do not have a claim on any revenue of the issuer; that description aligns more with general obligation backing or a broad pledge.

  Choice D is incorrect because bondholders are owed debt service per the bond's terms (interest and principal), not a "specified percentage" of issuer revenue. The phrase "tax-free" refers to the typical federal tax-exempt status of municipal bond interest (subject to exceptions), but it does not change the fundamental revenue bond structure: repayment depends on the project's performance and revenue collection. This is a key SIE distinction between GO bonds (supported by full faith and credit/taxing power) and revenue bonds (supported by a designated revenue stream).

• Question 300:

  Which of the following describes a dividend?

  A. Interest paid on bonds
  B. Profit distributed to shareholders
  C. Capital gain from selling securities
  D. Fee paid to brokers
  B. Profit distributed to shareholders

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  Explanation

  Dividend: Distribution of a corporation's earnings to shareholders.

  Incorrect Options:

  A: Interest.

  C: Capital gain.

  D: Commission.