Securities Industry Essentials (SIE) Quiz: Identify Prohibited Activities
20 questions · exam conditions
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Identify Prohibited ActivitiesQuestion 1 of 20

An unregistered administrative assistant at a broker-dealer is permitted to perform which of the following activities?

Accept a customer's order to sell 100 shares of stock.
Explain the tax benefits of a 529 plan to a potential client.
Send an approved research report to a list of clients.
Cold-call prospects to solicit new brokerage accounts.
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Securities Industry Essentials (SIE) Quiz

Securities Industry Essentials (SIE) Quiz: Identify Prohibited Activities

Practice Identify Prohibited Activities in Securities Industry Essentials (SIE) with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Identify Prohibited Activities, giving you a quick way to practice the rules, question types, and explanations that matter most for Securities Industry Essentials (SIE).

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

An unregistered administrative assistant at a broker-dealer is permitted to perform which of the following activities?

  1. Accept a customer's order to sell 100 shares of stock.
  2. Explain the tax benefits of a 529 plan to a potential client.
  3. Send an approved research report to a list of clients. (correct answer)
  4. Cold-call prospects to solicit new brokerage accounts.
Explanation: Unregistered persons are limited to clerical and administrative duties. Sending firm-approved literature is a ministerial act. Accepting orders, providing investment advice or explanations of products, and soliciting business are all functions that require registration.

Question 2

A registered representative is experiencing temporary financial difficulty and considers borrowing money from a client who is also a close personal friend. Under FINRA rules, this activity is:

  1. always prohibited as it represents a conflict of interest.
  2. permitted only if the client is an immediate family member.
  3. permitted if the member firm has written procedures allowing such loans and the loan complies with those procedures. (correct answer)
  4. permitted without restriction as long as the client is a pre-existing friend.
Explanation: While borrowing money from a client is generally prohibited, FINRA rules provide specific exceptions. One such exception is when the borrowing arrangement is based on a personal relationship outside of the broker-customer relationship, provided the representative's firm has written procedures allowing for such arrangements.

Question 3

The primary purpose of prohibiting unregistered individuals from receiving transaction-based compensation is to:

  1. reduce the operating expenses of member firms.
  2. prevent the public from being solicited by unqualified individuals. (correct answer)
  3. ensure that all compensation is processed through a centralized payroll system.
  4. limit the number of individuals working in the securities industry.
Explanation: Registration requirements, which include passing qualification exams and undergoing background checks, are designed to protect the investing public by ensuring that individuals who deal with them have met minimum standards of competency and ethics. Prohibiting transaction-based compensation for unregistered persons removes the primary incentive for unqualified individuals to engage in sales activities.

Question 4

A registered representative knowingly encourages a client to purchase shares of a thinly traded stock by making false claims about a pending merger. This activity is a prohibited practice because it:

  1. violates the firm's business continuity plan.
  2. is a manipulative and deceptive act intended to defraud the client. (correct answer)
  3. fails to adhere to the T+1 settlement cycle.
  4. disregards the rules on gifts and gratuities.
Explanation: Knowingly making false statements of material fact to induce a securities transaction is a classic example of a manipulative, deceptive, or fraudulent device. This is prohibited under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

Question 5

An individual who has passed the SIE exam but is not yet associated with a member firm is considered:

  1. a registered representative.
  2. a non-registered person. (correct answer)
  3. a general securities principal.
  4. statutorily disqualified.
Explanation: Passing the SIE exam is only one part of the registration process. An individual must also be associated with a member firm and pass a top-off qualification exam (like the Series 7 or 6) to become registered and engage in securities business. Until then, they are considered a non-registered person.

Question 6

Forging a customer's signature on a document, such as an account transfer form, is:

  1. a serious violation regardless of the representative's intent. (correct answer)
  2. permissible if the representative has verbal permission from the customer.
  3. a minor infraction if it is done solely for the customer's convenience.
  4. only a violation if the customer suffers a financial loss as a result.
Explanation: Forgery is an act of fraud and is strictly prohibited under all circumstances. A representative's intent, whether for convenience or otherwise, and a customer's verbal permission are not valid defenses. It is a serious violation that can lead to termination and statutory disqualification.

Question 7

According to FINRA rules on IPO allocations, which of the following individuals would be prohibited from purchasing a new issue of common stock?

  1. A doctor who has an account with the underwriting firm.
  2. A portfolio manager for a mutual fund buying for the fund's portfolio.
  3. The spouse of a registered representative at a member firm. (correct answer)
  4. A foreign investor with no connection to the securities industry.
Explanation: Immediate family members of restricted persons (like employees of member firms) are also considered restricted persons if they share a household, are materially supported by the employee, or the employee has control over their account. Portfolio managers buying for a fund are generally exempt, and the other individuals are not restricted.

Question 8

Which of the following activities by a registered representative would be considered an improper use of customer funds or securities?

  1. Recommending a high-yield bond to a client seeking income.
  2. Holding a client's stock certificate in the firm's vault for safekeeping.
  3. Pledging a client's fully paid securities as collateral for a firm loan. (correct answer)
  4. Executing a trade in a client's discretionary account that results in a loss.
Explanation: A client's fully paid securities must be kept segregated and cannot be used by the broker-dealer for its own business purposes, such as collateral for a loan. This action constitutes an improper use and commingling of customer assets. Margin securities, however, can be rehypothecated up to a certain limit.

Question 9

Under FINRA Rule 5130, which of the following would be considered a "restricted person" and therefore generally prohibited from purchasing a new issue of common stock?

  1. A public school teacher with a brokerage account.
  2. A registered nurse who is the sister of a registered representative.
  3. An employee of a broker-dealer. (correct answer)
  4. An investor who owns more than 10% of a public company unrelated to the offering.
Explanation: FINRA Rule 5130 identifies several categories of 'restricted persons' who are prohibited from purchasing shares in an IPO. This list includes FINRA member firms and their employees (associated persons). The other individuals listed are not considered restricted persons by default.

Question 10

Which scenario involves an unregistered individual performing regulated activities by giving specific recommendations and taking custody of funds?

  1. A firm's customer service associate provides account balances and mailing addresses without discussing investments.
  2. An unregistered "wealth strategist" recommends specific securities, collects client wires to a personal account, and trades for clients. (correct answer)
  3. A registered representative executes trades only after client approval and uses the firm's approved communication channels.
  4. A client reads a firm's educational article on budgeting and decides independently to increase monthly savings.
Explanation: This question tests the understanding of prohibited activities within the securities industry, focusing on unregistered recommendations and custody of funds. Prohibited activities include any actions that violate securities regulations, such as unregistered specific advice and handling client wires personally. In the given scenario, the wealth strategist recommends and takes custody, directly violating registration and custody rules. Choice B is correct because it identifies unregistered recommendations and fund custody. Choice A is incorrect because it describes non-advisory customer service. To help students: Emphasize custody prohibitions for unregistered persons. Practice distinguishing general service from specific advisory activities.

Question 11

A client signs an incomplete new account form. The registered representative later fills in the missing financial information based on a previous conversation without the client's review or subsequent signature. This action is:

  1. acceptable if the information is accurate and helps expedite the account opening process.
  2. considered a prohibited activity as it constitutes the falsification of records. (correct answer)
  3. permissible as long as the representative's branch manager approves it in writing.
  4. a violation of Regulation S-P regarding customer privacy.
Explanation: Altering a signed document, or adding information to it after it has been signed by the client, is a form of falsification of books and records. This is a serious violation of industry rules, regardless of intent.

Question 12

An individual is hired by a brokerage firm to work as an assistant. This individual has not yet passed any securities qualification exams. Which of the following tasks would be a violation of FINRA rules for this person to perform?

  1. Answering the phone and taking messages for registered representatives.
  2. Prequalifying a potential customer to determine if they are a suitable client for a particular investment. (correct answer)
  3. Inviting prospective clients to a free seminar hosted by a licensed representative.
  4. Inputting customer data into a new account form from a completed questionnaire.
Explanation: Prequalifying a customer involves asking questions about their financial status and objectives to determine suitability, which is considered part of the sales process and requires registration. The other tasks are acceptable clerical or administrative duties for an unregistered person.

Question 13

A brokerage firm wants to hire a part-time college student to help generate leads. The firm proposes to pay the student a small hourly wage plus $50 for every prospect who opens and funds an account. This compensation arrangement is:

  1. acceptable, as the student is not making recommendations.
  2. a violation, because unregistered persons cannot receive transaction-based compensation. (correct answer)
  3. acceptable, provided the payment is classified as a "finder's fee."
  4. a violation, unless the student is registered in the state as an agent.
Explanation: Compensation that is tied to securities transactions or the opening of accounts is considered transaction-based compensation. Only properly registered individuals may receive such compensation. An hourly wage or a fixed salary is permissible for an unregistered person, but the bonus structure makes this arrangement a violation.

Question 14

A registered representative has a joint account with a client who is not an immediate family member. For the representative to share in the profits and losses of this account, which condition must be met?

  1. The representative must obtain prior written approval from the SEC.
  2. The client must be classified as an accredited investor.
  3. The sharing must be in direct proportion to the financial contributions made to the account. (correct answer)
  4. The representative must handle all trades in the account on a discretionary basis.
Explanation: FINRA rules permit a registered representative to share in the profits and losses of a client's account only if they have written permission from their firm and the client, and the sharing arrangement is directly proportional to each party's financial contribution. The proportionality requirement is waived only for accounts with immediate family members.

Question 15

A customer requests a copy of the most recent prospectus for a mutual fund they are considering purchasing. The registered representative tells the customer they will send it but fails to do so before accepting the customer's purchase order. This is a violation because:

  1. a prospectus must be provided to the customer at or before the solicitation of the sale. (correct answer)
  2. the representative engaged in freeriding.
  3. all customer requests must be fulfilled within 24 hours.
  4. the representative is acting in a principal capacity.
Explanation: The Securities Act of 1933 requires that any offer of new issues, which includes open-end mutual fund shares, be preceded or accompanied by a prospectus. Failing to provide one before accepting an order is a violation of federal securities law.

Question 16

When opening a new account, a member firm asks the customer to provide the name and contact information for a trusted contact person. If the customer provides this information, the member firm is authorized to:

  1. execute transactions based on instructions from the trusted contact.
  2. contact and disclose information about the customer's account if financial exploitation is suspected. (correct answer)
  3. send duplicate account statements to the trusted contact automatically.
  4. allow the trusted contact to make withdrawals from the account.
Explanation: The purpose of the trusted contact person is to serve as a resource for the firm in specific circumstances, such as when there is a reasonable belief of financial exploitation or if there are concerns about the customer's health and ability to manage their affairs. The trusted contact does not have trading or withdrawal authority.

Question 17

FINRA's rule restricting the purchase of equity IPOs applies to new issues of:

  1. common stock.
  2. common and preferred stock. (correct answer)
  3. corporate bonds.
  4. U.S. Treasury securities.
Explanation: FINRA Rule 5130 restricts member firms and their associated persons from purchasing equity IPOs. The rule applies to new issues of both common stock and preferred stock, as both are considered equity securities. The rule does not apply to debt securities, such as corporate bonds or U.S. Treasury securities.

Question 18

A registered representative leaves their firm, and their registration is terminated. While seeking a new position, they refer a former client to another registered representative at a different firm. The new firm may pay the now-unregistered individual a referral fee:

  1. under no circumstances.
  2. if the fee is a flat dollar amount and not tied to any transactions.
  3. if the fee arrangement was part of a contract entered into while the individual was registered. (correct answer)
  4. as long as the fee is less than $100.
Explanation: Generally, unregistered individuals cannot receive compensation for referrals that lead to securities business. A specific exception exists for payments made under a contract to a former representative after they retire or leave the industry, provided the contract was entered into while they were properly registered.

Question 19

A registered representative has discretionary authority over a client's account. Without the client's knowledge, the representative moves $5,000 from the client's securities account to the representative's personal bank account. This is an example of:

  1. conversion. (correct answer)
  2. layering.
  3. churning.
  4. freeriding.
Explanation: Conversion is the illegal act of taking possession of a client's assets for one's own personal use. It is a form of theft. Churning is excessive trading, freeriding is paying for a purchase with the proceeds of its sale, and layering is a stage of money laundering.

Question 20

A representative receives a written complaint from a customer. Fearing it will reflect poorly on their record, the representative intentionally withholds the complaint from their supervising principal. This action is a violation because it:

  1. constitutes insider trading.
  2. interferes with the firm's obligation to supervise its employees and handle complaints. (correct answer)
  3. violates the customer's privacy under Regulation S-P.
  4. is a form of market manipulation known as backing away.
Explanation: Broker-dealers are required to have supervisory procedures in place to handle all written customer complaints. Intentionally hiding or withholding a complaint from a supervisor prevents the firm from fulfilling its regulatory obligations and is a serious violation of FINRA rules.