SIE section 3: Understanding Trading, Customer Accounts and Prohibited Activities

1. A market order is an order to:

1. Buy or sell a security immediately
2. Buy only after the price falls to a set level
3. Sell only at the day's closing price
4. Buy or sell only at a set price or better

2. What does a market order guarantee?

1. Execution, but not the price
2. Both price and execution
3. Neither price nor execution
4. The price, but not execution

3. An investor enters a buy limit order at $30. At what price can it fill?

1. Only at exactly $30
2. $30 or lower
3. $30 or higher
4. At any market price

4. What happens when a stock reaches the stop price on a stop order?

1. The order waits until the next trading day
2. The order becomes a limit order at the stop price
3. The order becomes a market order
4. The order is cancelled

5. Under SEC Rule 15c6-1, regular-way trades in most stocks must settle no later than:

1. The third business day after the trade, as before
2. The second business day after the trade
3. The first business day after the trade date
4. The trade date itself

6. Which of these is excluded from the T+1 requirement of Rule 15c6-1(a)?

1. Commercial paper
2. Exchange-traded funds
3. Common stock
4. Corporate bonds

7. A firm-commitment registered offering is priced after 4:30 p.m. Eastern time. Under Rule 15c6-1(c), the cash sales may settle as late as:

1. The first business day after the trade
2. The second business day after the trade
3. The same day
4. The fifth business day after the trade date

8. A customer buys stock regular way on a Thursday with no holiday. When does the trade normally settle?

1. Tuesday
2. Monday
3. Thursday
4. Friday

9. Under SEC Rule 10b-10, a customer confirmation must disclose:

1. Whether the broker acted as agent or principal
2. Other customers' pending orders in the same stock
3. The representative's home address
4. The firm's quarterly profits

10. When must a written trade confirmation generally be given under Rule 10b-10?

1. Only if the customer asks
2. Within 30 calendar days after the trade date
3. Only at the end of each quarter
4. At or before completion of the transaction

11. FINRA Rule 2231 generally requires customer account statements to be sent at least:

1. Once a year
2. Only after a trade
3. Once each calendar quarter
4. Once a month for every account

12. To receive a declared cash dividend, an investor must buy the stock:

1. On the ex-dividend date
2. On the payment date
3. Any time before the payment date
4. Before the ex-dividend date

13. For a regular cash dividend, the ex-dividend date is usually set as:

1. The declaration date
2. The payment date
3. The record date
4. Two business days before the record date

14. On the ex-dividend date for a significant dividend, a stock's price may:

1. Double automatically
2. Rise by about the dividend amount
3. Fall by about the dividend amount
4. Stop trading for the day

15. For a stock dividend, when is the ex-dividend date set?

1. The declaration date
2. The business day after the stock dividend is paid
3. Two business days before the record date
4. The same day as the record date

16. An investor owns 10 shares at $100. After a 2-for-1 split, the investor holds:

1. 20 shares worth about $50 each
2. 20 shares worth about $100 each
3. 10 shares worth about $200 each
4. 5 shares worth about $200 each

17. After a 1-for-200 reverse split, an investor with 5,000 shares at $0.10 holds:

1. 200 shares at about $2.50
2. 1,000,000 shares at $0.0005
3. 5,000 shares at about $20
4. 25 shares at about $20 each

18. How does a stock split affect the value of the company?

1. It reduces the company's debt
2. It raises the company's earnings per share and value
3. It doubles the company's value
4. It does not change the company's value

19. In a cash account, how must securities purchases be paid?

1. Only after the securities are sold
2. With 50 percent borrowed from the broker-dealer
3. With a loan secured by the account
4. In full, without borrowing from the broker

20. In a margin account, the broker-dealer:

1. Buys securities with its own money for itself
2. Guarantees the investor against losses
3. Lends the investor cash against the account
4. Holds only cash and no securities

21. Under Regulation T, the initial margin required for a margin equity security is:

1. 150 percent of current market value
2. 25 percent of current market value
3. 100 percent of current market value
4. 50 percent of current market value

22. Under FINRA Rule 4210, what is the minimum equity required to open a margin account and buy on margin?

1. $25,000 in all cases, for every customer
2. $2,000, unless the purchase costs less
3. $5,000 in all cases
4. $500 in all cases

23. FINRA's maintenance margin for long positions in margin securities is generally:

1. 75 percent of current market value
2. 25 percent of current market value
3. 10 percent of current market value
4. 50 percent of the original cost

24. Why does margin trading expose investors to larger losses?

1. It removes the need to pay for securities purchased
2. It is not covered by any regulator
3. It increases buying power with borrowed money
4. It requires buying only risky stocks

25. Under FINRA Rule 2090 (Know Your Customer), when must a firm know the essential facts about a customer?

1. At account opening and throughout the relationship
2. Only when a customer complaint is filed
3. Only at account opening
4. Only for margin accounts

26. A trusted contact person on a brokerage account may:

1. Withdraw funds in an emergency
2. Change the account's named beneficiaries
3. Be contacted by the firm but not trade
4. Place trades for the customer

27. Who may serve as a trusted contact person?

1. Only another registered representative
2. Any person at least 18 years old
3. Only a spouse or relative
4. Only an attorney

28. A customer tells a representative by phone, "Buy whatever you think is best." Under Rule 3260, what is still needed before the representative may choose the security?

1. The customer's prior written authorization and firm acceptance
2. Approval from the SEC
3. A signed margin agreement only
4. Oral consent from the customer, noted on the order ticket

29. A parent deposits money into an UTMA account for a child. Under FINRA's guidance, the deposit is:

1. A loan the parent can recall
2. An irrevocable gift to the child
3. Still owned by the parent
4. Jointly owned with the custodian

30. Who manages an UTMA account until the custodianship ends?

1. The firm's branch manager
2. The minor beneficiary
3. The state treasurer of the minor's home state
4. The custodian, for the minor's benefit

31. Under the broker-dealer customer identification program rule, which item must be obtained before opening an account for an individual?

1. Date of birth
2. Annual income
3. Employer's phone number
4. Investment experience

32. When must a firm verify a new customer's identity under the CIP rule?

1. Within a reasonable time of opening
2. Within one year of opening
3. Only if the customer deposits cash
4. Only at the customer's request

33. A broker-dealer must generally file a suspicious activity report on suspicious transactions involving at least:

1. $1,000
2. $5,000
3. $25,000
4. $10,000

34. After detecting facts that require a SAR, the firm generally has how long to file?

1. 10 business days
2. 60 calendar days
3. 90 calendar days
4. 30 calendar days

35. May a broker-dealer tell a customer that a SAR was filed about the customer's activity?

1. Yes, within 30 days
2. Yes, if the customer asks in writing
3. Yes, after the account closes
4. No, it may not disclose the SAR

36. Under Regulation S-P, when must a firm generally give an individual customer its initial privacy notice?

1. Only if information is sold
2. When the customer relationship is established
3. Within one year of opening
4. Only when the account is finally closed

37. An employee takes a retirement plan distribution paid directly to her, planning to roll it over. What withholding applies?

1. 30 percent backup withholding
2. No withholding at all
3. Mandatory 20 percent withholding
4. 10 percent optional federal withholding

38. How long does a person generally have to complete an indirect rollover of an IRA or plan distribution?

1. 60 days from receipt
2. One year from receipt
3. 90 days from receipt
4. 30 days from receipt

39. Which transfer avoids the 20 percent withholding on a plan distribution?

1. A 60-day rollover of a check made out to the employee
2. A direct rollover to the new plan or IRA
3. A cash withdrawal at a branch
4. A check payable to the participant

40. The IRS one-rollover-per-year rule applies to which transactions?

1. 60-day IRA-to-IRA rollovers
2. Roth conversions
3. Trustee-to-trustee IRA transfers
4. Direct rollovers from employer plans

41. A 45-year-old takes a taxable distribution from a traditional IRA with no exception. What federal penalty applies?

1. No penalty
2. A 25 percent additional tax on the full balance
3. A 10 percent additional tax
4. A 6 percent excise tax

42. Does the original owner of a Roth IRA have to take required minimum distributions?

1. Yes, starting at age 73
2. No, regardless of age
3. Yes, after five years
4. Yes, starting at age 70 1/2

43. Rule 5270 restricts a firm from trading ahead of which kind of information?

1. An imminent block transaction that is not yet public
2. A customer's routine odd-lot order in the same stock
3. A published research report on the issuer
4. A stock quote that already appears on the tape

44. Under Rule 5270, a transaction of fewer than 10,000 shares:

1. can never be considered a block transaction
2. is always exempt from this rule
3. is treated as a block only if it exceeds $1 million
4. could still be considered a block transaction

45. A firm trades ahead of a pending block order but can show the trade was unrelated to the block information. Under Rule 5270:

1. the trade is always a violation of it
2. only a customer can excuse the trade
3. an exception can apply to that trade
4. the trade must be reversed at once

46. Quantitative suitability under Rule 2111 asks whether a series of recommended transactions:

1. was approved in advance by the security's issuer
2. is excessive when taken together for the customer's profile
3. paid the representative the same fixed fee each time
4. was entered for the customer on a single trading day by phone

47. How does Rule 2111 guidance treat the question of excessive trading in a customer's account?

1. Turnover above a fixed number is always a violation
2. No single test applies, though turnover and cost-equity ratio count
3. Only a written complaint from the customer proves it
4. Only accounts opened on margin can ever be traded excessively here

48. Which of these is a factor that may indicate excessive trading under Rule 2111?

1. In-and-out trading in the customer's account
2. A long-term buy-and-hold approach
3. Dividends reinvested every quarter
4. A one-time purchase of a single bond held to maturity

49. A rep uses a customer's fully paid securities as collateral for the rep's own loan. This violates Rule 2150's ban on:

1. sharing in a customer account without approval
2. improper use of a customer's securities or funds
3. publishing a false quotation for a listed security
4. holding a customer's mail for too long a time

50. A representative tells a customer, "I guarantee you will not lose money on this trade." Under Rule 2150, this is:

1. prohibited, since guaranteeing against loss is not allowed
2. allowed if the promise is put in writing and signed
3. allowed for accounts over $100,000 in total value
4. allowed if the customer is a senior

51. A rep may share in the profits or losses of a customer account only with prior written authorization from the firm and the customer, and:

1. only in direct proportion to the rep's financial contribution
2. only at a fixed rate of 50 percent each year
3. only when profits exceed 10 percent a year for the customer
4. only for accounts held jointly with a spouse or partner

52. Which person falls within the Rule 2150 definition of immediate family?

1. A neighbor of the associated person
2. A client of the associated person
3. A co-worker at the same branch
4. A parent of the associated person

53. Rule 3240 generally prohibits a registered person from:

1. accepting a gift card worth under $100
2. discussing tax rules in a general way
3. borrowing money from or lending money to a customer
4. opening a joint account for a married customer

54. A rep asks a customer who is a fellow registered person at the same firm for a personal loan. Under Rule 3240 this may be allowed if:

1. the loan is shorter than one month long
2. the firm has procedures and gives written pre-approval
3. the customer is not an active client of the rep
4. the loan carries a fairly high rate of interest

55. Under Rule 5130, a member may not sell a new issue to an account in which which of these has a beneficial interest?

1. A retail investor with no industry ties
2. A restricted person
3. A person who already owns the stock
4. A customer who has held cash for a year

56. Which of these is a restricted person for purposes of buying a new issue under Rule 5130?

1. An employee of a broker-dealer
2. A retiree with no industry ties
3. A teacher who owns mutual funds
4. A customer of the firm's bank

57. Which person is an immediate family member under Rule 5130?

1. A co-worker at another firm
2. A college roommate and friend
3. A long-time client of the firm
4. A person's brother or sister

58. Under Rule 5130, a restricted person includes someone who has authority to buy or sell securities for:

1. only the person's own personal account
2. a nonprofit food bank or charity group
3. an investment company or an investment adviser
4. a local school board or school district

59. Under Rule 2165, a specified adult includes a natural person who is:

1. age 55 or older
2. age 70 or older
3. age 65 or older
4. age 62 or older

60. Besides age 65 and older, who qualifies as a specified adult under Rule 2165?

1. An adult with a margin account at the member firm
2. An adult with an impairment that blocks self-protection
3. An adult with a joint account at the firm
4. An adult with an IRA held at the firm

61. A firm reasonably believes a specified adult is being financially exploited and places a temporary hold on a disbursement. The initial hold expires no later than:

1. 15 business days after it was first placed
2. 5 business days after it was first placed
3. 30 calendar days after it was first placed
4. 60 business days after it was first placed

62. After the initial 15 business days of a Rule 2165 hold, the member itself may extend it for no longer than:

1. 5 more business days
2. 20 more business days
3. 30 more business days
4. 10 more business days

63. When a firm places a Rule 2165 temporary hold, it must notify the trusted contact person unless that person is:

1. a family member
2. a co-signer on the account
3. over age 65
4. unavailable

64. Under Rule 2210, correspondence is a written communication sent to:

1. only to institutional investors during a full year
2. more than 25 retail investors in 30 days
3. 25 or fewer retail investors within 30 calendar days
4. only to one named person in a calendar year

65. A firm sends the same written marketing piece to 400 retail investors in one month. Under Rule 2210 it is:

1. correspondence
2. a retail communication
3. an institutional communication
4. an internal communication

66. A written piece made available only to institutional investors is classified under Rule 2210 as:

1. an institutional communication
2. a retail communication
3. correspondence to retail investors
4. an internal firm communication

67. Under Rule 2210's content standards, a communication must be:

1. fair and balanced, based on fair dealing
2. approved by the issuer before use
3. free of any mention of risk at all
4. limited to one page of printed text or less

68. As a general rule, Rule 2210 says a communication may not:

1. state the firm's business address
2. describe a product's fees and expenses
3. list a representative's license status online
4. predict performance or imply past results recur

69. Under Rule 3230, a firm generally may not call a residence before or after which local times at the called party's location?

1. Before 7 a.m. or after 8 p.m.
2. Before 9 a.m. or after 10 p.m.
3. Before 8 a.m. or after 9 p.m.
4. Before 6 a.m. or after 11 p.m.

70. Under Rule 3230, a firm must not make outbound calls to a person who:

1. has a joint account with a spouse
2. is on the national do-not-call registry
3. owns shares of several mutual funds
4. lives in a different state than the rep

71. Under Rule 3150, a firm may hold a customer's mail for more than three months only if the customer gives:

1. a verbal request that gives no stated reason
2. written instructions and a reason like safety
3. a request made for convenience alone
4. a request made by the representative alone

72. FINRA Rule 4513 requires customer complaint records to be preserved for at least:

1. four years
2. three years
3. five years
4. seven years

73. For purposes of Rule 4513, a customer complaint is:

1. only a lawsuit filed in a court
2. only a complaint made to FINRA staff
3. any comment posted on a firm's public website
4. a grievance by a customer about the firm's activities

74. For FINRA-required records with no specified retention period, Rule 4511 sets a default of at least:

1. one year
2. three years
3. six years
4. fifteen years

75. Under Exchange Act Rule 17a-4(b)(4), a broker-dealer keeps business communications for at least three years, with the first:

1. year in a bank safe deposit vault
2. six months at the firm's main branch
3. two years in an easily accessible place
4. four years in an easily accessible place

76. A representative signs a customer's name on a form without the customer's permission. FINRA says this violates:

1. Rule 3150 on holding customer mail
2. Rule 2010 (and Rule 4511 if a firm record)
3. Rule 5130 on new issue purchases
4. no rule applies if the customer benefits

77. Under Rule 8210, a person subject to FINRA's jurisdiction who is asked for information in an investigation:

1. must provide the information or testimony
2. may refuse if the firm objects to it
3. may decline without any penalty
4. may answer only by sending a mailed letter

78. Rule 2020 prohibits a member from effecting or inducing a securities transaction by means of:

1. an unsolicited customer request on file
2. a commission-based fee schedule used
3. a limit order held overnight by the firm
4. a fraudulent or deceptive device

79. Under Rule 5210, a member may not publish a report of a securities transaction unless it believes the transaction was:

1. settled in one business day
2. made by an institutional buyer
3. made at the best-priced venue
4. a bona fide purchase or sale

80. SEC Rule 10b-5 makes certain conduct unlawful when it is done:

1. only by the issuer of the security
2. only in a registered public offering of stock
3. in connection with buying or selling a security
4. only on a national exchange floor

81. Under Exchange Act Section 21A, the civil penalty for an insider trading violation may not exceed:

1. twice the commission earned on the trade
2. three times the profit gained or loss avoided
3. the full dollar amount of the trade
4. $10,000 flat per each violation

82. Under Section 21A, a controlling person's civil penalty may not exceed the greater of:

1. $1,000,000 or triple the profit or loss avoided
2. $100,000 or the amount of the trade
3. $500,000 or twice the commission
4. $5,000,000 or the firm's total yearly revenue

83. No Section 21A insider trading civil action may be brought more than how long after the purchase or sale?

1. 5 years
2. 1 year
3. 2 years
4. 10 years

84. An investor in a cash account buys a security and sells it before paying for it. This is called:

1. marking the close
2. backing away
3. layering
4. freeriding

85. After a freeriding violation, the broker may freeze the cash account for 90 days. During the freeze the investor:

1. may not place any orders at all
2. may buy only with margin credit extended
3. must pay in full on each trade date
4. may trade using unsettled funds