49 Regulations & Ethics Practice Questions & Answers
Every Regulations & Ethics practice question from the SIE / Series 7 Practice Test, with the correct answer and a short explanation.
Start practice test →1. The Securities Act of 1933 primarily regulates which of the following?
- A.The creation of the Securities and Exchange Commission (SEC)
- B.The operation of secondary-market exchanges and trading
- C.The issuance and registration of new securities in the primary market✓ Answer
- D.The registration of broker-dealers and their associated persons
The Securities Act of 1933, often called the 'paper act' or 'prospectus act,' governs the registration and disclosure requirements for new securities offered in the primary market.
2. Which law created the Securities and Exchange Commission (SEC) and regulates the secondary market?
- A.The Securities Act of 1933
- B.The Securities Exchange Act of 1934✓ Answer
- C.The Trust Indenture Act of 1939
- D.The Investment Company Act of 1940
The Securities Exchange Act of 1934 established the SEC and governs the secondary market, including exchanges, broker-dealers, and ongoing reporting.
3. The Financial Industry Regulatory Authority (FINRA) is best described as which type of body?
- A.A private stock exchange that lists securities
- B.A division within the U.S. Department of the Treasury
- C.A self-regulatory organization (SRO) overseen by the SEC✓ Answer
- D.A federal government agency that reports to Congress
FINRA is a self-regulatory organization (SRO) that regulates broker-dealers and their registered representatives, operating under the oversight of the SEC.
4. Under the Securities Exchange Act of 1934, most individuals who conduct a securities business with the public must register with FINRA by first passing which corequisite exam?
- A.The Series 65 investment adviser exam
- B.The Series 63 state law exam
- C.The Series 24 principal exam
- D.The Securities Industry Essentials (SIE) exam✓ Answer
The SIE exam tests fundamental securities knowledge and, combined with a specialized qualification exam such as the Series 7, is required to register as a representative.
5. Insider trading, as prohibited under the securities laws, is best defined as:
- A.Trading on material, nonpublic information in breach of a duty of trust✓ Answer
- B.Recommending a security without disclosing a sales commission
- C.Buying large blocks of stock that move the market price
- D.Any purchase or sale of securities by a company's officers or directors
Illegal insider trading involves trading securities on the basis of material, nonpublic information in breach of a fiduciary or similar duty of trust and confidence.
6. Spreading false rumors to move a stock's price, or executing wash sales and matched orders, are examples of which prohibited activity?
- A.Front running
- B.Market manipulation✓ Answer
- C.Breakpoint selling
- D.Churning
Market manipulation includes deceptive practices such as wash trades, matched orders, and spreading false rumors intended to artificially affect a security's price.
7. Under the Bank Secrecy Act (BSA), a firm must file a Currency Transaction Report (CTR) when a customer conducts cash transactions exceeding what amount in a single business day?
- A.$10,000✓ Answer
- B.$5,000
- C.$50,000
- D.$25,000
A CTR must be filed for cash transactions that aggregate to more than $10,000 by or on behalf of one person in a single business day.
8. A firm generally must file a Suspicious Activity Report (SAR) when it detects a suspicious transaction involving at least what amount in funds?
- A.$5,000✓ Answer
- B.$2,000
- C.$25,000
- D.$10,000
A SAR is generally required for suspicious transactions aggregating $5,000 or more when the firm suspects illegal activity or attempts to evade BSA requirements.
9. The deliberate practice of breaking a large cash transaction into smaller amounts to avoid triggering a CTR is known as:
- A.Layering
- B.Netting
- C.Rehypothecation
- D.Structuring✓ Answer
Structuring is intentionally arranging cash transactions to stay below the $10,000 CTR threshold, and it is illegal under the BSA.
10. The three recognized stages of money laundering, in order, are:
- A.Integration, placement, layering
- B.Layering, integration, placement
- C.Placement, integration, layering
- D.Placement, layering, integration✓ Answer
Money laundering proceeds through placement (introducing illicit cash), layering (disguising its origin through transactions), and integration (returning funds as apparently legitimate).
11. Under FINRA communications rules, retail communications generally must be:
- A.Approved in advance by the SEC before use
- B.Free of any mention of risk to encourage investment
- C.Fair, balanced, and not misleading, with no false or exaggerated claims✓ Answer
- D.Guaranteed to produce the returns they describe
FINRA Rule 2210 requires all communications to be fair and balanced, provide a sound basis for evaluation, and prohibits false, exaggerated, or misleading statements and guarantees.
12. Which of the following communications is subject to a principal's approval and is directed to more than 25 retail investors within any 30-calendar-day period?
- A.Correspondence
- B.Institutional communication
- C.Internal firm memorandum
- D.Retail communication✓ Answer
FINRA defines a retail communication as any written communication distributed to more than 25 retail investors within a 30-calendar-day period; correspondence goes to 25 or fewer.
13. A registered representative wishes to open a personal brokerage account at another member firm. Under FINRA rules, the representative must:
- A.Obtain written approval from the SEC before opening the account
- B.Do nothing, since personal accounts are private and unregulated
- C.Notify their employing member firm in writing and notify the executing firm of the association✓ Answer
- D.Open the account only at their own employing firm
FINRA Rule 3210 requires an associated person to obtain prior written consent from their employer and notify the executing member firm of their association before opening an outside account.
14. The Securities Investor Protection Corporation (SIPC) protects customers primarily against which of the following?
- A.Losses caused by a decline in the market value of their securities
- B.Losses resulting from bad investment advice by a broker
- C.The financial failure or liquidation of their broker-dealer✓ Answer
- D.Default on the bonds held in their portfolio
SIPC protects customers against the loss of cash and securities held at a member broker-dealer that fails financially; it does not protect against market losses or bad advice.
15. SIPC coverage limits protect each separate customer up to how much, including a maximum for cash claims?
- A.$250,000 total, with no separate cash limit
- B.$500,000 total, of which up to $250,000 may be cash✓ Answer
- C.$1,000,000 total, of which up to $500,000 may be cash
- D.$100,000 total, all of which may be cash
SIPC covers up to $500,000 per separate customer, of which a maximum of $250,000 may be for cash claims.
16. Which organization provides deposit insurance for bank deposits but does NOT cover securities purchased through a broker-dealer?
- A.The Securities Investor Protection Corporation (SIPC)
- B.The Municipal Securities Rulemaking Board (MSRB)
- C.The Federal Reserve Board (FRB)
- D.The Federal Deposit Insurance Corporation (FDIC)✓ Answer
The FDIC insures bank deposits such as checking, savings, and CDs; it does not cover securities like stocks, bonds, or mutual funds bought through a broker-dealer.
17. The Municipal Securities Rulemaking Board (MSRB) writes rules governing which market, though it has no enforcement authority of its own?
- A.The U.S. Treasury securities market
- B.The municipal securities market✓ Answer
- C.The listed equity options market
- D.The corporate commercial paper market
The MSRB creates rules for firms dealing in municipal securities, but enforcement of those rules is carried out by FINRA, the SEC, and bank regulators.
18. Which form is used to register an associated person with FINRA, and what document is filed when that person leaves the firm?
- A.Form U5 to register; Form U4 upon termination
- B.Form BD to register; Form ADV upon termination
- C.Form U4 to register; Form U5 upon termination✓ Answer
- D.Form 10-K to register; Form 8-K upon termination
The Form U4 is the Uniform Application for Securities Industry Registration used to register an individual; the Form U5 is the Uniform Termination Notice filed when the individual leaves.
19. After an associated person's Form U5 is filed at termination, for how long does FINRA generally retain jurisdiction to bring an action against that person?
- A.6 months
- B.1 year
- C.2 years✓ Answer
- D.5 years
FINRA retains jurisdiction over a formerly associated person for two years after the effective date of the Form U5 termination for purposes of bringing disciplinary action.
20. Which of the following would statutorily disqualify a person from associating with a FINRA member firm?
- A.A felony conviction within the past 10 years✓ Answer
- B.A single customer complaint that was denied
- C.Failing the SIE exam on the first attempt
- D.Holding accounts at more than one broker-dealer
A felony conviction (of any type) within the prior 10 years is a statutory disqualification, as is any securities-related misdemeanor conviction within that period.
21. Registered representatives must satisfy the Regulatory Element of Continuing Education (CE). Under current rules, this requirement must be completed:
- A.Only once, within 120 days of initial registration
- B.Every three years on the anniversary of registration
- C.Annually by December 31 for each registration held✓ Answer
- D.Only when a representative changes firms
Under current FINRA rules, the Regulatory Element of CE must be completed annually by December 31 for each registration category a person holds.
22. Under the Securities Act of 1933, which of the following securities is EXEMPT from registration?
- A.Common stock of a newly formed technology company
- B.Corporate bonds issued in a public offering
- C.Shares of a nonexempt mutual fund
- D.U.S. government and municipal securities✓ Answer
U.S. government securities and municipal securities are exempt from the registration requirements of the Securities Act of 1933.
23. During the cooling-off period after a registration statement is filed, a broker-dealer may deliver which document to gauge investor interest?
- A.A final prospectus with the offering price
- B.A confirmation of an executed purchase
- C.A preliminary prospectus (red herring)✓ Answer
- D.A signed subscription agreement
During the cooling-off period, only a preliminary prospectus (red herring) may be used to solicit indications of interest; sales and final prospectuses are not permitted until the effective date.
24. A cash account differs from a margin account primarily because in a cash account the customer must:
- A.Pay in full for all securities purchased✓ Answer
- B.Borrow at least half the purchase price from the firm
- C.Sign a hypothecation agreement before trading
- D.Maintain a minimum equity of $2,000 at all times
In a cash account, the customer must pay in full for all purchases; borrowing and buying on credit are features of a margin account.
25. In a joint account registered as Joint Tenants with Right of Survivorship (JTWROS), when one owner dies:
- A.The decedent's share passes to their estate
- B.The account is automatically frozen for one year
- C.The share is divided among the decedent's named heirs
- D.The surviving owner(s) assume full ownership of the account✓ Answer
Under JTWROS, a deceased owner's interest passes automatically to the surviving owner(s), bypassing the decedent's estate.
26. In a joint account held as Tenants in Common (TIC), when one owner dies, that owner's proportionate interest:
- A.Passes automatically to the surviving co-owner
- B.Passes to the decedent's estate✓ Answer
- C.Is forfeited to the broker-dealer
- D.Must be liquidated immediately by the firm
In a Tenants in Common account, a deceased owner's fractional interest passes to their estate rather than to the surviving co-owner(s).
27. A key characteristic of an UGMA or UTMA custodial account is that:
- A.It may be opened as a joint account with two minors
- B.There is one custodian and one minor, and the minor is the beneficial owner✓ Answer
- C.The custodian owns the assets and keeps any gains
- D.It can be traded on margin to increase returns
UGMA/UTMA accounts have one custodian and one minor beneficial owner; the assets belong to the minor, and the accounts must be operated as cash accounts.
28. A discretionary account is one in which:
- A.The customer must approve each trade before it is entered
- B.The firm may hold the customer's mail indefinitely
- C.A representative may choose the security, amount, or action without prior approval for each trade✓ Answer
- D.Only cash securities may be purchased
A discretionary account authorizes the representative to decide the security, the number of shares, and whether to buy or sell without the customer's approval for each trade; it requires prior written authorization and principal approval.
29. Under FINRA rules, how often must a principal review a discretionary account?
- A.Frequently and at regular intervals✓ Answer
- B.Only once, when the account is opened
- C.Only when the customer complains
- D.No review is required by rule
FINRA rules require that discretionary accounts be reviewed frequently and at regular intervals by a principal to detect problems such as excessive trading.
30. Excessive trading in a customer's account by a representative primarily to generate commissions is the prohibited practice of:
- A.Freeriding
- B.Churning✓ Answer
- C.Selling away
- D.Interpositioning
Churning is excessive trading in a customer's account driven by the representative's desire to generate commissions rather than to benefit the customer.
31. A representative who sells private securities transactions to customers without their firm's knowledge or approval is engaged in:
- A.Selling away✓ Answer
- B.Front running
- C.Backing away
- D.Painting the tape
Selling away is participating in private securities transactions outside the scope of employment without providing prior written notice to, and obtaining approval from, the member firm.
32. A trader who buys a security for a personal account just ahead of a large customer order they know will move the price is engaging in:
- A.Churning
- B.Front running✓ Answer
- C.Commingling
- D.Breakpoint selling
Front running is trading a security for one's own benefit based on advance knowledge of a pending block order that is likely to affect the security's price.
33. Mixing a firm's own securities or cash with those of its customers in the same account is the prohibited practice of:
- A.Commingling✓ Answer
- B.Netting
- C.Rehypothecation
- D.Subordination
Commingling is improperly mixing a firm's proprietary assets with customer assets; firms must segregate and safeguard fully paid customer securities.
34. Entering a trade in a customer's account without the customer's prior consent, in an account that is not discretionary, is:
- A.Permitted if the trade is profitable
- B.An unauthorized transaction, which is prohibited✓ Answer
- C.Allowed if reported within 24 hours
- D.Acceptable for institutional accounts only
Placing a trade in a non-discretionary account without the customer's prior authorization is an unauthorized transaction and is prohibited regardless of the outcome.
35. Under a firm's Customer Identification Program (CIP), which of the following must be collected before opening an account for a new customer?
- A.The customer's annual charitable donations
- B.Name, date of birth, address, and taxpayer identification number✓ Answer
- C.A list of the customer's social media accounts
- D.The customer's voting history
A CIP requires collecting and verifying, at minimum, the customer's name, date of birth, physical address, and taxpayer identification number (such as a Social Security number).
36. The Office of Foreign Assets Control (OFAC) requires firms to block transactions with:
- A.Any customer who lives outside the United States
- B.Individuals and entities on the Specially Designated Nationals (SDN) list✓ Answer
- C.Customers who trade options
- D.Any account holding more than $10,000
OFAC administers economic sanctions and requires firms to screen against and block transactions with individuals and entities on the Specially Designated Nationals (SDN) list.
37. Regulation S-P (privacy) requires a broker-dealer to:
- A.Publish customers' account balances quarterly
- B.Provide an initial and annual privacy notice and an opt-out of certain information sharing✓ Answer
- C.Obtain SEC approval before opening any account
- D.Report all customer trades to the IRS daily
Regulation S-P requires firms to provide privacy notices at account opening and annually, and to allow customers to opt out of sharing nonpublic personal information with certain nonaffiliated third parties.
38. Regulation Best Interest (Reg BI) requires a broker-dealer, when recommending a securities transaction to a retail customer, to:
- A.Guarantee the recommendation will be profitable
- B.Act in the retail customer's best interest and not place its own interests ahead of the customer's✓ Answer
- C.Recommend only the products that pay the highest commission
- D.Obtain the customer's written consent to every conflict of interest
Reg BI requires a broker-dealer to act in the retail customer's best interest at the time a recommendation is made, without placing the firm's financial interests ahead of the customer's.
39. Under FINRA's suitability and Reg BI framework, which category of information is part of a customer's investment profile?
- A.The customer's risk tolerance, time horizon, and financial situation✓ Answer
- B.The customer's favorite brands and hobbies
- C.The representative's personal opinion of the market
- D.The firm's quarterly revenue targets
A customer's investment profile includes factors such as age, financial situation, tax status, investment objectives, time horizon, liquidity needs, and risk tolerance.
40. When a new options account is opened, the customer must generally receive the Options Disclosure Document (ODD):
- A.Within 15 days after the first trade
- B.At or prior to the time the account is approved for options trading✓ Answer
- C.Only if the customer specifically requests it
- D.After the account has been open for one year
The Options Disclosure Document must be delivered to the customer at or before the time the account is approved for options trading.
41. Under FINRA books and records rules, customer account records and most communications generally must be retained for at least:
- A.6 months
- B.1 year
- C.3 years✓ Answer
- D.10 years
Many required records, including communications with the public and customer complaint records, must be retained for at least three years, with certain records kept longer (for example, the lifetime of the firm for its formation documents).
42. Before a retail communication that includes a recommendation is distributed, it generally must be:
- A.Filed with and pre-approved by the SEC
- B.Approved by a registered principal before first use✓ Answer
- C.Reviewed by every customer who will receive it
- D.Published in a national newspaper
Under FINRA Rule 2210, retail communications generally must be approved by a registered principal before first use or filing, and firms must keep records of these communications.
43. Institutional communications differ from retail communications in that institutional communications:
- A.Are distributed only to institutional investors and are not subject to principal pre-approval✓ Answer
- B.May contain false or misleading statements
- C.Must always be filed with the SEC first
- D.Are never subject to any supervisory review
Institutional communications go only to institutional investors and are exempt from the principal pre-approval requirement, but firms must still establish supervisory procedures and the content must remain fair and not misleading.
44. A corporate account seeking to trade securities, including on margin, generally must provide which document establishing who is authorized to act?
- A.A personal tax return of the CEO
- B.A corporate resolution✓ Answer
- C.A marriage certificate
- D.A residential lease agreement
A corporate account requires a corporate resolution identifying the individuals authorized to trade on behalf of the corporation, and margin trading additionally requires the corporate charter/bylaws to permit it.
45. In a trust account, the person with the authority to make investment decisions and act on behalf of the trust is the:
- A.Beneficiary
- B.Grantor's attorney
- C.Custodian
- D.Trustee✓ Answer
The trustee is authorized to manage the trust's assets and make investment decisions in accordance with the trust document, for the benefit of the beneficiaries.
46. The SEC is best described as which type of body?
- A.A self-regulatory organization funded by member firms
- B.A federal government agency created by Congress✓ Answer
- C.A private nonprofit trade association
- D.A division of the Federal Reserve
The SEC is a federal government agency created by the Securities Exchange Act of 1934 to enforce the federal securities laws and oversee SROs such as FINRA.
47. Under the Bank Secrecy Act, associated persons of a broker-dealer generally must be fingerprinted primarily to:
- A.Verify their identity and check for a disqualifying criminal history✓ Answer
- B.Confirm they have passed the SIE exam
- C.Register them as investment advisers
- D.Establish their annual continuing education schedule
Associated persons must be fingerprinted so the firm can conduct a background check for criminal history that could be a statutory disqualification.
48. A CTR must be filed with which agency?
- A.The SEC
- B.FINRA
- C.The Financial Crimes Enforcement Network (FinCEN)✓ Answer
- D.The MSRB
Currency Transaction Reports (and Suspicious Activity Reports) are filed with FinCEN, the bureau of the U.S. Treasury that administers the Bank Secrecy Act.
49. A firm must generally keep a Suspicious Activity Report (SAR) confidential. This means the firm:
- A.May tell the customer a SAR was filed if asked directly
- B.Must not notify the customer that a SAR has been filed✓ Answer
- C.Must post the SAR on its public website
- D.Must send a copy of the SAR to the customer
SAR filings are strictly confidential; a firm and its employees are prohibited from notifying the subject that a SAR has been filed (an act known as 'tipping off').
Practice questions based on the FINRA SIE content outline. Not affiliated with FINRA and not investment advice. About the SIE (FINRA) →