SIE Practice Test

80 questions · 105 answering minutes.

Original practice booklet. Record your answers, then open explanations after your attempt. Responses stay in this browser when storage is available. This booklet does not predict an official score.

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SIE original practice form Answer all 80 four-choice questions. Choose one answer per question. Allow 105 minutes for answering; any breaks use that time. This is an original study form based on the October 2025 content outline, not an official FINRA examination. The real examination has 75 scored questions plus 5 unidentified pretest questions. This form uses the scored domain counts plus 5 editorially allocated practice pilots. Explanations are supplied for all 80 items after your attempt. The pilot allocation is not an official FINRA allocation. Use no books or reference material. To approximate testing-center conditions, use a four-function calculator and erasable workspace; the actual testing center supplies these. Online examination conditions use electronic tools and prohibit personal paper and calculators. This booklet does not reproduce testing-center software. The official passing result is 70 on an equated 0-to-100 scale. A raw practice percentage does not predict that result or confer securities-industry registration. Keep answers closed until your attempt is finished.
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Question 1

A customer authorizes a representative to buy 200 shares of a specified stock that day, leaving only the execution time and price to the representative. No written discretionary authority exists. The representative instead wants to buy 100 shares of a different stock. Which action is permitted under the stated time-and-price authorization alone?
  • ☐ A. Exercise security-selection discretion after receiving only firm acceptance.
  • ☐ B. Substitute another stock if the representative considers it more suitable.
  • ☐ C. Choose execution time and price for the specified 200-share purchase.
  • ☐ D. Change the stock and quantity after obtaining only oral permission.
Show answer and explanation

Response: C

Final answer: Choose execution time and price for the specified 200-share purchase.

The customer has already fixed the security and quantity, so the limited time-and-price permission concerns execution of that purchase. Substituting another stock goes further. That security-selection discretion would require the applicable written customer authorization and written firm acceptance before its use.

Question 2

A customer keeps common shares at a SIPC-member broker-dealer. The firm remains financially sound, but the shares fall in value because the issuer's profits decline. What does SIPC protection provide for that market loss?
  • ☐ A. Reimbursement up to the customer's original purchase price
  • ☐ B. Reimbursement only after the customer sells the shares
  • ☐ C. Reimbursement subject to SIPC's securities-protection limit
  • ☐ D. No reimbursement for the decline in the shares' market value
Show answer and explanation

Response: D

Final answer: No reimbursement for the decline in the shares' market value

SIPC protects customer property in a qualifying brokerage failure, but the stated broker remains financially sound and the loss arises from the issuer's declining profits. This is an investment loss. SIPC does not reimburse it.

Question 3

An issuer sells a bond with a separate instrument allowing its holder to purchase common shares at a stipulated price for five years. What is the separate instrument?
  • ☐ A. An American depositary receipt
  • ☐ B. A subscription right granted solely to current shareholders
  • ☐ C. A stock purchase warrant
  • ☐ D. A common-stock dividend
Show answer and explanation

Response: C

Final answer: A stock purchase warrant

The separate instrument is a stock purchase warrant: it allows its holder to purchase common shares at a specified price during the stated five-year period and can accompany the issuer's bond.

Question 4

Which arrangement meets FINRA's requirement concerning approval of a member firm's anti-money-laundering program?
  • ☐ A. A written program approved by a member of senior management
  • ☐ B. An oral program approved by a member of senior management
  • ☐ C. A written program approved only by a newly hired representative
  • ☐ D. A written program that requires no management approval
Show answer and explanation

Response: A

Final answer: A written program approved by a member of senior management

The program must be written. FINRA Rule 3310 also requires approval by a member of senior management, so either an oral program or approval solely by a newly hired representative misses part of the stated requirement.

Question 5

A registered representative's employment with a firm ends. Under FINRA's Form U5 filing requirement, within how many days of that employment end date must the firm submit the termination form?
  • ☐ A. 30 days
  • ☐ B. 10 days
  • ☐ C. 90 days
  • ☐ D. 60 days
Show answer and explanation

Response: A

Final answer: 30 days

The deadline is thirty days. FINRA measures it from the employment end date, and the firm must provide the individual a copy within that period as well as submit the termination filing rather than waiting for a request.

Question 6

Which issuer's debt carries the full faith and credit backing of the U.S. government?
  • ☐ A. A state highway revenue authority
  • ☐ B. The U.S. Treasury
  • ☐ C. A publicly traded U.S. industrial corporation
  • ☐ D. A municipal hospital financing corporation
Show answer and explanation

Response: B

Final answer: The U.S. Treasury

The U.S. Treasury issues debt backed by the government's full faith and credit. Public-service purposes or domestic incorporation do not give the other issuers that backing.

Question 7

A customer will buy a stock only at US $28 per share or less. Which order directly specifies that condition?
  • ☐ A. A buy limit order at US $28
  • ☐ B. A market order to buy
  • ☐ C. A sell limit order at US $28
  • ☐ D. A buy stop order at US $28 with no limit
Show answer and explanation

Response: A

Final answer: A buy limit order at US $28

The limit caps the purchase. A buy limit of US $28 permits a purchase at US $28 or less, matching the customer's condition while leaving open the possibility that the order will not execute.

Question 8

A customer submits an order to buy shares of an ordinary open-end mutual fund. Which price normally determines the purchase before any applicable sales charge?
  • ☐ A. The previous business day's NAV regardless of order timing
  • ☐ B. The last price quoted for that fund on a stock exchange
  • ☐ C. A price negotiated with another shareholder
  • ☐ D. The next calculated net asset value
Show answer and explanation

Response: D

Final answer: The next calculated net asset value

Open-end funds use forward pricing. The purchase receives the next calculated NAV, with any applicable sales charge added, rather than an exchange price negotiated between shareholders or yesterday's value regardless of the order's timing.

Question 9

A corporate employee is entrusted with confidential news of an unannounced acquisition that would be important to investors. Before public disclosure, the employee buys the company's stock on the basis of that information. Which description best applies?
  • ☐ A. A permitted trade because no customer account is involved
  • ☐ B. An exempt trade because the employee is not a company director
  • ☐ C. Illegal insider trading
  • ☐ D. A permitted trade because the employee uses personal funds
Show answer and explanation

Response: C

Final answer: Illegal insider trading

Trading on material, nonpublic acquisition information entrusted through employment breaches the employee's duty of trust and confidence, illustrating illegal insider trading regardless of personal funding or a position below director.

Question 10

An exchange-traded note is an unsecured obligation of its financial-institution issuer linked to an index. If that issuer cannot pay, which risk directly threatens the holder even if the index performs well?
  • ☐ A. Currency risk
  • ☐ B. Interest-rate risk
  • ☐ C. Market liquidity risk
  • ☐ D. Issuer credit risk
Show answer and explanation

Response: D

Final answer: Issuer credit risk

The ETN is an unsecured obligation of its issuer. If the issuer cannot pay, the holder faces issuer credit risk even when the linked index performs well. Index gains do not settle the issuer's debt.

Question 11

An associated person proposes to help an unrelated startup sell securities outside the regular course of the person's employment and receive a finder's fee. No Rule 3280 exclusion applies. After receiving prior written notice, the member firm disapproves participation in writing. What must the person do?
  • ☐ A. Participate after accepting shares instead of a cash fee
  • ☐ B. Participate after removing references to the firm from offering materials
  • ☐ C. Refrain from participating directly or indirectly
  • ☐ D. Participate after disclosing the firm's disapproval to buyers
Show answer and explanation

Response: C

Final answer: Refrain from participating directly or indirectly

The firm has disapproved participation. Under Rule 3280, that written decision bars both direct and indirect participation in this compensated transaction, and a buyer's acknowledgment or compensation paid as shares does not override the prohibition.

Question 12

An ordinary covered U.S. stock trade occurs on Friday under the standard T+1 cycle. Monday is a market holiday, and Tuesday is a normal business day. When does it normally settle?
  • ☐ A. Wednesday
  • ☐ B. Tuesday
  • ☐ C. Friday
  • ☐ D. Saturday
Show answer and explanation

Response: B

Final answer: Tuesday

Count the next business day. Saturday and Sunday are excluded, and Monday is the stated holiday, so Tuesday is the next business day after the Friday trade and therefore its standard T+1 settlement date.

Question 13

An investor buys ordinary common shares in a corporation. Which description best identifies the investor's interest?
  • ☐ A. A creditor interest with contractual coupon payments
  • ☐ B. An ownership interest whose value can rise or fall
  • ☐ C. An option to purchase the corporation's shares later
  • ☐ D. A debt claim with repayment at a specified maturity
Show answer and explanation

Response: B

Final answer: An ownership interest whose value can rise or fall

Common stock conveys equity ownership. Its holder participates in the corporation's fortunes through a share whose market value can rise or fall, without the repayment-at-maturity obligation associated with a debt security.

Question 14

Which action is an example of fiscal policy rather than monetary policy?
  • ☐ A. The Federal Reserve changes its administered interest rates.
  • ☐ B. The central bank changes the stance of monetary policy.
  • ☐ C. The FOMC changes its target range for the federal funds rate.
  • ☐ D. Congress and the Administration change federal spending and taxes.
Show answer and explanation

Response: D

Final answer: Congress and the Administration change federal spending and taxes.

Congress and the Administration determine fiscal policy through tax and federal-spending decisions, so their stated action is the fiscal-policy choice. The other actions concern monetary policy.

Question 15

Two investors hold a US $120,000 account as tenants in common, with documented interests of 70 percent and 30 percent. The 30 percent owner dies, and account value is unchanged. What interest belongs to the deceased owner's estate or heirs under this ownership form?
  • ☐ A. US $60,000; death makes the two interests equal.
  • ☐ B. US $84,000; death reverses the documented ownership percentages.
  • ☐ C. US $36,000; the survivor keeps the separate US $84,000 interest.
  • ☐ D. US $0; the survivor receives the entire US $120,000 by survivorship.
Show answer and explanation

Response: C

Final answer: US $36,000; the survivor keeps the separate US $84,000 interest.

The documented 30 percent interest is US $36,000, and tenancy in common sends that interest to the deceased owner's estate or heirs. The survivor keeps US $84,000. Neither equal division nor automatic transfer of the entire account follows from these ownership terms.

Question 16

In Transaction I, a corporation sells newly issued shares and receives the proceeds. In Transaction II, an existing shareholder sells previously issued shares to another investor. Which classification is correct?
  • ☐ A. Both are secondary-market activity.
  • ☐ B. I is primary-market activity, and II is secondary-market activity.
  • ☐ C. Both are primary-market activity.
  • ☐ D. I is secondary-market activity, and II is primary-market activity.
Show answer and explanation

Response: B

Final answer: I is primary-market activity, and II is secondary-market activity.

Transaction I raises issuer funds. New securities sold by the corporation belong to the primary market, whereas Transaction II transfers previously issued shares between investors and therefore belongs to the secondary market.

Question 17

A company has 1,000,000 shares outstanding. An investor owns 500 shares and receives a 10 percent stock dividend, as do all other shareholders. What are the investor's resulting share count and ownership percentage?
  • ☐ A. 600 shares and 0.06%
  • ☐ B. 550 shares and 0.055%
  • ☐ C. 550 shares and 0.05%
  • ☐ D. 500 shares and 0.05%
Show answer and explanation

Response: C

Final answer: 550 shares and 0.05%

The investor receives 50 shares, bringing the holding to 550, while total shares increase to 1,100,000 through the same distribution. Divide 550 by 1,100,000. The investor still owns 0.05 percent because the company's other shareholders received proportional additions too.

Question 18

A municipal bond finances a toll facility and is payable solely from its toll revenues. Which classification best fits these terms?
  • ☐ A. A revenue bond
  • ☐ B. A corporate debenture
  • ☐ C. A general obligation bond
  • ☐ D. A Treasury note
Show answer and explanation

Response: A

Final answer: A revenue bond

The bond's sole repayment source is toll revenue, which makes it a revenue bond dependent on project income rather than a general obligation backed by taxing power.

Question 19

A customer sends a written complaint about an allegedly unauthorized securities sale. Under FINRA Rule 4513, for how long must the firm preserve the customer complaint record at minimum?
  • ☐ A. Three years
  • ☐ B. Two years
  • ☐ C. Four years
  • ☐ D. One year
Show answer and explanation

Response: C

Final answer: Four years

Keep the record four years. Rule 4513 covers this written customer complaint concerning execution of a securities transaction, including any action the firm took, and resolution of the dispute does not shorten the required retention period.

Question 20

An IPO registration statement is effective. Its prospectus describes a pending lawsuit that could materially reduce the issuer's earnings. A customer asks whether SEC effectiveness means that this lawsuit risk has been resolved. Which response is accurate?
  • ☐ A. Effectiveness means the prospectus need only discuss risks arising after the offering.
  • ☐ B. Effectiveness means the SEC independently resolved the lawsuit before allowing sales.
  • ☐ C. Effectiveness means the underwriting firm has assumed the issuer's lawsuit liability.
  • ☐ D. Effectiveness permits the offering; the customer must still evaluate the disclosed lawsuit risk.
Show answer and explanation

Response: D

Final answer: Effectiveness permits the offering; the customer must still evaluate the disclosed lawsuit risk.

The lawsuit remains an investment concern. SEC effectiveness allows the offering to proceed, but it neither resolves the disclosed litigation nor transfers that liability to the underwriter, so the prospectus still matters to the customer's decision.

Question 21

A customer writes an American-style equity call that remains open. Which statement accurately describes assignment exposure?
  • ☐ A. Assignment can occur before expiration.
  • ☐ B. The writer decides whether the holder may exercise.
  • ☐ C. Assignment is impossible while the writer owns the underlying shares.
  • ☐ D. Assignment is possible only on the expiration date.
Show answer and explanation

Response: A

Final answer: Assignment can occur before expiration.

American-style exercise can occur before expiration, so a writer with an open short call remains exposed to assignment during the contract's life even when shares are already owned to cover delivery. Coverage supplies the shares.

Question 22

An investor bought stock at US $30 per share. It now trades at US $40 and pays a US $0.30 quarterly dividend, with four equal payments annually. What is its current dividend yield?
  • ☐ A. 0.75%
  • ☐ B. 3%
  • ☐ C. 1%
  • ☐ D. 4%
Show answer and explanation

Response: B

Final answer: 3%

The stock now yields 3 percent. Its four quarterly dividends total US $1.20 annually, which is divided by the current US $40 price, while dividing by the original US $30 cost would answer the different question of yield on purchase cost at 4 percent.

Question 23

During one aggregation year, a firm gives a recipient US $175 in covered business-related gifts and its representative separately gives that same recipient US $80. No exception applies. Under FINRA Rule 3220's current annual limit, what maximum additional covered gift may they give this recipient in that year?
  • ☐ A. US $220
  • ☐ B. US $125
  • ☐ C. US $300
  • ☐ D. US $45
Show answer and explanation

Response: D

Final answer: US $45

Aggregate both givers' gifts: US $175 plus US $80 already uses US $255 of the current US $300 annual recipient limit. That leaves US $45. Calculating a separate allowance for the representative or counting only the firm's gifts would overstate the available amount.

Question 24

Before entering options trading, which document addresses the characteristics and risks of standardized options?
  • ☐ A. A municipal bond's official statement
  • ☐ B. The Options Disclosure Document
  • ☐ C. An issuer's proxy ballot
  • ☐ D. A stock dividend notice
Show answer and explanation

Response: B

Final answer: The Options Disclosure Document

Read the Options Disclosure Document. Its explanations cover standardized options and their risks, while the brokerage firm's separate approval remains necessary before trading even after the customer receives this document.

Question 25

A U.S. investor holds an investment whose value stays at 1,000 euros. Its exchange rate changes from US $1.20 per euro to US $1.10 per euro. Ignoring fees and any hedging, what happens to its U.S.-dollar value?
  • ☐ A. It falls by US $10.
  • ☐ B. It stays at US $1,000.
  • ☐ C. It rises by US $100.
  • ☐ D. It falls by US $100.
Show answer and explanation

Response: D

Final answer: It falls by US $100.

Convert at each stated rate: 1,000 euros initially equals US $1,200 and later equals US $1,100, a decline of US $100 despite unchanged euro value. Currency conversion changes the dollar value.

Question 26

A registered person plans to take a paid weekend job managing a restaurant, outside the person's role at the member firm. What does FINRA Rule 3270 require before beginning that activity?
  • ☐ A. Written notice only after the activity begins
  • ☐ B. Prior written notice to the member firm
  • ☐ C. Annual disclosure at the end of the calendar year
  • ☐ D. Prior oral notice without a written notice
Show answer and explanation

Response: B

Final answer: Prior written notice to the member firm

Rule 3270 requires prior written notice of this paid outside business activity, allowing the member firm to consider conflicts and impose conditions or prohibit it. Weekend hours do not remove that requirement.

Question 27

A promoter posts fabricated claims about a company's breakthrough, driving buyers into the stock. The promoter then sells a large personal holding into the increased demand and stops promoting it. Which scheme is described?
  • ☐ A. Legal insider reporting
  • ☐ B. Front running
  • ☐ C. A registered rights offering
  • ☐ D. Pump and dump
Show answer and explanation

Response: D

Final answer: Pump and dump

False claims pump demand. The promoter then disposes of personal shares into that demand and stops promotion, completing the pump-and-dump pattern through fabricated publicity followed by selling the promoted holding.

Question 28

During a variable annuity's accumulation phase, the chosen underlying investment options lose value. Which statement correctly describes the account?
  • ☐ A. Its investment value grows at a fixed contractual interest rate.
  • ☐ B. Its investment value can fall, including a loss of principal.
  • ☐ C. Its principal can fall only after annuity payments begin.
  • ☐ D. Its original investment is protected from loss by the insurer.
Show answer and explanation

Response: B

Final answer: Its investment value can fall, including a loss of principal.

Variable annuity accumulation value follows the selected underlying investments, so losses can reduce principal even though the contract is issued by an insurance company. A separate guarantee would require stated contractual terms.

Question 29

A customer enters a sell stop-limit order with a $46 stop and a $45 limit. The stop is triggered, but the stock then trades only below $45. Which statement describes the order?
  • ☐ A. It may remain unfilled because a sale below $45 is outside the limit.
  • ☐ B. It must execute below $45 once the stop is triggered.
  • ☐ C. It remains inactive unless the stock trades at exactly $45.
  • ☐ D. It executes as a market order after the $46 trigger.
Show answer and explanation

Response: A

Final answer: It may remain unfilled because a sale below $45 is outside the limit.

The stop has already triggered, leaving a sell limit that permits execution only at $45 or higher, and trading solely below that level can leave the order unfilled. The limit still applies after activation.

Question 30

An investor will need the entire account for a tuition payment in two months and cannot tolerate a substantial loss. Which fact is most relevant when assessing volatile securities for that goal?
  • ☐ A. The short horizon and low tolerance for loss
  • ☐ B. The investor's preference for the securities' familiar company names
  • ☐ C. The securities' strong performance during the preceding month
  • ☐ D. The securities' potential returns over several decades
Show answer and explanation

Response: A

Final answer: The short horizon and low tolerance for loss

Tuition is due soon. The two-month horizon leaves little time to recover from a price decline, and the investor's inability to tolerate substantial loss makes that timing relevant when evaluating volatile securities.

Question 31

A company has US $900 million in assets, US $540 million in liabilities and 30 million common shares outstanding. It has no preferred shares. The common stock trades at US $18. What is book value per common share?
  • ☐ A. US $12
  • ☐ B. US $48
  • ☐ C. US $30
  • ☐ D. US $18
Show answer and explanation

Response: A

Final answer: US $12

Book value comes from net assets. After subtracting US $540 million in liabilities from US $900 million in assets, the US $360 million balance is divided among 30 million common shares, giving US $12 per share regardless of the US $18 market quotation.

Question 32

A U.S. depositary bank issues receipts representing shares of a company based outside the United States. What are these receipts?
  • ☐ A. Options giving a right to sell U.S. bank shares
  • ☐ B. Treasury receipts backed by U.S. government debt
  • ☐ C. Domestic corporate bonds with fixed coupons
  • ☐ D. American depositary receipts
Show answer and explanation

Response: D

Final answer: American depositary receipts

ADRs represent foreign-company shares. A U.S. depositary bank issues the receipts against those underlying shares, with each receipt potentially representing several shares or a fraction rather than a new U.S. Treasury obligation.

Question 33

An investor reviewing an IPO wants the company's disclosed risks that could materially affect its business or the offered shares. Which prospectus section should the investor consult first?
  • ☐ A. Risk Factors
  • ☐ B. Dividend Policy
  • ☐ C. Use of Proceeds
  • ☐ D. Underwriting compensation
Show answer and explanation

Response: A

Final answer: Risk Factors

Risk Factors addresses the requested concern. Investors can find disclosed material risks there before evaluating how those risks might affect the company or offered shares.

Question 34

An account places US $12,000 in Fund A, which holds 75 percent technology stocks, and US $8,000 in Fund B, which holds 50 percent technology stocks. What proportion of this US $20,000 account is exposed to technology stocks through the two funds?
  • ☐ A. 65%
  • ☐ B. 50%
  • ☐ C. 75%
  • ☐ D. 62.5%
Show answer and explanation

Response: A

Final answer: 65%

Fund A contributes US $9,000 of technology exposure and Fund B contributes US $4,000, totaling US $13,000 of the US $20,000 account. That is 65 percent. The unweighted average of the fund percentages ignores how much money was placed in each fund.

Question 35

A broker-dealer sells a bond to a customer from the firm's own inventory. In which capacity is the firm acting in that transaction?
  • ☐ A. Agent for a purchase from an unrelated seller
  • ☐ B. Principal
  • ☐ C. Transfer agent for the bond issuer
  • ☐ D. Custodian under a minor's account
Show answer and explanation

Response: B

Final answer: Principal

The firm owns the bond. Selling that inventory to the customer makes the broker-dealer a principal in this transaction, and an agent would arrange a purchase from another party instead of being the seller itself.

Question 36

An investor expects a bond's fixed coupon for ten more years. The issuer exercises a permitted call after market interest rates fall. Which risk has occurred?
  • ☐ A. Call risk
  • ☐ B. Credit risk
  • ☐ C. Currency risk
  • ☐ D. Inflation risk
Show answer and explanation

Response: A

Final answer: Call risk

Permitted early redemption is call risk. The issuer's call ends the expected ten-year coupon stream early, leaving the investor to consider reinvesting the proceeds at the lower prevailing rates.

Question 37

A customer wants an account in which purchases must be fully paid without borrowing the purchase money from the broker. Which account type meets that description?
  • ☐ A. Cash account
  • ☐ B. Discretionary margin account
  • ☐ C. Margin account
  • ☐ D. Portfolio margin account
Show answer and explanation

Response: A

Final answer: Cash account

Cash accounts require full payment for securities purchases without borrowing that purchase money from the brokerage firm.

Question 38

Which feature most characterizes a traditional unit investment trust compared with an actively managed mutual fund?
  • ☐ A. A portfolio regularly revised through active security selection
  • ☐ B. A generally fixed portfolio held until the trust's specified termination
  • ☐ C. A continuously managed portfolio with no specified termination date
  • ☐ D. A portfolio whose shareholders elect changes to its holdings daily
Show answer and explanation

Response: B

Final answer: A generally fixed portfolio held until the trust's specified termination

A traditional UIT generally holds a relatively fixed portfolio until a specified termination, distinguishing it from a continuously managed portfolio with ongoing active security selection.

Question 39

Which organization oversees FINRA and the MSRB as part of its oversight of U.S. securities markets?
  • ☐ A. FDIC
  • ☐ B. Federal Reserve Board
  • ☐ C. SIPC
  • ☐ D. SEC
Show answer and explanation

Response: D

Final answer: SEC

The SEC oversees securities self-regulatory organizations, including FINRA and the MSRB, while the other named organizations perform deposit-insurance, brokerage-customer protection or central-banking functions. FINRA remains an SRO.

Question 40

An ETF has US $255 million in portfolio assets, US $5 million in liabilities and 10 million shares outstanding. Its shares trade at US $24.50. Which statement compares the market price with NAV?
  • ☐ A. The ETF trades at a US $0.50 discount to its US $25 NAV.
  • ☐ B. The ETF trades at a US $0.50 premium to its US $24 NAV.
  • ☐ C. The ETF trades at a US $1.00 discount to its US $25.50 NAV.
  • ☐ D. The ETF trades at NAV because its exchange price is US $24.50.
Show answer and explanation

Response: A

Final answer: The ETF trades at a US $0.50 discount to its US $25 NAV.

Net assets are US $250 million after liabilities, and dividing by 10 million shares gives US $25 NAV. The market price is lower. At US $24.50, these shares trade US $0.50 below their calculated NAV, a discount rather than a premium.

Question 41

Before allowing someone to place orders for a customer account, which fact is essential under FINRA's Know Your Customer rule?
  • ☐ A. The person's preferred investment strategy for their own account
  • ☐ B. The person's ability to qualify independently for a margin loan
  • ☐ C. The person's authority to act on behalf of the customer
  • ☐ D. The person's investment experience in an unrelated personal account
Show answer and explanation

Response: C

Final answer: The person's authority to act on behalf of the customer

Verify authority to act. Know Your Customer includes essential facts about anyone acting for the customer, so willingness to place an order or experience in a personal account does not establish the necessary authority here.

Question 42

A parent wants a tax-advantaged account designed for qualifying education costs. Which plan is specifically designed for that purpose?
  • ☐ A. A 529 plan
  • ☐ B. An individual retirement account
  • ☐ C. An ABLE account
  • ☐ D. A health savings account
Show answer and explanation

Response: A

Final answer: A 529 plan

A 529 plan is designed to encourage saving for qualifying education costs, matching the parent's specific education-saving purpose.

Question 43

A representative learns confidentially that a customer's agreed 60,000-share purchase will be executed shortly. Seeking to profit from its expected price effect, the representative buys the same stock for a personal account before the block is completed or reported. No permitted exception applies. Which practice is illustrated?
  • ☐ A. Dollar-cost averaging
  • ☐ B. Market making
  • ☐ C. Executing a customer limit order
  • ☐ D. Front running
Show answer and explanation

Response: D

Final answer: Front running

The representative's personal trade exploits confidential information about the imminent customer block before its completion or reporting, which constitutes front running under the stated profit motive and absence of an exception.

Question 44

New bonds with comparable credit quality begin offering higher yields. Other factors remain unchanged. What generally happens to the market price of an existing fixed-rate bond?
  • ☐ A. It becomes equal to face value automatically.
  • ☐ B. It falls.
  • ☐ C. It changes only when the issuer misses a payment.
  • ☐ D. It rises.
Show answer and explanation

Response: B

Final answer: It falls.

The price generally falls. With the coupon fixed and comparable new bonds offering higher yields, buyers ordinarily need a lower purchase price to make the existing bond competitive, assuming the other factors stay unchanged.

Question 45

A college student passes the SIE but has not joined a member firm, completed a representative-level qualification exam or become registered. What authority does passing the SIE alone confer?
  • ☐ A. It permits customer trading as long as the student declines commissions.
  • ☐ B. It authorizes unrestricted sales of every type of security.
  • ☐ C. It automatically creates an active Series 7 registration.
  • ☐ D. It does not alone authorize the student to conduct securities business as a registered representative.
Show answer and explanation

Response: D

Final answer: It does not alone authorize the student to conduct securities business as a registered representative.

The SIE result alone cannot authorize representative securities business because the appropriate qualification and registration process remains incomplete, even though the student has demonstrated knowledge of industry essentials.

Question 46

An investor writes one put covering 100 shares with a US $38 strike and receives a US $2 per-share premium. The put is assigned. Ignoring fees and taxes, what is the effective purchase cost per share after allowing for the premium received?
  • ☐ A. US $40
  • ☐ B. US $38
  • ☐ C. US $2
  • ☐ D. US $36
Show answer and explanation

Response: D

Final answer: US $36

Assignment requires buying at US $38. The US $2 premium was received rather than paid, so the net cash spent is US $3,800 minus US $200, or US $3,600 for 100 shares: US $36 each. This is purchase cost, not a guarantee against losses.

Question 47

A representative recommends a security to a retail customer investing for household purposes. The representative discloses a higher sales incentive but evaluates only personal compensation, ignoring the customer's objectives, costs and risks. Which statement best describes the recommendation under Reg BI?
  • ☐ A. Disclosure transfers responsibility for the recommendation entirely to the customer.
  • ☐ B. Disclosure alone does not satisfy the best-interest and applicable component obligations.
  • ☐ C. Disclosure satisfies Reg BI whenever the customer signs an acknowledgment.
  • ☐ D. Disclosure makes evaluation of the customer's objectives necessary only after purchase.
Show answer and explanation

Response: B

Final answer: Disclosure alone does not satisfy the best-interest and applicable component obligations.

Disclosure is one part of Reg BI, and acknowledging the higher incentive does not replace the obligations that apply when making this recommendation. The representative considered personal compensation alone. Ignoring the customer's objectives, costs and risks cannot satisfy the stated best-interest standard.

Question 48

An investor sells ordinary ETF shares on a stock exchange at 11:00 a.m. Which price mechanism normally applies?
  • ☐ A. The next calculated portfolio NAV
  • ☐ B. An intraday market price that may differ from NAV
  • ☐ C. The previous business day's closing NAV
  • ☐ D. The original public offering price
Show answer and explanation

Response: B

Final answer: An intraday market price that may differ from NAV

This is an exchange sale. Ordinary ETF shares trade during the day at market prices, which may differ from NAV, and the next calculated NAV instead governs ordinary open-end mutual-fund redemption rather than this secondary-market ETF transaction.

Question 49

Two adults hold a brokerage account as joint tenants with rights of survivorship. One owner dies, and the other survives. What does that ownership feature provide?
  • ☐ A. The surviving joint owner becomes owner of the account.
  • ☐ B. The account remains jointly owned by the estate and survivor.
  • ☐ C. The survivor must sell all holdings before acquiring ownership.
  • ☐ D. The deceased owner's half necessarily passes to the estate.
Show answer and explanation

Response: A

Final answer: The surviving joint owner becomes owner of the account.

Rights of survivorship transfer ownership to the surviving joint owner when the other owner dies, providing the account feature specified here rather than tenancy-in-common treatment through the estate.

Question 50

A customer may need money on short notice and compares a listed REIT with a registered non-traded REIT. Which distinction is especially relevant?
  • ☐ A. The non-traded REIT must redeem shares daily like an open-end fund.
  • ☐ B. The non-traded REIT's distributions provide a market for its shares.
  • ☐ C. The non-traded REIT offers the same exchange liquidity as the listed REIT.
  • ☐ D. The non-traded REIT may be difficult to sell quickly on an open market.
Show answer and explanation

Response: D

Final answer: The non-traded REIT may be difficult to sell quickly on an open market.

The non-traded REIT lacks the listed REIT's exchange market, which matters when a customer needs to convert the investment into cash quickly. Distributions do not establish liquidity, and registration does not require daily redemption.

Question 51

An investor owns 80 shares quoted at US $75 before a 3-for-2 stock split. Assuming only the mechanical split adjustment, what holding and price should result immediately afterward?
  • ☐ A. 80 shares at US $50 each
  • ☐ B. 120 shares at US $50 each
  • ☐ C. 120 shares at US $75 each
  • ☐ D. approximately 53.33 shares at US $112.50 each
Show answer and explanation

Response: B

Final answer: 120 shares at US $50 each

The split preserves the mechanical value. The 3-for-2 ratio turns 80 shares into 120 and divides the US $75 price by 1.5 to give US $50, keeping the holding at US $6,000 before any independent market movement changes that value.

Question 52

An investor wants to sell a bond but cannot find a buyer at a reasonable price. The issuer still pays interest on time. Which risk is most directly involved?
  • ☐ A. Credit risk
  • ☐ B. Liquidity risk
  • ☐ C. Inflation risk
  • ☐ D. Call risk
Show answer and explanation

Response: B

Final answer: Liquidity risk

Finding a buyer is difficult. That difficulty in selling at a reasonable price identifies liquidity risk, even though the issuer continues to meet interest obligations and therefore has not demonstrated the payment failure described by credit risk.

Question 53

A candidate has used Allow Rep Edits to complete a Form U4 draft in FinPro. A firm employee reviews the draft but has no regulator-filing entitlement. Who can submit this filing?
  • ☐ A. Any registered representative using a personal FinPro login
  • ☐ B. A firm user with the required filing entitlement
  • ☐ C. The candidate because the draft's permitted edits are complete
  • ☐ D. The reviewing employee because reviewing creates filing authority
Show answer and explanation

Response: B

Final answer: A firm user with the required filing entitlement

Editing and reviewing do not create submission entitlement. A firm user with the required permission must submit the Form U4 to regulators, so neither the candidate's completed edits nor another employee's review substitutes for that filing access.

Question 54

An investor asks about a tax-advantaged method of saving for qualified disability expenses. Which account is designed for that purpose?
  • ☐ A. A 529 education savings plan
  • ☐ B. An ABLE account
  • ☐ C. A health savings account
  • ☐ D. An individual retirement account
Show answer and explanation

Response: B

Final answer: An ABLE account

ABLE addresses qualified disability expenses. Applicable federal tax advantages depend on meeting the account requirements, and investing in similar assets through a different account does not give that account the ABLE program's disability-related structure.

Question 55

A broker-dealer is applying to register a newly associated representative. Which uniform form establishes the individual's securities-industry registration request?
  • ☐ A. Form CRS
  • ☐ B. Form U5
  • ☐ C. Form U4
  • ☐ D. Form BD
Show answer and explanation

Response: C

Final answer: Form U4

Form U4 initiates the individual's registration or transfer request, whereas U5 reports termination, BD concerns the firm and CRS provides a relationship summary. Identify whose registration is requested. Here it is the associated representative's.

Question 56

An investor buys a corporate bond directly from its issuer. Which relationship does the bond normally establish?
  • ☐ A. The investor is a creditor of the issuer.
  • ☐ B. The investor becomes a voting common stockholder.
  • ☐ C. The investor immediately owns the issuer's pledged property.
  • ☐ D. The investor becomes a managing partner of the issuer.
Show answer and explanation

Response: A

Final answer: The investor is a creditor of the issuer.

The investor lends to the issuer by buying its bond and becomes a creditor with rights defined by the debt terms, including any applicable collateral arrangements. Collateral supports repayment. Purchase does not transfer collateral ownership.

Question 57

An adult makes a completed, valid gift of securities to a child's UGMA account and serves as custodian. Which statement correctly identifies ownership?
  • ☐ A. The adult retains ownership until the child receives control.
  • ☐ B. The child and custodian share ownership of the gifted securities.
  • ☐ C. The custodian may reclaim ownership before the statutory control age.
  • ☐ D. The securities belong to the child, with the custodian managing them under applicable state law.
Show answer and explanation

Response: D

Final answer: The securities belong to the child, with the custodian managing them under applicable state law.

The completed gift belongs to the child, with the adult managing it as custodian under applicable state law rather than retaining personal ownership pending transfer of control. Ownership and control differ. The control-transfer age varies by state.

Question 58

An investor receives the same dollar coupon from a bond each year while prices of everyday goods rise. Which risk explains the coupon's declining buying power?
  • ☐ A. Liquidity risk
  • ☐ B. Inflation risk
  • ☐ C. Credit risk
  • ☐ D. Call risk
Show answer and explanation

Response: B

Final answer: Inflation risk

Prices rise while coupons stay fixed, so the same dollars purchase fewer everyday goods even if every interest payment arrives on schedule. This is inflation risk, concerning the coupon's real buying power.

Question 59

A dealer displays a US $31.20 bid for 500 shares and a US $31.35 ask for 200 shares. These quantities are stated in shares. Which interpretation is correct?
  • ☐ A. The dealer offers to sell 500 shares at US $31.20; the displayed spread is US $0.15.
  • ☐ B. The dealer offers to sell 200 shares at US $31.35; the displayed spread is US $0.15.
  • ☐ C. The dealer offers to sell 200 shares at US $31.35; the displayed spread is US $0.075.
  • ☐ D. The dealer offers to buy 200 shares at US $31.35; the displayed spread is US $0.15.
Show answer and explanation

Response: B

Final answer: The dealer offers to sell 200 shares at US $31.35; the displayed spread is US $0.15.

The ask identifies the selling interest. Here the dealer offers 200 shares at US $31.35, whereas the US $31.20 bid indicates a willingness to buy 500 shares, and subtracting those two prices gives the US $0.15 spread. Quotes can change before execution.

Question 60

An investor replaces a large position in one airline with shares in 30 companies across several industries. The next month, stock prices fall broadly as economic forecasts weaken. Which risk distinction best explains the portfolio's continued decline?
  • ☐ A. Company concentration remains the same because all 30 holdings are stocks.
  • ☐ B. Liquidity risk alone explains a decline during a broad stock-market selloff.
  • ☐ C. Credit risk replaces market risk whenever more than one company is held.
  • ☐ D. Company concentration has been reduced, but broad market risk remains.
Show answer and explanation

Response: D

Final answer: Company concentration has been reduced, but broad market risk remains.

Owning several industries reduces dependence on one airline's fortunes, but many stocks can still fall together when economic expectations weaken across the market. The change addresses concentration. It leaves the portfolio exposed to the broad price fluctuations described in this scenario.

Question 61

Which description identifies FINRA's role in the securities industry?
  • ☐ A. A corporation that protects missing customer property after brokerage failure
  • ☐ B. A federal agency that registers public securities offerings
  • ☐ C. A self-regulatory organization that regulates member broker-dealers
  • ☐ D. A federal agency that conducts monetary policy
Show answer and explanation

Response: C

Final answer: A self-regulatory organization that regulates member broker-dealers

FINRA is an SRO. It writes and enforces rules for member broker-dealers under SEC oversight, giving it a frontline industry-regulation role without making it a federal agency or central bank.

Question 62

Two funds each begin with US $10,000 and earn US $600 before expenses. For this comparison, Fund A deducts exactly US $70 and Fund B exactly US $150; there are no other cash flows or charges. What is Fund A's advantage in ending value?
  • ☐ A. US $150
  • ☐ B. US $80
  • ☐ C. US $70
  • ☐ D. US $220
Show answer and explanation

Response: B

Final answer: US $80

Fund A ends ahead. After the equal US $600 gains, deducting US $70 leaves Fund A at US $10,530, while deducting US $150 leaves Fund B at US $10,450, making their ending-value difference US $80 rather than the US $220 combined costs.

Question 63

Without the customer's permission, a representative affixes the customer's digital signature to an account document and files it as signed by the customer. The customer discussed the account but never authorized the signature. How should this conduct be classified?
  • ☐ A. A permissible draft awaiting the customer's signature
  • ☐ B. Authorized delegation of signing authority
  • ☐ C. Prohibited signature forgery
  • ☐ D. An administrative correction permitted after filing
Show answer and explanation

Response: C

Final answer: Prohibited signature forgery

The customer gave no signature permission. Affixing the customer's signature and filing the document as signed creates a forged record, even if the customer had discussed the account and the representative intended to expedite processing.

Question 64

Under FINRA's definition, which feature identifies a direct participation program regardless of its legal structure?
  • ☐ A. A fixed maturity date for every program interest
  • ☐ B. Regular intraday exchange trading of program units
  • ☐ C. A contractual fixed rate of return to every participant
  • ☐ D. Flow-through tax consequences
Show answer and explanation

Response: D

Final answer: Flow-through tax consequences

Flow-through tax consequences identify a DPP under FINRA's definition regardless of legal structure, without requiring exchange trading, a uniform maturity or a contractual fixed investor return.

Question 65

A compliance employee needs rules governing municipal securities dealer conduct. Which organization is specifically responsible for making those rules?
  • ☐ A. SIPC
  • ☐ B. Federal Reserve Board
  • ☐ C. FDIC
  • ☐ D. MSRB
Show answer and explanation

Response: D

Final answer: MSRB

The MSRB makes municipal securities rules. Its rulemaking function addresses dealer conduct in that market, while the other organizations handle customer-property protection, deposit insurance or central-banking functions rather than this municipal-dealer rulebook.

Question 66

A hedge fund accepts an investor's money on July 1. Its stated one-year lockup ends the following June 30, and the next permitted redemption date is September 30. There are no exceptions or notice complications. The investor expects to need this money the following July 15. Which concern follows from these terms?
  • ☐ A. The investor can redeem on June 30 because a lockup's end is itself a redemption date.
  • ☐ B. The lockup ends before the need, but the next redemption date still comes too late.
  • ☐ C. The investment becomes redeemable on July 15 because the one-year lockup has ended.
  • ☐ D. The investor must wait another full year because the need occurs after the lockup.
Show answer and explanation

Response: B

Final answer: The lockup ends before the need, but the next redemption date still comes too late.

The two restrictions operate together: finishing the lockup permits access to the fund's redemption schedule, which in this case next allows withdrawal on September 30. July 15 falls between those dates. Ending the lockup therefore does not meet the stated cash need.

Question 67

A FINRA-required record has no retention period specified by the applicable FINRA or Exchange Act rules. Under FINRA Rule 4511, what minimum retention period applies?
  • ☐ A. Four years
  • ☐ B. Two years
  • ☐ C. Three years
  • ☐ D. Six years
Show answer and explanation

Response: D

Final answer: Six years

Rule 4511 supplies a six-year default when the applicable FINRA and Exchange Act rules specify no retention period, and a different period prescribed for a particular record would govern that record.

Question 68

A bond with US $1,000 face value has a 6 percent annual coupon and trades at US $960. Ignoring accrued interest, which pair states its annual coupon payment and current yield?
  • ☐ A. US $57.60 and 6.00%
  • ☐ B. US $60 and 6.25%
  • ☐ C. US $60 and 6.00%
  • ☐ D. US $62.50 and 6.25%
Show answer and explanation

Response: B

Final answer: US $60 and 6.25%

The coupon stays US $60. Its 6 percent rate applies to the US $1,000 face amount, while current yield divides that US $60 annual income by the US $960 market price to obtain 6.25 percent. Yield to maturity also considers principal repayment.

Question 69

A bond yield increases from 4.15% to 4.60%. How many basis points did it increase?
  • ☐ A. 4.5 basis points
  • ☐ B. 45 basis points
  • ☐ C. 450 basis points
  • ☐ D. 0.45 basis points
Show answer and explanation

Response: B

Final answer: 45 basis points

The yield rises 0.45 percentage point, and one basis point is 0.01 percentage point, so dividing 0.45 by 0.01 gives an increase of 45 basis points. Keep percentage points distinct from percentages of the original yield.

Question 70

A fund seeks to track a broad stock-market index using a sample of its constituent shares. Which statement best describes the fund?
  • ☐ A. It is an index fund whose operating expenses cannot affect returns.
  • ☐ B. It is an index fund required to reproduce the index's return exactly.
  • ☐ C. It is actively managed because it holds only some index constituents.
  • ☐ D. It is an index fund, and its returns may differ from the index.
Show answer and explanation

Response: D

Final answer: It is an index fund, and its returns may differ from the index.

Sampling can track an index, so holding a representative selection of constituents is consistent with an index fund's objective rather than proof of active management. Fees and tracking error can prevent an exact return match.

Question 71

An investor buys one share for $50, receives $2 in dividends and sells it for $54 one year later. Ignoring taxes and transaction costs, what is the holding-period return?
  • ☐ A. 4%
  • ☐ B. 8%
  • ☐ C. 12%
  • ☐ D. 16%
Show answer and explanation

Response: C

Final answer: 12%

The price gain is $4. Add $2 in dividends to obtain a $6 total gain, then divide by the original $50 investment: $6 / $50 equals 0.12, or 12 percent for the stated holding period.

Question 72

An investor buys 100 shares at US $42 each and writes one call covering those shares with a US $47 strike, receiving a US $2 per-share premium. The call is assigned when the shares trade at US $51. Ignoring dividends, fees and taxes, what is the total profit from these transactions?
  • ☐ A. US $500
  • ☐ B. US $1,100
  • ☐ C. US $700
  • ☐ D. US $200
Show answer and explanation

Response: C

Final answer: US $700

The writer receives US $4,700 for the assigned shares and keeps US $200 of premium, against the original US $4,200 stock purchase. Total profit is US $700. Assignment fixes the sale at the US $47 strike despite the later US $51 market quotation.

Question 73

To restrain persistent inflation, the FOMC raises its federal funds rate target range. Which effect is consistent with the intended transmission of contractionary monetary policy?
  • ☐ A. Higher borrowing costs can reduce spending and investment.
  • ☐ B. Higher federal income-tax rates directly reduce disposable income.
  • ☐ C. Lower borrowing costs can stimulate spending and investment.
  • ☐ D. Larger federal spending programs directly increase aggregate demand.
Show answer and explanation

Response: A

Final answer: Higher borrowing costs can reduce spending and investment.

Borrowing becomes more expensive. Higher rates can discourage household spending and business investment, reducing demand and inflationary pressure through the monetary-policy transmission described here rather than directly changing tax law.

Question 74

A company gives its existing shareholders rights to buy additional shares in proportion to their holdings before a stated expiration date. What is the company conducting?
  • ☐ A. A cash dividend distribution
  • ☐ B. A tender offer to repurchase its outstanding shares
  • ☐ C. A reverse stock split
  • ☐ D. A rights offering
Show answer and explanation

Response: D

Final answer: A rights offering

Existing holders receive subscription rights. Their ability to buy additional shares in proportion to current holdings before the deadline identifies a rights offering, while a split, cash distribution and repurchase offer change holdings in different ways.

Question 75

An issuer needs an intermediary to maintain its shareholder ownership records, record transfers and distribute dividends. Which market participant performs those functions?
  • ☐ A. Investment adviser
  • ☐ B. Transfer agent
  • ☐ C. SIPC
  • ☐ D. Credit rating agency
Show answer and explanation

Response: B

Final answer: Transfer agent

Follow the issuer's recordkeeping needs: shareholder records, transfers and dividend distribution identify the transfer agent, whose function keeps ownership information and associated distributions connected to the issuer's securities. Credit evaluation is a separate role.

Question 76

A company encounters financial trouble and may miss the next interest payment on its bonds. Which risk does this most directly illustrate?
  • ☐ A. Purchasing-power risk
  • ☐ B. Credit risk
  • ☐ C. Call risk
  • ☐ D. Currency risk
Show answer and explanation

Response: B

Final answer: Credit risk

The possible missed interest payment raises credit risk because the concern is the issuer's ability to meet its debt obligations, rather than the bond's buying power or early redemption.

Question 77

A customer owns a stock and enters an ordinary sell stop order below its current market price. What happens when the specified stop price is reached?
  • ☐ A. The order remains inactive until the customer gives a new instruction.
  • ☐ B. The order becomes a limit order at the stop price.
  • ☐ C. The order expires immediately if the price moves below the trigger.
  • ☐ D. The order becomes a market order, with no guaranteed execution price.
Show answer and explanation

Response: D

Final answer: The order becomes a market order, with no guaranteed execution price.

The trigger activates a market order, so reaching the stop price does not set a limit on the eventual sale price or require a new instruction. Execution can occur lower. The trigger is not price protection.

Question 78

A corporation's share terms give its preferred shares dividend priority over its common shares. Which statement correctly describes that priority?
  • ☐ A. Preferred shareholders are guaranteed a dividend even if none is declared.
  • ☐ B. Common shareholders receive dividends first because they have voting rights.
  • ☐ C. Preferred shareholders receive payment before every creditor in liquidation.
  • ☐ D. Preferred shareholders receive applicable dividends before common shareholders.
Show answer and explanation

Response: D

Final answer: Preferred shareholders receive applicable dividends before common shareholders.

The stated terms give preferred shareholders priority over common shareholders for applicable dividends, without guaranteeing a dividend declaration or moving stockholders ahead of creditors in liquidation. Dividend priority is not payment assurance.

Question 79

A representative first registered in 2024 and remains registered throughout 2026. Assuming no extension or special exception, when must the representative complete the 2026 Regulatory Element?
  • ☐ A. By December 31, 2027
  • ☐ B. By December 31, 2026
  • ☐ C. Only three years after the previous completion
  • ☐ D. Only on the representative's second registration anniversary
Show answer and explanation

Response: B

Final answer: By December 31, 2026

The requirement is annual now. For this representative registered before 2026 and remaining registered throughout that year, the 2026 Regulatory Element is due by December 31, assuming the stated absence of an extension or special exception.

Question 80

An investor pays a US $3 per-share premium for one call covering 100 shares with a US $45 strike. At expiration, the investor exercises when the stock is US $52 and immediately sells all received shares at US $52. Ignoring fees and taxes, what is the net profit?
  • ☐ A. US $700
  • ☐ B. US $300
  • ☐ C. US $1,000
  • ☐ D. US $400
Show answer and explanation

Response: D

Final answer: US $400

Exercise produces a US $700 stock-trade gain: 100 shares bought at US $45 are sold at US $52. Deduct the US $300 premium paid when the call was purchased, leaving US $400 overall rather than treating the exercise gain as the entire profit.