FINRA FINRA-SIE Online Practice Questions and Exam Preparation

FINRA FINRA-SIE Online Questions & Answers

• Question 31:

  A customer buys 100 ABC at $50 and at the same time sells an ABC April 50 call at $8.

  At expiration, ABC must be at what market price for the customer to break even?

  A. $42
  B. $44
  C. $50
  D. $58
  A. $42

  ---

  Explanation

  Breakeven Calculation: For covered call writing, breakeven is the stock purchase price minus the premium received.

  Purchase Price = $50

  Premium Received = $8

  Breakeven = $50 - $8 = $42.

  Other Options: B, C, and D: Incorrect because they do not reflect the proper calculation of stock price minus the premium.

• Question 32:

  The prohibited practice of excessively trading in a discretionary account in order to generate commissions is known as:

  A. kiting.
  B. churning.
  C. freeriding.
  D. front running.
  B. churning.

  ---

  Explanation

  Churning is the prohibited practice of excessive trading in a customer's account-often a discretionary account-primarily to generate commissions or other compensation for the broker rather than to meet the customer's investment objectives.

  That makes B correct. The core elements regulators look for are: control over the account (discretion or de facto control), excessive frequency/volume relative to the customer's profile, and an intent or effect of generating commissions at the customer's expense. Churning violates ethical standards and anti-fraud principles because it places the broker's interest ahead of the customer's. Choice A, kiting, typically refers to exploiting the time it takes for checks to clear by writing checks against insufficient funds-this is a banking/payment fraud concept, not excessive trading.

  Choice C, freeriding, refers to buying securities in a cash account and then selling them before paying for them, using sale proceeds to cover the purchase-this is linked to cash account payment violations and Regulation T concepts, not overtrading.

  Choice D, front running, involves trading ahead of a customer order or block trade (or ahead of research) to profit from an expected price move-again, not the same as excessive trading to generate commissions. The SIE emphasizes prohibited practices in customer accounts, including excessive trading, conflicts of interest, and supervisory obligations. Recognizing churning is essential because it is a classic example of misconduct where the customer's best interest is subordinated to compensation incentives.

• Question 33:

  Which of the following statements characterizes the typical relationship between the market value of a municipal bond portfolio and interest rates?

  A. As interest rates increase, the market value goes up.
  B. As interest rates decrease, the market value goes up.
  C. As the market value goes down, interest rates decrease.
  D. As the market value goes up, interest rates stay constant.
  B. As interest rates decrease, the market value goes up.

  ---

  Explanation

  Inverse Relationship: Bond prices and interest rates have an inverse relationship. When interest rates fall, existing bonds with higher coupon rates become more valuable, leading to an increase in market value.

  Incorrect Options:

  A: Market value decreases as interest rates increase.

  C: Interest rates and bond values move inversely, not in the same direction.

  D: Interest rates are not constant; they fluctuate over time.

  SEC Municipal Bonds Overview: SEC Municipal Bonds.

• Question 34:

  A registered representative pleads guilty to an investment fraud scheme that occurred five years ago.

  Which of the following documents must be updated within 30 days of the guilty plea?

  A. Form U4
  B. Form U5
  C. An arbitration disclosure
  D. Written supervisory procedures (WSPs)
  A. Form U4

  ---

  Explanation

  The correct answer is A, Form U4. Form U4 (Uniform Application for Securities Industry Registration or Transfer) must be kept current at all times and updated promptly-generally within 30 days-whenever a registered representative experiences a reportable event, including criminal matters such as a guilty plea. Step-by-step, a guilty plea to an investment fraud scheme is considered a material disclosure event, even if the misconduct occurred years earlier. The key factor is the date of the guilty plea, not when the underlying activity occurred. This triggers the obligation to update Form U4 so regulators (such as FINRA and the SEC) have accurate and current information about the individual's disciplinary history. Choice B, Form U5, is used when a registered representative leaves a firm and is not relevant to ongoing disclosures.

  Choice C, arbitration disclosure, pertains to dispute resolution records, not regulatory filings.

  Choice D, written supervisory procedures (WSPs), are internal firm compliance documents and do not relate to individual disclosure updates. Thus, any criminal event such as a guilty plea must be reported through an updated Form U4 within 30 days, making Answer A correct.

• Question 35:

  A customer wants to establish an account for the benefit of his grandchildren. He states to his registered representative that he wants to be able to control the distribution of the assets and direct how the account will be invested.

  Which of the following account types is most appropriate?

  A. Trust
  B. UTMA
  C. 529 savings plan
  D. Certificate of deposit (CD)
  A. Trust

  ---

  Explanation

  Trust Accounts: Provide the account owner (trustee) full control over distributions and investment decisions. Suitable for complex estate planning needs.

  Incorrect Options:

  UTMA: Transfers control to the minor upon reaching the age of majority. 529

  Plan: Used for educational savings, with limited control over distributions.

  CD: A fixed-term deposit, not an account type for managing distributions.

  SEC and FINRA Guidelines on Trusts: FINRA Trust Accounts.

• Question 36:

  Which of the following statements best describes a characteristic of 529 savings plan accounts?

  A. There are no contribution limits to the account.
  B. The number of contributors to the account is limited.
  C. Using funds for undergraduate or graduate studies is permissible.
  D. Earnings are taxed to the donor at the time of a qualified withdrawal.
  C. Using funds for undergraduate or graduate studies is permissible.

  ---

  Explanation

  529 Savings Plans: These plans allow tax-advantaged savings for education expenses. They can be used for both undergraduate and graduate studies, as well as certain K-12 expenses.

  Contribution Limits: Contributions are subject to gift tax limits but have no specific statutory maximum under federal law.

  Tax Treatment: Earnings grow tax-deferred and are tax-free if used for qualified education expenses. IRS Section 529

  Guidance: IRS 529 Plans.

• Question 37:

  Under Industry rules, what is the maximum price that qualifies a security as a penny stock?

  A. $0.10
  B. $0.50
  C. $i.00
  D. $5.00
  D. $5.00

• Question 38:

  A customer fails to make a timely payment for a substantial purchase in a cash account.

  Federal Reserve Regulation T requires that, in the absence of an extension, the firm must take which of following actions?

  A. Close the account
  B. Sell the stock and freeze the account for 90 days
  C. Give the customer a first warning of late payment
  D. Establish a margin account and journal the transaction to it
  B. Sell the stock and freeze the account for 90 days

  ---

  Explanation

  Under Federal Reserve Regulation T, if a customer does not pay for a purchase in a cash account within the required payment period and the firm does not grant an extension, the firm must liquidate the securities (sell them) and impose a 90- day freeze on the account's ability to purchase securities on credit, which corresponds to choice B. The "freeze" means that for 90 days the customer must make full payment in advance (or deliver fully paid funds) before new purchases can be made in that account. This is a classic SIE test area tied to cash account payment rules and settlement discipline.

  Choice A is incorrect because the rule does not require the firm to close the account; the standard remedy is liquidation and restriction (freeze).

  Choice C is incorrect because merely warning the customer does not satisfy the regulatory requirement; the firm must take action to address the unpaid trade.

  Choice D is incorrect because firms cannot simply convert the transaction into a margin obligation to avoid Regulation T cash account rules. Establishing a margin account requires proper account documentation and suitability/approval, and it does not retroactively "cure" a cash account payment violation. The compliance purpose behind this rule is to prevent "free riding" behavior-customers attempting to buy securities and then selling them before paying, using sale proceeds to cover the purchase without providing funds. Regulation T supports orderly markets by requiring timely payment and imposing restrictions when customers fail to meet obligations. For exam purposes, remember the key pairing: failure to pay #

  liquidation + 90-day freeze (unless an extension is granted).

• Question 39:

  A customer purchased 100 shares of Company XYZ common stock five years ago for $20.00 per share. Over the life of her investment, the customer received cash dividends of $2.00 per share, on which she paid total income taxes of $0.50 per share. She recently sold the stock for $30.00 per share.

  What is the customer's cost basis in each share of XYZ stock?

  A. $20.00
  B. $21.50
  C. $22.00
  D. $30.00
  A. $20.00

  ---

  Explanation

  The cost basis of a stock represents the purchase price and does not include dividends received. Taxes paid on dividends also do not affect the cost basis.

  Original purchase price per share = $20.00.

  Dividends and taxes on dividends do not adjust the stock's cost basis.

  A is correct because the cost basis remains $20.00.

  B, C, and D incorrectly assume that dividends or taxes change the cost basis.

  References:

  IRS Publication 550: Investment Income and Expenses

• Question 40:

  A grandfather establishes a Uniform Transfers to Minors Act (UTMA) custodial account for his grandson and appoints an attorney as custodian.

  Which of the following individuals owns the account?

  A. Attorney
  B. Grandfather
  C. Grandson
  D. Grandson's parent
  C. Grandson

  ---

  Explanation

  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 correct because the grandson (the minor) is the account's legal owner. A is incorrect because the attorney is the custodian, not the owner. B is incorrect because the grandfather established the account but does not own it. D is incorrect because the parent does not have ownership unless explicitly named as the custodian.

  References:

  SIE Study Guide, Chapter 9: Custodial Accounts