Free FINRA SIE Practice Exam with Questions & Answers | Set: 11

Accounts held individually are subject to probate, which is the legal process of administering the decedent’s estate. Probate determines the distribution of assets according to the deceased’s will or state intestacy laws.

A is correct because individual accounts require probate to transfer assets.

B is incorrect because irrevocable trusts bypass probate.

C is incorrect because TOD accounts allow direct transfer of assets to named beneficiaries without probate.

D is incorrect because JTWROS accounts transfer ownership to the surviving account holder automatically.

A discretionary account is the correct account type when a customer authorizes a registered representative to make investment decisions and determine when trades should be placed. Discretion means the representative has authority over one or more essential elements of the trade, such as the security, action, amount, or timing, depending on the authority granted. Choice D is correct because the question states that the representative will make investment decisions and decide when to place trades. A margin account allows the customer to borrow funds from the broker-dealer to purchase securities, but margin authority is not the same as trading discretion. An options account permits options trading after approval and risk disclosure, but it does not automatically authorize the representative to make decisions. A custodial account is opened for a minor or legally incapacitated person and managed by a custodian. The SIE outline includes discretionary versus non-discretionary accounts, customer account types, order authorization, and FINRA Rule 3260 governing discretionary accounts. Written customer authorization and firm approval are required for discretionary authority. Reference: Section 3.2.1 Account Types and Characteristics; FINRA Rule 3260 Discretionary Accounts.

The correct answer is A, Buying the stock. A short put position means the investor has sold (written) a put option and is obligated to buy the underlying stock at the strike price if the option is exercised. The primary risk is that the stock price falls significantly, forcing the writer to purchase shares at a price above market value.

Step-by-step, the best hedge is to own the underlying stock. If the investor already owns the stock, then being assigned on the short put simply results in acquiring more shares, which can offset losses or align with their investment strategy. More importantly, owning the stock reduces the overall directional risk exposure.

Choice B (selling short the stock) would increase risk because it creates a bearish position, which is inconsistent with the bullish/neutral nature of a short put. Choice C (selling another put) increases exposure and risk rather than hedging. Choice D (buying a call) does not effectively hedge downside risk from a falling stock price.

Thus, the most appropriate hedge for a short put is to buy or own the underlying stock, making Answer A correct.

Step by Step Explanation:

Escalation Requirement: The RR must promptly notify their supervisor or compliance department about the customer’s complaint as required by FINRA rules. Supervisors handle customer complaints according to firm procedures.

Incorrect Options:

B: Reimbursing the customer is not permissible without firm approval and may create compliance issues.

C: Complaints requiring Form U4 updates involve specific allegations such as fraud, not general dissatisfaction.

D: The RR should not contact FINRA directly; the firm will handle communications.

FINRA Rule 4530 (Reporting Requirements): FINRA Rule 4530.

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).

The correct answer is B, Distributing the prospectus to prospective investors. In an IPO, responsibilities are divided among various participants, including the issuer, underwriters, and selling group members. A selling group member is part of the distribution network and is primarily responsible for selling the securities to the public and delivering the prospectus to potential investors.

The prospectus is a legal disclosure document that must be provided to investors before or at the time of sale. Selling group members play a key role in ensuring that investors receive this document so they can make informed decisions.

Choice A, preparing the prospectus, is the responsibility of the issuer, along with assistance from the lead underwriter and legal counsel. Choice C, ensuring filing with the SEC, is also the issuer’s responsibility. Choice D, ensuring accuracy and completeness, falls on the issuer and underwriters, who are liable for disclosures under securities laws.

Thus, the selling group’s primary role is distribution, not creation or verification of the prospectus. Therefore, choice B is correct.

FINRA’s gifts rule (commonly tested as the $100 per person per year limit) restricts the value of gifts that a member or associated person may give to any one person where the gift is in relation to the recipient’s business. The key test concept is: gifts tied to business cannot exceed $100 annually per recipient (with certain distinctions for bona fide personal gifts and “ordinary and usual business entertainment”). In this question, the gifts are explicitly “as a thank you for recent transactions,” so the business-related gift limit applies. A $125 store gift card exceeds $100, making choice D the violation.

Choices A ($75), B ($90), and C ($100) are at or below the typical annual limit, so they would not violate the $100 threshold (assuming they are gifts—not entertainment—and there are no other gifts to that recipient in the year). The $100 sports event ticket is right at the limit and is generally permissible as a gift under the cap, again assuming no other gifts and treating it as a gift rather than business entertainment.

A common SIE nuance: business entertainment (like taking a client to a game where the RR is present) is often treated differently from a “gift” because it is not simply handing something over—however, a ticket given without the RR attending can be treated as a gift. This question is testing the straightforward dollar cap, not the entertainment distinction. Because the only option that clearly breaches the cap is $125, that is the correct answer.

The broader compliance theme is managing conflicts and improper influence: the gifts rule helps prevent business decisions from being swayed by excessive personal benefit.

Fixed-interest investments expose the investor primarily to purchasing power risk, also called inflation risk. When an investment pays a fixed rate, the nominal payment does not automatically rise with inflation. If the cost of goods and services increases faster than the fixed return, the investor’s real return declines. For example, a bond paying 4% may appear stable, but if inflation rises to 6%, the investor loses purchasing power even though the issuer continues paying interest. Credit risk is the risk that an issuer cannot meet its payment obligations; it may apply to some bonds but is not the central risk described by fixed interest payments. Political risk concerns changes in government policy or instability. Liquidity risk concerns the ability to sell without significantly affecting price. The question focuses on the erosion of fixed payments over time, making purchasing power risk the best answer. The SIE outline lists “Inflationary/purchasing power” as a core investment risk and also identifies debt instruments as products that generate income through interest. Reference: Section 2.1.2 Debt Instruments; Section 2.2 Investment Risks.

Step by Step Explanation:

Regulation D (Rule 506(b)): Allows offerings to an unlimited number of accredited investors and up to 35 non-accredited investors, provided certain disclosure requirements are met.

Incorrect Options:

A: Refers to Regulation S, which governs offshore offerings, not domestic exemptions.

B: There is no 40-investor limit in Regulation D.

C: The $5 million limit applies to Rule 504, not Rule 506(b).

SEC Regulation D: SEC Regulation D.

Open-end mutual funds do not trade on secondary markets. Instead, shares are continuously issued or redeemed by the fund at the net asset value (NAV), calculated at the market close.

D is correct because investors purchase and redeem shares directly through the fund or authorized brokers.

A is incorrect because mutual funds do not have a predetermined dissolution date.

B is incorrect because mutual fund shares are priced at the NAV calculated once daily after the market closes.

C is incorrect because secondary market trading applies to closed-end funds and ETFs, not open-end mutual funds.