Free Finra Securities Industry Essentials Exam SIE Exam Questions

Step by Step

Variable Life Insurance: The cash value depends on the performance of the underlying investment options.

Fluctuating Market Conditions: Since the cash value is linked to market performance, fluctuations directly impact its value.

Beneficiary/Death Benefit Changes: These do not directly impact the cash value unless they involve additional costs or changes to premiums.

SEC Bulletin on Variable Life Insurance: SEC Variable Insurance.

When interest rates rise, the price of fixed-rate corporate bonds falls because the bond's coupon payments become less attractive compared to new bonds issued at higher rates.

D is correct as bond prices move inversely to interest rates.

A is incorrect because bond prices fluctuate with interest rate changes.

B is incorrect because bond prices revert to par only at maturity.

C is incorrect because prices do not appreciate when rates rise.

A bond's current yield is calculated as annual interest (coupon payment) divided by the bond's current market price. For a fixed-rate bond, the annual interest amount is based on the coupon rate times par value (typically $1,000 par). With a 7% coupon, annual interest is $70 per $1,000 of par value. Since the coupon payment is fixed, the current yield becomes higher when the purchase price is lower, because you are receiving the same $70 of annual interest while paying less for the bond.

In this question, the possible market prices are 92, 100, 102, and 107 (quoted as percentages of par). A price of 92 means the bond costs $920 per $1,000 par. The current yield at 92 is $70 $920, which is higher than $70 $1,000 (at par), higher than $70 $1,020, and higher than $70 $1,070. Therefore, the bond has the highest current yield at the lowest price, which is 92.

This question is testing a fundamental SIE relationship: for bonds, yield and price move inversely. While ''current yield'' is a simpler measure than yield to maturity (YTM) because it ignores time to maturity and any gain/loss if the bond is redeemed at par, it is still widely used as a quick comparison tool. The exam expects you to recognize that as price declines (discount), current yield rises; as price increases (premium), current yield falls---assuming the coupon rate is fixed. The SIE outline includes debt instrument basics such as coupon, par, yield, and price/yield relationships.

This fact pattern describes a classic conflict-and-manipulation style scenario: the RR buys first, promotes purchases to customers in a thinly traded security, benefits from the price increase that customer buying helps create, then sells for a profit and tells customers to sell afterward. In FINRA terms, this is consistent with a deceptive practice that violates standards of commercial honor and fair dealing (e.g., conduct rules requiring ethical behavior and prohibiting manipulative or deceptive devices). Thinly traded securities are especially vulnerable because relatively small buying pressure can move the price materially; when an RR uses their position and influence over customers to create demand that benefits the RR's own account, regulators view that as improper and potentially manipulative.

Choice B is wrong because ''customers also made money'' does not cure a deceptive or manipulative practice. The issue is the RR's conduct, conflicts, and potential misuse of customer recommendations to profit personally. Choice C is wrong because suitability and ethical standards apply regardless of a customer's wealth level; high net worth does not make conflicted or deceptive conduct permissible. Choice D is wrong because there is no rule that representatives may only accept unsolicited orders for thinly traded securities. Firms may accept solicited orders if recommendations are suitable and communications are fair and balanced, but the scenario here is about deceptive/conflicted trading behavior.

On the SIE, this falls under prohibited practices and market manipulation concepts, including ethics, conflicts of interest, and improper trading ahead of customers.

FINRA Rule 3270 requires registered representatives to disclose all outside business activities that involve compensation or could reasonably be perceived as a conflict of interest.

C is correct because serving as a board member for a publicly traded company is a business activity requiring disclosure, even if compensation is indirect.

A is incorrect because volunteer work for charities does not require disclosure.

B is incorrect because acting as a trustee for a personal or family estate is generally not considered an OBA.

D is incorrect because unpaid board membership for a not-for-profit entity does not typically require disclosure.

Step by Step

Rule 144 Holding Period: Restricted securities held by affiliates require a six-month holding period before sale, provided the issuer is subject to SEC reporting requirements.

Other Options:

Notification to FINRA (C) is incorrect; Form 144 is submitted to the SEC, not FINRA.

The 10% ADTV limitation (D) applies to the volume of shares sold, not the conditions for sale.

SEC Rule 144 (Selling Restricted Securities): SEC Rule 144.

The most appropriate next step is to notify a supervisor (or follow the firm's escalation procedures), so A is correct. When a customer expresses dissatisfaction---especially a senior customer and especially when the customer threatens to contact FINRA---this should be treated as a serious compliance matter. Firms have supervisory systems designed to address complaints promptly, document the issue, evaluate suitability and communications, and ensure that required reporting and recordkeeping obligations are met. Escalating to a supervisor is the correct immediate action because it triggers oversight and ensures the firm responds appropriately and consistently.

Choice B is incorrect because a registered representative generally may not reimburse a customer for a loss to resolve a complaint, as that can violate rules regarding improper use of funds, conflicts, and firm policies. Reimbursement decisions, if ever allowed, are typically tightly controlled and would require firm approval, and it is not the RR's unilateral decision. Choice C is incorrect because not every expression of dissatisfaction automatically requires a Form U4 update; U4 reporting relates to specified disclosure events. The proper first step is internal escalation so the firm can determine whether it constitutes a formal complaint and what reporting is required. Choice D is inappropriate because the RR should not try to preempt the customer by calling FINRA ''to explain their side.'' The correct process is to handle the complaint through firm supervision and compliance channels.

On the SIE, this ties to customer complaint handling, supervision, and senior investor protections: identify concerns, escalate internally, document, and follow firm procedures rather than attempting self-help solutions.

In cumulative voting, shareholders can allocate all their votes to a single candidate. The total number of votes is calculated by multiplying the number of shares owned by the number of seats available:

Total votes = 100 shares 10 seats = 1,000 votes.

The investor can allocate all votes to one candidate.

C is correct because cumulative voting allows all votes to be concentrated.

Step by Step

Securitization: The process of pooling financial assets, such as mortgage loans, and creating asset-backed securities that investors can buy.

Incorrect Options:

B: Hypothecation refers to pledging assets as collateral.

C & D: Loan and claim processing are administrative terms, not related to the creation of securities.

SEC Guidance on Asset-Backed Securities: SEC ABS Info.

Federal Reserve Regulation T mandates that customers must pay for purchases in a cash account within two business days of settlement (T+4). If payment is not made, the brokerage firm must liquidate the securities and place the account on a 90-day restriction.

C is correct because the customer's account is frozen for 90 days, during which all trades must be paid for in advance.

A is incorrect as closing transactions are still permitted but require prepayment.

B is incorrect because the restriction lasts for 90 days, not 30.

D is incorrect as only the delinquent account, not related accounts, is frozen.

The announcement of negative regulatory changes introduces unsystematic risk, specific to the technology sector. Diversification into unrelated sectors can reduce exposure to this risk.

A is correct because uncorrelated holdings reduce portfolio risk.

B is incorrect because adding more microchip companies increases exposure to sector-specific risk.

C does not address the core issue of over-concentration.

D is the opposite of mitigating risk.