56 Markets & Accounts Practice Questions & Answers

1. 1. A corporation sells newly issued shares to investors through an underwriting. Where do the proceeds of this sale go?

   • A.To the selling shareholders, because this is a secondary market transaction
   • B.To the exchange on which the shares will later trade
   • C.Split equally between the issuer and the syndicate manager
   • D.To the issuing corporation, because this is a primary market transaction✓ Answer

   The primary market is where an issuer sells newly created securities, so the proceeds (net of the underwriting spread) flow to the issuer itself. In the secondary market, investors trade already-outstanding securities with each other and the issuer receives nothing.

   Source: FINRA SIE Content Outline 1.2.1 (Types of Markets); Securities Act of 1933Report a problem with this question

2. 2. An underwriter purchases an entire issue of stock from the issuer and resells it to the public, keeping any unsold shares in its own inventory. What type of underwriting commitment is this, and in what capacity is the underwriter acting?

   • A.Best efforts; acting as agent
   • B.All-or-none; acting as agent
   • C.Firm commitment; acting as principal✓ Answer
   • D.Mini-maxi; acting as principal

   In a firm commitment the underwriter buys the whole issue for its own account and therefore acts as a principal, bearing the full risk of any shares it cannot resell. Best efforts, all-or-none and mini-maxi arrangements make the underwriter an agent that takes no capital risk.

   Source: FINRA SIE Content Outline 1.4 (Offerings — methods of distribution)Report a problem with this question

3. 3. During the 20-day cooling-off period of a registered offering, which of the following is a registered representative PERMITTED to do?

   • A.Accept a firm order that will be executed on the effective date
   • B.Send customers a research report recommending the new issue
   • C.Send a customer a preliminary prospectus and record a non-binding indication of interest✓ Answer
   • D.Accept a check and hold it until the effective date

   During the cooling-off period the only permitted activities are distributing the preliminary prospectus (red herring), publishing a Rule 134 tombstone, gathering non-binding and revocable indications of interest, and holding due diligence meetings. Sales, orders and the acceptance of funds are prohibited until the registration statement is effective.

   Source: Securities Act of 1933, Section 5; SEC Rule 134; FINRA SIE Content Outline 1.4Report a problem with this question

4. 4. A customer notices that a prospectus cover page states the SEC has not approved or disapproved the securities. Why must this legend appear?

   • A.Because approval is granted only after the offering is fully subscribed
   • B.Because the SEC only approves issues sold on national exchanges
   • C.Because the SEC never passes on the merits or accuracy of a security, and representing otherwise is unlawful✓ Answer
   • D.Because FINRA, not the SEC, approves all new issues

   Section 23 of the Securities Act of 1933 makes it unlawful to represent that the SEC has approved, endorsed or guaranteed any security. An effective registration statement means only that the disclosure requirements appear to have been met and the issue may be sold, not that the SEC judged it a good investment.

   Source: Securities Act of 1933, Section 23; SEC Rule 481Report a problem with this question

5. 5. Which statement best describes the role of the selling group in a corporate underwriting?

   • A.It sets the public offering price and allocates shares among syndicate members
   • B.It sells shares on a best-efforts basis for the selling concession and assumes no capital risk✓ Answer
   • C.It guarantees the issuer a minimum amount of proceeds
   • D.It commits its own capital alongside the syndicate and shares in unsold inventory

   Selling group members have no underwriting commitment: they take no shares into inventory and bear no risk for unsold stock, earning only the selling concession on what they place. Pricing and allocation are the responsibility of the lead or managing underwriter, who runs the books.

   Source: FINRA SIE Content Outline 1.4 (Offerings — underwriting participants)Report a problem with this question

6. 6. An issue is priced at $20 per share to the public and the issuer receives $18.40 per share. Which component of the resulting spread is normally the largest?

   • A.The registrar's fee
   • B.The selling concession✓ Answer
   • C.The manager's fee
   • D.The underwriting fee

   The spread of $1.60 (public offering price minus proceeds to the issuer) is divided into the manager's fee, the underwriting fee and the selling concession, and the concession is the largest piece because it compensates whoever actually places the shares with investors. A registrar's fee is not part of the underwriting spread.

   Source: FINRA SIE Content Outline 1.4 (Offerings — the underwriting spread)Report a problem with this question

7. 7. Under FINRA Rule 5130, which person is generally PROHIBITED from purchasing a new-issue equity IPO at the public offering price?

   • A.A corporate treasurer of a company unrelated to the offering
   • B.An institutional investor with more than $100 million in securities
   • C.A retired schoolteacher with a $3 million portfolio
   • D.A registered representative's spouse whom the representative materially supports✓ Answer

   Rule 5130 defines restricted persons to include broker-dealer employees and their immediate family members who materially support, or are supported by, the associated person, so those accounts may not buy new-issue equity at the offering price. Wealth or institutional status alone does not make an investor restricted.

   Source: FINRA Rule 5130 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings)Report a problem with this question

8. 8. A seasoned issuer registers securities once and then sells them in tranches over time as market conditions permit. This is best described as:

   • A.A Regulation A+ Tier 2 offering
   • B.An intrastate offering under Rule 147
   • C.A shelf registration under Rule 415, usable for up to three years✓ Answer
   • D.A Rule 144A resale to qualified institutional buyers

   Rule 415 shelf registration lets an issuer file one registration statement and take the securities off the shelf in tranches for up to three years, filing a prospectus supplement at each takedown. The other choices are separate exemptive or resale routes, not a mechanism for staged sales off a single registration.

   Source: SEC Rule 415 (Delayed or Continuous Offering and Sale of Securities)Report a problem with this question

9. 9. An issuer wants to raise capital privately and intends to advertise the offering publicly on its website. Which exemption may it use, and what condition applies?

   • A.Rule 506(b), provided no more than 35 purchasers are accredited
   • B.Rule 147, provided the advertising is limited to one state
   • C.Rule 506(b), provided all purchasers are verified as accredited
   • D.Rule 506(c), provided all purchasers are accredited and the issuer takes reasonable steps to verify it✓ Answer

   Rule 506(c) is the only Regulation D safe harbor that permits general solicitation and general advertising, but in exchange every purchaser must be an accredited investor and the issuer must take reasonable steps to verify accredited status. Rule 506(b) allows up to 35 non-accredited sophisticated purchasers but forbids general solicitation entirely.

   Source: SEC Regulation D, Rules 506(b) and 506(c)Report a problem with this question

10. 10. Shares of a company listed on the New York Stock Exchange are traded between two broker-dealers in the over-the-counter market. This activity takes place in the:

    • A.Second market
    • B.Fourth market
    • C.Third market✓ Answer
    • D.First market

    The third market is defined as exchange-listed securities traded over the counter rather than on the listing exchange. The first market is exchange floor trading, the second market is unlisted OTC trading, and the fourth market is direct institution-to-institution trading through ECNs or ATSs without a broker-dealer intermediary.

    Source: FINRA SIE Content Outline 1.2.1 (Types of Markets)Report a problem with this question

11. 11. Which pairing correctly describes how the two principal U.S. equity market models operate?

    • A.NYSE: auction market with a designated market maker; Nasdaq: negotiated market of competing market makers✓ Answer
    • B.Both are auction markets, differing only in listing standards
    • C.NYSE: negotiated dealer market; Nasdaq: auction market
    • D.Both are negotiated markets, differing only in trading hours

    The NYSE is an auction market where orders for a given security meet at a single point and are matched under price-time priority, precedence and parity rules overseen by a designated market maker. Nasdaq is a negotiated dealer market in which multiple competing market makers post bids and offers for the same security.

    Source: FINRA SIE Content Outline 1.2.1 (Types of Markets — exchange vs. OTC)Report a problem with this question

12. 12. A market maker quotes a stock 24.50 bid, 24.65 ask. A customer places an order to sell 100 shares at the market. What price will the customer receive, and what is the spread?

    • A.24.50; spread of 0.075
    • B.24.65; spread of 0.15
    • C.24.50; spread of 0.15✓ Answer
    • D.24.65; spread of 0.30

    Customers sell at the bid and buy at the ask, so a market sell order is filled at the 24.50 bid. The spread is the ask minus the bid, 24.65 minus 24.50, or 0.15, and it represents the market maker's compensation for providing liquidity.

    Source: FINRA SIE Content Outline 1.1.4 / 3.1.1 (market makers, bid-ask spread)Report a problem with this question

13. 13. A firm fills a customer's buy order out of its own inventory. Which statement about compensation on that trade is correct?

    • A.The firm may charge both a markup and a commission if both are disclosed
    • B.The firm acted as a broker and must charge a commission
    • C.The firm must charge a markdown because it is a purchase for the customer
    • D.The firm acted as a dealer and charges a markup; it may not also charge a commission on the same trade✓ Answer

    Selling from inventory means the firm acted as a principal (dealer), and a dealer is compensated by a markup on a sale to the customer. A firm may act only in one capacity per trade, so it cannot charge both a markup as principal and a commission as agent on the same transaction, and the capacity must be disclosed on the confirmation.

    Source: FINRA SIE Content Outline 3.1.1 (trade capacity); SEC Rule 10b-10Report a problem with this question

14. 14. An investor holds a long position purchased at $60 and wants to limit losses if the stock declines. Which order should be entered, and where relative to the current market of $58?

    • A.A buy stop above the market
    • B.A sell limit below the market
    • C.A sell stop below the market✓ Answer
    • D.A buy limit above the market

    A sell stop protects a long position, and stop orders to sell are always placed below the current market so the order is triggered as the price falls. The BLiSS mnemonic (buy limit and sell stop below the market) and SLoBS (sell limit and buy stop above) capture the required placement.

    Source: FINRA SIE Content Outline 3.1.1 (Orders and Strategies)Report a problem with this question

15. 15. A customer is short 200 shares of a stock trading at $40 and wants protection against a sharp price rise. The appropriate order is:

    • A.A buy limit entered below $40
    • B.A buy stop entered above $40✓ Answer
    • C.A sell limit entered above $40
    • D.A sell stop entered below $40

    A short seller loses as the price rises, so protection comes from a buy stop placed above the current market, which is elected if the stock trades up to the stop price and then buys the stock back. Buy stops are always entered above the market; a buy limit below the market would not be triggered by a rising price.

    Source: FINRA SIE Content Outline 3.1.1 (Orders and Strategies)Report a problem with this question

16. 16. A sell stop order at $45 is triggered when the stock trades at $45. What happens next?

    • A.It is cancelled unless the customer re-enters it
    • B.It is executed at exactly $45 in every case
    • C.It becomes a market order and will be executed at the next available price, which may be below $45✓ Answer
    • D.It becomes a limit order and can only be executed at $45 or higher

    Once the stop price is touched the order is elected and becomes a market order, which guarantees execution but not price, so in a fast-falling market the fill can be well below the stop price. Only a stop-limit order converts to a limit order at that point, and it may therefore never be filled.

    Source: FINRA SIE Content Outline 3.1.1 (stop and stop-limit orders)Report a problem with this question

17. 17. A customer enters an order for 10,000 shares specifying that any portion that can be filled immediately should be executed and the rest cancelled. This qualifier is:

    • A.All-or-none (AON)
    • B.Immediate-or-cancel (IOC)✓ Answer
    • C.Not-held
    • D.Fill-or-kill (FOK)

    An immediate-or-cancel order permits a partial execution and cancels whatever cannot be filled at once. Fill-or-kill demands the entire quantity immediately or nothing, all-or-none requires the full amount but not immediately, and a not-held order gives the floor broker discretion over time and price.

    Source: FINRA SIE Content Outline 3.1.1 (order qualifiers)Report a problem with this question

18. 18. Unless otherwise specified by the customer, an equity order entered during the trading session is treated as which duration?

    • A.Good until the next settlement date
    • B.Good for one week
    • C.Good-till-cancelled, remaining open until executed
    • D.A day order, expiring at the close of that trading day✓ Answer

    The default duration for a customer order is a day order, which is automatically cancelled if unexecuted at the close of that trading day. A good-till-cancelled or open order must be specifically designated as such by the customer.

    Source: FINRA SIE Content Outline 3.1.1 (order durations)Report a problem with this question

19. 19. Which statement about selling stock short is correct?

    • A.Maximum loss is limited to the proceeds received from the short sale
    • B.Short sales may be executed in a cash account without borrowing shares
    • C.The short seller must own the shares being sold
    • D.Loss potential is theoretically unlimited, and the firm must locate shares before effecting the sale✓ Answer

    A short seller sells borrowed shares and must eventually buy them back, so because there is no ceiling on how high a stock can rise the loss potential is theoretically unlimited. Regulation SHO requires the firm to have reasonable grounds to believe the security can be borrowed (the locate requirement) before accepting or effecting a short sale, and short sales must be done in a margin account.

    Source: SEC Regulation SHO Rule 203(b); FINRA SIE Content Outline 3.1.1Report a problem with this question

20. 20. A customer buys corporate bonds in a regular-way trade on a Tuesday, with no intervening holidays. When does the trade settle?

    • A.Thursday, two business days after the trade date
    • B.The same day, Tuesday
    • C.Friday, three business days after the trade date
    • D.Wednesday, one business day after the trade date✓ Answer

    Regular-way settlement for corporate and municipal securities, common and preferred stock, ETFs and ADRs is T+1, one business day after the trade date, under SEC Rule 15c6-1 as amended effective May 28, 2024. A Tuesday trade therefore settles Wednesday; same-day (cash) settlement requires the agreement of both parties.

    Source: SEC Rule 15c6-1 (T+1 standard settlement cycle, effective May 28, 2024)Report a problem with this question

21. 21. Under Regulation T as applied to the current settlement cycle, by when must a customer pay for a regular-way securities purchase?

    • A.No later than three business days after the trade date, i.e., two business days after settlement✓ Answer
    • B.No later than two business days after the trade date
    • C.No later than the trade date
    • D.No later than four business days after the trade date

    Regulation T requires payment within two business days after the settlement date; with T+1 settlement that produces a deadline of T+3, replacing the T+4 deadline that applied under the old T+2 cycle. If the customer does not pay, the firm sells out the position and freezes the account for 90 days unless a Reg T extension is obtained.

    Source: Federal Reserve Regulation T; FINRA Regulatory Notice 23-15Report a problem with this question

22. 22. A broker-dealer receives notice of a trade from a contra-firm that its own records do not show. This is known as a:

    • A.A rejected good delivery
    • B.A DK (don't know) item, which must be reconciled before settlement✓ Answer
    • C.A Rule 10b-10 confirmation
    • D.A when-issued trade

    A DK, or don't know, item arises in the comparison process when one side's trade details do not match or are not recognized by the other, and the discrepancy must be resolved before the trade can clear and settle. Good delivery and Rule 10b-10 confirmations concern the form of securities delivered and disclosure to the customer, not unmatched trade comparison.

    Source: FINRA SIE Content Outline 3.1.3 (Trade Settlement — comparison and DK procedures)Report a problem with this question

23. 23. Which pair correctly describes the roles of a transfer agent and a registrar for a corporate issuer?

    • A.The transfer agent sets the public offering price; the registrar clears trades
    • B.The transfer agent issues and cancels certificates and maintains ownership records; the registrar audits the transfer agent to prevent over-issuance✓ Answer
    • C.Both functions must be performed by the same entity for efficiency
    • D.The registrar issues certificates; the transfer agent guarantees the dividend

    The transfer agent issues and cancels certificates, records changes of ownership and handles lost or stolen certificates, while the registrar independently accounts for the number of shares outstanding to ensure the issuer does not over-issue. Because the registrar's function is a check on the transfer agent, the two roles are kept separate.

    Source: FINRA SIE Content Outline 1.1.4 (Market Participants — transfer agent and registrar)Report a problem with this question

24. 24. What is the correct order of the phases of a business cycle?

    • A.Trough, contraction, expansion, peak
    • B.Expansion, peak, contraction, trough✓ Answer
    • C.Contraction, trough, peak, expansion
    • D.Peak, expansion, trough, contraction

    Economic activity rises through an expansion until it reaches a peak, then declines through a contraction until it bottoms at a trough, after which recovery begins the next expansion. A recession is conventionally identified as two consecutive quarters of declining GDP and a depression as roughly six consecutive quarters of decline.

    Source: FINRA SIE Content Outline 1.3.2 (Business Economic Factors)Report a problem with this question

25. 25. Which of the following is classified as a LEADING economic indicator?

    • A.The average duration of unemployment
    • B.The Consumer Price Index
    • C.Corporate profits
    • D.Initial claims for unemployment insurance✓ Answer

    Initial jobless claims turn before the broader economy does and are therefore a leading indicator, along with building permits, new orders for durable goods, stock prices and consumer expectations. The CPI, the average duration of unemployment and corporate profits all confirm changes after the fact and are lagging indicators.

    Source: FINRA SIE Content Outline 1.3.2 (economic indicators)Report a problem with this question

26. 26. Which statement correctly distinguishes monetary policy from fiscal policy?

    • A.Monetary policy is set by Congress and the President; fiscal policy is set by the Federal Reserve
    • B.Monetary policy governs taxation while fiscal policy governs bank reserve requirements
    • C.Both are controlled by the Federal Reserve Board
    • D.Monetary policy is the Federal Reserve's management of money supply and interest rates; fiscal policy is taxation and government spending set by Congress and the President✓ Answer

    Monetary policy belongs to the Federal Reserve, which influences the money supply and the level of interest rates, while fiscal policy is the taxing and spending authority of Congress and the President. Confusing the two is one of the most common errors on this material.

    Source: FINRA SIE Content Outline 1.3.1 (The Federal Reserve — monetary vs. fiscal policy)Report a problem with this question

27. 27. The Federal Open Market Committee directs the purchase of Treasury securities in the open market. What is the intended effect?

    • A.The discount rate is set directly by the transaction
    • B.Bank reserves increase, the money supply expands, and interest rates tend to fall✓ Answer
    • C.Bank reserves decrease, the money supply contracts, and interest rates tend to rise
    • D.Reserve requirements rise automatically for member banks

    When the Fed buys securities it pays for them by crediting bank reserves, which injects money into the banking system, expands the money supply and puts downward pressure on interest rates; falling rates in turn push existing bond prices up. Selling securities drains reserves and has the opposite, tightening effect. Open market operations are the Fed's most frequently used and most flexible tool.

    Source: FINRA SIE Content Outline 1.3.1 (Fed tools — open market operations)Report a problem with this question

28. 28. Which description of the interest rates commonly compared on the SIE is correct?

    • A.The federal funds rate is the overnight, unsecured rate banks charge each other and is the most volatile of the group✓ Answer
    • B.The discount rate is charged between banks overnight and is the most volatile
    • C.The prime rate is the rate banks charge broker-dealers on margin loan collateral
    • D.The federal funds rate is charged by Federal Reserve Banks to member banks

    The federal funds rate is the overnight, unsecured rate banks charge one another for reserves and changes daily, making it the most volatile of the commonly compared rates. The discount rate is what Federal Reserve Banks charge member banks, the broker call rate is what banks charge broker-dealers on margin loan collateral, and the prime rate is charged to a bank's most creditworthy corporate customers.

    Source: FINRA SIE Content Outline 1.3.1 (interest rate structure)Report a problem with this question

29. 29. A yield curve on which short-term yields exceed long-term yields is described as, and is generally taken to signal:

    • A.Normal (positive); expectations of falling short-term rates
    • B.Flat; indifference between maturities
    • C.Normal (positive); expectations of continued growth
    • D.Inverted (negative); tight money and expectations of slowing economic activity✓ Answer

    An inverted or negative yield curve occurs when short-term yields are higher than long-term yields, typically during periods of tight money, and it has historically been read as a market expectation of slowing growth and lower rates ahead. A normal curve slopes upward because investors demand more yield for the added risk of longer maturities, and a flat curve shows little difference across maturities.

    Source: FINRA SIE Content Outline 1.3.1 / 1.3.2 (interest rates and the yield curve)Report a problem with this question

30. 30. Two sisters own a joint account registered as joint tenants with right of survivorship (JTWROS). One sister dies. What happens to the account?

    • A.The registration automatically converts to tenants in common held by the estate.
    • B.The account is liquidated and the proceeds are divided equally between the survivor and the estate.
    • C.The deceased sister's proportional interest passes to her estate and must go through probate.
    • D.The entire account passes to the surviving sister without going through probate.✓ Answer

    In a JTWROS registration each owner holds an undivided interest in the whole account, so the survivorship feature transfers the decedent's interest directly to the surviving owner by operation of law and the assets bypass probate. The firm will still cancel open orders and require a death certificate before retitling the account.

    Source: FINRA SIE Content Outline 3.2.2 (customer account registrations); JTWROS survivorship; FINRA Rule 4512Report a problem with this question

31. 31. Two business partners own an account as tenants in common (TIC); the first partner holds a 70% interest. The first partner dies. Which statement is correct?

    • A.The 70% interest passes automatically to the surviving partner.
    • B.The deceased partner's 70% interest passes to his estate.✓ Answer
    • C.The entire account passes to the survivor without probate.
    • D.The account registration automatically becomes JTWROS.

    Tenants in common has no survivorship feature: each tenant owns a stated fractional interest that becomes part of that owner's estate at death and is distributed under the will or state intestacy law. This is the defining contrast with JTWROS, where the survivor takes the whole account.

    Source: FINRA SIE Content Outline 3.2.2 (customer account registrations — tenants in common)Report a problem with this question

32. 32. A registered representative wants to decide which security to buy, and how many shares, in a customer's account without contacting the customer first. Before entering such orders:

    • A.the customer must grant a full power of attorney that also permits withdrawals of cash and securities.
    • B.verbal authorization from the customer is sufficient if the representative notes it on the order ticket.
    • C.only the branch manager's approval is required.
    • D.the customer must give prior written authorization naming the representative, and the firm must accept the account in writing.✓ Answer

    Choosing the security, the action or the number of shares is discretion, and FINRA Rule 3260 requires prior written authorization from the customer naming the individual exercising discretion plus the firm's written acceptance of the account. Deciding only the time or price of an order the customer has fully specified is not discretion and needs no written authorization.

    Source: FINRA Rule 3260 (Discretionary Accounts)Report a problem with this question

33. 33. Which document associated with opening a margin account is OPTIONAL for the customer to sign?

    • A.The hypothecation agreement
    • B.The credit agreement
    • C.The loan consent agreement✓ Answer
    • D.None — all three must be signed before the first margin trade

    The loan consent agreement merely permits the firm to lend the customer's margin securities to other market participants, typically to facilitate short sales, so it is voluntary and the account may be opened without it. The credit agreement (terms and interest of the loan) and the hypothecation agreement (pledging the securities as collateral) are both mandatory.

    Source: FINRA SIE Content Outline 3.2.1 (margin accounts — margin agreement components)Report a problem with this question

34. 34. In a margin account, the initial margin requirement is established by which body, and the minimum maintenance requirement by which?

    • A.The SEC sets both requirements.
    • B.FINRA sets the initial requirement; the Federal Reserve Board sets the maintenance requirement.
    • C.The broker-dealer sets the initial requirement; the SEC sets the maintenance requirement.
    • D.The Federal Reserve Board sets the initial requirement under Regulation T; the SRO (FINRA or the exchange) sets the minimum maintenance requirement.✓ Answer

    Regulation T is a Federal Reserve Board credit regulation that governs the initial extension of credit by a broker-dealer, while the ongoing minimum equity a customer must maintain is set by the self-regulatory organization's margin rule. An individual firm may impose stricter house requirements than either, but never lower ones.

    Source: Federal Reserve Regulation T (12 CFR 220); FINRA Rule 4210 (Margin Requirements)Report a problem with this question

35. 35. Which of the following is NOT one of the four component obligations of Regulation Best Interest?

    • A.Ongoing monitoring✓ Answer
    • B.Conflict of interest
    • C.Disclosure
    • D.Care

    Reg BI is built on four obligations — disclosure, care, conflict of interest and compliance — and applies when a broker-dealer or associated person makes a recommendation of a securities transaction or investment strategy to a retail customer. It does not by itself create a duty to monitor the account after the recommendation, and it is not the same as a full fiduciary standard.

    Source: SEC Rule 15l-1 (Regulation Best Interest)Report a problem with this question

36. 36. A member firm must make reasonable efforts to obtain the name and contact information of a trusted contact person for a retail customer's account. The trusted contact person:

    • A.may be contacted to address possible financial exploitation and to confirm the customer's health status, whereabouts or legal guardian, but has no authority over the account.✓ Answer
    • B.may enter orders in the account if the customer cannot be reached.
    • C.must be an immediate family member of the customer.
    • D.automatically becomes the beneficiary of the account on the customer's death.

    FINRA Rule 4512 requires the firm to try to obtain a trusted contact so it has someone to call about possible financial exploitation or about the customer's health, whereabouts, or the existence of a guardian or power of attorney. The trusted contact is purely an information resource and receives no trading authority, no ownership and no beneficiary rights.

    Source: FINRA Rule 4512(a)(1)(F) (Customer Account Information — trusted contact person)Report a problem with this question

37. 37. A representative learns that the sole owner of an individual cash account has died. The representative should:

    • A.immediately liquidate the positions to protect the value of the estate.
    • B.continue to accept instructions from the surviving spouse until the estate papers arrive.
    • C.cancel all open orders, mark the account deceased and restrict it, and wait for the required legal documents.✓ Answer
    • D.transfer the securities to the trusted contact person named on the account.

    All trading authority — the customer's own and any power of attorney — terminates at death, so the firm cancels open orders and freezes the account until it receives the required documentation, typically a death certificate, letters testamentary or other proof of the executor's appointment, and where applicable an affidavit of domicile and state tax waivers. Only the duly appointed representative of the estate may then give instructions.

    Source: FINRA SIE Content Outline 3.2.2; FINRA Rule 4512 (account records); industry procedure on death of a customerReport a problem with this question

38. 38. An investor made only fully deductible contributions to a traditional IRA over many years. When she takes distributions in retirement, those distributions are:

    • A.taxed as long-term capital gains.
    • B.tax-free, because the growth occurred inside a retirement account.
    • C.tax-free up to the amount contributed, with only the earnings taxed.
    • D.taxed as ordinary income in the year received.✓ Answer

    Because the contributions were deducted and the earnings accumulated tax-deferred, the investor has zero cost basis in the account, so the entire distribution is taxed as ordinary income regardless of whether the growth came from dividends or price appreciation. The last choice describes a non-qualified plan, where after-tax contributions are recovered tax-free and only the earnings are taxed.

    Source: IRC §408(d); FINRA SIE Content Outline 3.2.2 (retirement plans — traditional IRA distributions)Report a problem with this question

39. 39. Compared with a traditional IRA, a Roth IRA:

    • A.is funded with after-tax dollars, and qualified distributions of both contributions and earnings are free of federal income tax.✓ Answer
    • B.requires the owner to begin taking required minimum distributions during his or her lifetime.
    • C.allows the owner to deduct contributions in the year they are made.
    • D.permits earnings, but not contributions, to be withdrawn at any time without tax or penalty.

    Roth contributions are never deductible, but because the money went in after tax, a qualified distribution — one made after the required holding period and after a qualifying event such as reaching the statutory retirement age, death or disability — is entirely free of federal income tax, earnings included. The Roth owner is also not subject to required minimum distributions during his or her lifetime, and contributions (not earnings) may be withdrawn at any time tax- and penalty-free.

    Source: IRC §408A (Roth IRAs); FINRA SIE Content Outline 3.2.2Report a problem with this question

40. 40. An investor owns both a traditional IRA and a Roth IRA and has reached the age at which required minimum distributions begin. Which statement is correct?

    • A.Required minimum distributions must be taken from the Roth IRA only.
    • B.Neither account is subject to required minimum distributions, because both are individual retirement accounts.
    • C.Required minimum distributions must be taken from both accounts.
    • D.Required minimum distributions must be taken from the traditional IRA, but the Roth IRA owner is not required to take distributions during his lifetime.✓ Answer

    The required minimum distribution rules exist to force eventual taxation of money that went in pre-tax and grew tax-deferred, so they apply to the traditional IRA. Roth contributions were already taxed, so the original owner never has to take a lifetime distribution — although beneficiaries who inherit a Roth are subject to their own distribution rules.

    Source: IRC §401(a)(9); IRC §408A(c)(5) (Roth IRAs not subject to lifetime RMDs)Report a problem with this question

41. 41. Which statement about moving assets between IRAs is correct?

    • A.An IRA owner may move assets from one IRA to another only once in a lifetime.
    • B.An indirect rollover must be completed within 60 days, and only one indirect IRA-to-IRA rollover is allowed in any 12-month period, while direct trustee-to-trustee transfers are unlimited.✓ Answer
    • C.Direct trustee-to-trustee transfers are subject to mandatory withholding of 20% of the amount moved.
    • D.Indirect rollovers are unlimited, but direct trustee-to-trustee transfers are limited to one in any 12-month period.

    In an indirect rollover the owner takes possession of the assets, so the tax code imposes a 60-day deadline to redeposit them and limits the owner to one such IRA-to-IRA rollover in any 12-month period; missing either condition makes the distribution taxable. A direct trustee-to-trustee transfer never passes through the owner's hands, so it is unlimited in frequency and is not subject to the mandatory withholding that applies to eligible rollover distributions from employer plans.

    Source: IRC §408(d)(3); IRS one-rollover-per-12-months ruleReport a problem with this question

42. 42. Which of the following retirement plans is NOT covered by ERISA?

    • A.A private company's defined benefit pension plan
    • B.A city government's Section 457 deferred compensation plan✓ Answer
    • C.A corporate 401(k) plan
    • D.A private employer's profit-sharing plan

    ERISA was enacted to protect participants in private-sector employer plans and expressly excludes governmental plans, so a state or municipal employer's 457 deferred compensation plan is non-ERISA. The other three are private-sector employer plans and are therefore subject to ERISA's participation, funding, vesting, fiduciary and reporting standards.

    Source: ERISA §4(b) (governmental plan exclusion); IRC §457(b)Report a problem with this question

43. 43. Which statement best describes a SEP IRA?

    • A.It is funded by employer contributions made to IRAs established for eligible employees.✓ Answer
    • B.It is funded solely by employee salary deferrals, with no employer contribution permitted.
    • C.It requires each employee to match the employer's contribution dollar for dollar.
    • D.It is a defined benefit plan that guarantees employees a fixed monthly retirement income.

    A Simplified Employee Pension is an employer-funded defined contribution arrangement: the employer contributes to a separate IRA owned by each eligible employee, and those contributions are immediately vested in the employee. Employee salary deferrals are the defining feature of a 401(k) or a SIMPLE plan, not of a SEP.

    Source: IRC §408(k) (Simplified Employee Pension); FINRA SIE Content Outline 3.2.2Report a problem with this question

44. 44. Which statement about a Section 529 college savings plan is correct?

    • A.It is registered under the Investment Company Act of 1940 and sold with a prospectus.
    • B.The contribution is an irrevocable gift and control of the assets passes to the beneficiary at the state age of majority.
    • C.It is a municipal fund security sold with a program disclosure document; the account owner keeps control of the assets and may change the beneficiary to another eligible family member.✓ Answer
    • D.Contributions are deductible on the donor's federal income tax return.

    Section 529 plans are municipal fund securities regulated under MSRB rules rather than registered investment companies, so they are offered with a program disclosure document (official statement) instead of a prospectus. A key structural feature is that the donor remains the account owner, controls withdrawals and may change the beneficiary to another qualifying family member — the opposite of the irrevocable, minor-controlled UTMA account described in the third choice.

    Source: IRC §529; MSRB rules on municipal fund securities; FINRA SIE Content Outline 2.1.5Report a problem with this question

45. 45. Which of the following distinguishes a Coverdell Education Savings Account from a Section 529 savings plan?

    • A.The Coverdell is a municipal fund security regulated by the MSRB, while the 529 is not.
    • B.The Coverdell has a much lower annual contribution ceiling and imposes age limits on when contributions may be made and by when the assets must be used.✓ Answer
    • C.Coverdell contributions are deductible on the contributor's federal income tax return, while 529 contributions are not.
    • D.Coverdell earnings are taxable when withdrawn for qualified education expenses, while 529 earnings are not.

    Both vehicles are funded with after-tax dollars, grow tax-deferred and allow federally tax-free withdrawals for qualified education expenses, so neither offers a federal deduction. The Coverdell is distinguished by a small statutory annual cap per beneficiary, a rule that contributions must stop once the beneficiary reaches a specified age, and a requirement that the assets be used or rolled to another family member by a later specified age; the 529 is the municipal fund security, with high lifetime limits and no age restrictions.

    Source: IRC §530 (Coverdell ESA); IRC §529; FINRA SIE Content Outline 2.1.5Report a problem with this question

46. 46. A customer owns 400 shares of ABC purchased at $50 per share. ABC declares a 5-for-4 stock split. After the split, the customer has:

    • A.500 shares plus a taxable gain on the 100 additional shares received.
    • B.500 shares with an adjusted cost basis of $40 per share and a total cost basis of $20,000.✓ Answer
    • C.320 shares with an adjusted cost basis of $62.50 per share.
    • D.500 shares with a cost basis of $50 per share and a total cost basis of $25,000.

    A forward split simply reallocates the existing cost basis over a larger number of shares: 400 x 5/4 = 500 shares, and $20,000 of total basis divided by 500 shares gives an adjusted basis of $40 per share. Total cost basis and total market value are unchanged and no taxable event occurs, because the shareholder's proportionate ownership of the company has not changed.

    Source: FINRA SIE Content Outline 3.1.4 (impact of splits on market price and cost basis); IRS Pub. 550 basis allocationReport a problem with this question

47. 47. A customer owns 1,000 shares of XYZ with a cost basis of $3 per share. XYZ effects a 1-for-10 reverse split. Immediately afterward the customer owns:

    • A.10,000 shares with a cost basis of $0.30 per share.
    • B.100 shares and a deductible capital loss for the 900 shares eliminated.
    • C.100 shares with a cost basis of $30 per share and an unchanged total cost basis of $3,000.✓ Answer
    • D.100 shares with a cost basis of $3 per share and a total cost basis of $300.

    A reverse split reduces the share count and raises the price and the per-share cost basis proportionally: 1,000 / 10 = 100 shares, and the original $3,000 of total basis spread over 100 shares is $30 per share. Like a forward split it leaves total basis and total value untouched and is not a taxable event, so no loss may be claimed.

    Source: FINRA SIE Content Outline 3.1.4 (reverse splits — effect on price and cost basis)Report a problem with this question

48. 48. Which of the following best describes a rights offering?

    • A.A distribution to a parent company's shareholders of the shares of one of its subsidiaries
    • B.A long-term privilege, usually attached to a bond or preferred stock as a sweetener, to buy common stock at a price above the market price at the time of issue
    • C.A short-term privilege given to existing common shareholders to buy additional shares at a subscription price below the current market price, preserving their proportionate ownership✓ Answer
    • D.An offer by the issuer to buy back its own outstanding shares from holders, usually at a premium to the market

    A rights offering exists to honor the preemptive right of existing common shareholders: each holder receives short-lived, transferable rights to subscribe to the new shares at a price below the current market, so their percentage ownership need not be diluted. The first choice describes a warrant, the third a tender offer or buyback, and the fourth a spin-off.

    Source: FINRA SIE Content Outline 3.1.4 (types of corporate actions — rights offerings)Report a problem with this question

49. 49. A customer holds shares of a common stock in street name at her broker-dealer. When the issuer solicits proxies for its annual meeting:

    • A.the broker-dealer must forward the proxy material to the customer as beneficial owner and vote according to her instructions, and the issuer reimburses the firm's reasonable expenses.✓ Answer
    • B.the customer loses the right to vote, because the shares are not registered in her own name.
    • C.the transfer agent mails the proxy directly to the customer and the broker-dealer plays no role.
    • D.the broker-dealer votes the shares as it sees fit, because it is the registered owner.

    When shares are held in street name the broker-dealer is only the record holder; beneficial ownership, including the right to vote, stays with the customer. FINRA Rule 2251 and Exchange Act Section 14(b) therefore require the firm to transmit the issuer's proxy and related materials to the beneficial owner and to vote as instructed, with the issuer reimbursing the firm's reasonable forwarding costs.

    Source: FINRA Rule 2251 (Forwarding of Proxy Materials); Securities Exchange Act §14(b)Report a problem with this question

50. 50. Which of the following corporate actions requires the shareholder to make an election in order to participate?

    • A.A reverse stock split
    • B.A forward stock split
    • C.A tender offer✓ Answer
    • D.A cash dividend payment

    Splits and cash dividends are mandatory corporate actions: they are applied automatically to every holder of record and no response is possible or required. A tender offer is a voluntary action — like an exchange offer or the exercise of subscription rights — because the shareholder must affirmatively respond by the stated deadline or nothing happens to the position.

    Source: FINRA SIE Content Outline 3.1.4 (corporate actions — notices, deadlines, voluntary vs mandatory)Report a problem with this question

51. 51. A customer sells 100 shares of DEF at a loss and buys 100 shares of DEF back 18 days later. For federal tax purposes:

    • A.the loss is disallowed only if the customer repurchased the shares in the same account.
    • B.the loss is currently deductible, because the repurchase is a separate new transaction.
    • C.the loss is disallowed and is added to the cost basis of the newly purchased shares.✓ Answer
    • D.the loss is permanently forfeited and produces no future tax benefit.

    The wash sale rule disallows a loss whenever a substantially identical security is purchased within 30 days before or after the sale — a 61-day window — and the repurchase here falls inside it. The disallowed loss is not lost: it is added to the basis of the replacement shares, so the tax benefit is deferred until those shares are sold, and the rule applies across accounts (including a spouse's or an IRA) and to losses only, never to gains.

    Source: IRC §1091 (wash sales); IRS Pub. 550Report a problem with this question

52. 52. An investor buys a general obligation bond issued by her home state in the secondary market and sells it at a profit before maturity. Which statement is correct?

    • A.The interest received is exempt from federal income tax, but the capital gain is taxable.✓ Answer
    • B.Both the interest received and the capital gain are exempt from federal income tax.
    • C.The interest is taxable, but the capital gain is exempt from federal income tax.
    • D.Both the interest and the gain are exempt from federal tax but are subject to state tax for an in-state resident.

    The federal exemption for municipal securities applies only to the interest paid by the issuer, not to price appreciation, so profit realized on the sale of a municipal bond is a capital gain taxed exactly like the gain on any other security. Because the investor lives in the issuing state, the interest also escapes that state's income tax, but the gain does not.

    Source: IRC §103 (exclusion of municipal bond interest); IRS Pub. 550 (capital gains on municipal bonds are taxable)Report a problem with this question

53. 53. Which statement correctly describes the taxation of interest income?

    • A.Interest on an out-of-state municipal bond is subject to federal income tax.
    • B.Interest on U.S. Treasury securities is exempt from federal income tax but taxable at the state level.
    • C.Interest on U.S. Treasury securities is taxable at the federal level but exempt from state and local income tax.✓ Answer
    • D.Interest on corporate bonds is exempt from state income tax.

    Federal law exempts obligations of the U.S. government from state and local taxation, but their interest is fully includible in federal taxable income. That is the mirror image of municipal interest, which is excluded from federal income tax (and from state tax for a resident of the issuing state) but is generally taxable by the investor's own state when the bond was issued elsewhere; corporate bond interest is taxable at every level.

    Source: 31 U.S.C. §3124 (Treasury interest exempt from state/local tax); IRC §103Report a problem with this question

54. 54. A customer inherits stock from her father. He had paid $20 per share, and the fair market value on the date of his death was $60 per share. The customer sells the stock three months later at $65 per share. Her tax consequence per share is:

    • A.a $5 long-term capital gain.✓ Answer
    • B.a $45 short-term capital gain.
    • C.a $5 short-term capital gain.
    • D.a $45 long-term capital gain.

    Inherited securities receive a stepped-up cost basis equal to their fair market value on the date of death, so her basis is $60 and the $65 sale produces a $5 gain, and inherited property is automatically treated as long-term no matter how briefly the heir holds it. Gifted securities work the opposite way: the recipient takes over the donor's original cost basis and holding period.

    Source: IRC §1014 (basis of property acquired from a decedent); IRC §1223(9) (automatic long-term treatment)Report a problem with this question

55. 55. A customer automatically reinvests all distributions from a mutual fund in additional fund shares. Which statement is correct?

    • A.Reinvested distributions are taxable in the year distributed, and a capital gains distribution is reported as long-term regardless of how long the customer has owned the fund shares.✓ Answer
    • B.Reinvested distributions are taxable, but a capital gains distribution is short-term if the customer has owned the fund shares for one year or less.
    • C.Reinvested distributions are not taxable until the fund shares are sold.
    • D.Only dividend distributions are taxable; capital gains distributions taken in additional shares are not.

    Fund distributions are taxable to the shareholder in the year they are paid whether taken in cash or reinvested, and a capital gains distribution passes through to the shareholder as long-term regardless of the investor's own holding period in the fund. Reinvested amounts are added to the shareholder's cost basis, which prevents the same dollars from being taxed a second time when the shares are eventually sold.

    Source: IRC §852 (taxation of RIC distributions); IRS Pub. 550Report a problem with this question

56. 56. A customer receives cash dividends on common stock held in a taxable account. If those dividends are 'qualified' dividends, they are:

    • A.taxed as ordinary income, in the same way as the distributions paid by a REIT.
    • B.exempt from federal income tax.
    • C.not taxable until the underlying stock is sold.
    • D.taxed at the same preferential rates that apply to long-term capital gains, provided the holding-period requirement is met.✓ Answer

    Dividends from most domestic corporations and qualified foreign corporations are taxed at the preferential long-term capital gains rates rather than at ordinary income rates, but only if the shareholder satisfies the statutory holding-period test for the underlying stock. Dividends that fail that test, along with most REIT distributions and all bond interest, are taxed as ordinary income.

    Source: IRC §1(h)(11) (qualified dividend income); IRS Pub. 550Report a problem with this question

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