Account Types Practice Questions for the SIE

Answer: A traditional IRA for a self-employed graphic designer

Tax-advantaged retirement accounts such as IRAs — along with UTMA/UGMA custodial accounts — must be opened as cash accounts: every purchase is paid for in full, and margin borrowing, short selling, and uncovered options are not permitted. The reason is tax law, not just firm policy. Pledging IRA assets as collateral for a margin loan is a prohibited transaction, and the IRS treats the account as ceasing to be an IRA as of the first day of that year and as having distributed everything in it — a tax disaster the cash-account requirement exists to prevent. A trust account may trade on margin when the trust document expressly grants that power, and a joint account may be opened as either cash or margin, so neither is forced into a cash account. The short seller is the reverse case: Regulation T lets a cash account sell only securities the customer already owns, and any transaction not authorized for another account is recorded in the margin account — so a short sale, which involves borrowed shares, must be done in a margin account and cannot be a cash-account trade at all.

The Trap: Believing margin is permitted in retirement/custodial accounts (or that short sales can occur in a cash account)

• A joint account with rights of survivorship for two sisters: Misconception that multiple-owner registrations face account-type restrictions. A joint account may be opened as either a cash or a margin account.
• An individual account for a customer who intends to sell stock short: Reversal trap: short sales are not permitted in a cash account and must be executed in a margin account — this is the one choice that CANNOT be a cash account.
• A trust account whose trust document expressly authorizes margin trading: Misconception that trust accounts can never use margin. A trust MAY trade on margin when the trust document expressly grants the trustee that power, so this account is not required to be a cash account.

Verified against: misconception 'margin in an IRA or UTMA'. Primary-source verified: 12 CFR 220.8(a)(2) (cash account may sell only securities the customer owns), 12 CFR 220.4(a)(1) (all other transactions recorded in the margin account), 12 CFR 220.12(c) (short sale = 150% margin requirement) via eCFR; IRS Pub. 590-A / 590-B (pledging IRA assets as security for a loan is a prohibited transaction; account stops being an IRA and is treated as fully distributed).

Answer: The Federal Reserve Board

Under Section 7 of the Securities Exchange Act of 1934, Congress gave the Federal Reserve Board authority over the extension of credit for securities purchases. The Fed exercises that authority through Regulation T, which sets the initial margin requirement at 50% of the purchase price for equity securities — so the Fed is the answer. FINRA is the tempting wrong answer: FINRA's Rule 4210 does layer on its own requirements (maintenance levels, a $2,000 minimum equity floor, margin requirements for securities Reg T does not cover such as corporate bonds, and conduct rules like the margin risk disclosure), but it incorporates Reg T as its baseline rather than setting the 50% figure. The SEC administers and enforces the securities laws and approves FINRA's rules, but it sets no margin percentage. Exchanges and individual firms may impose stricter 'house' requirements on top of Reg T; they cannot set Reg T itself. Regulator map: Fed = Reg T initial credit (50% on equities); FINRA = maintenance, minimum equity, and conduct; SEC = enforcement and rule approval.

The Trap: Attributing Regulation T's initial margin requirement to FINRA or the SEC instead of the Federal Reserve Board

• The exchange on which the security is listed: Exchange-rules trap: exchanges and individual firms may impose stricter 'house' requirements on top of Reg T, but Regulation T itself is a Federal Reserve Board rule — they cannot set it.
• FINRA: Regulator-mapping trap: FINRA's Rule 4210 sets maintenance levels, the $2,000 minimum equity floor, requirements for securities Reg T does not cover, and conduct/disclosure rules — and it incorporates Reg T as its baseline. But FINRA does not set the Reg T 50% initial requirement on equities.
• The Securities and Exchange Commission (SEC): Regulator-mapping trap: the SEC administers and enforces the securities laws and approves FINRA's rules, but the Exchange Act assigns margin-credit authority to the Federal Reserve Board, not to the SEC. The SEC sets no margin percentage.

Verified against: FINRA sets maintenance/conduct rules'; Rule 4210 adds maintenance and non-equity initial requirements).

Answer: Delivery versus payment (DVP)

Delivery versus payment (DVP) — also called a collect-on-delivery or cash-on-delivery (COD) arrangement — is the classic institutional settlement method on the BUY side: the customer (often a pension fund, bank trust department, or other institution) pays only when the purchased securities are delivered to its designated custodian bank. FINRA defines a COD/DVP order as 'a purchase by the customer where the agent is to receive the securities against payment for the purchase.' Watch the naming, because it is counterintuitive and this is exactly where the question bites. The DVP/RVP labels are written from the delivering broker-dealer's perspective, not the custodian's. Your custodian is *receiving* the shares, yet the arrangement is still called *delivery* versus payment. Reasoning 'my bank receives the securities, so it must be receive-versus-payment' is precisely how candidates land on RVP. Receive versus payment (RVP), also called payment on delivery (POD), is the sell-side mirror image — the customer's agent delivers the securities out and receives the sale proceeds. Anchor it as: DVP for buys, RVP for sells. Two related traps. No margin credit is involved in either direction — the institution pays in full at settlement, so paying at delivery is not an extension of credit. And designating a bank as the settlement agent does not, by itself, give that bank any authority to trade the account: that is a settlement instruction, not a trading authorization. (A bank can separately be granted trading or discretionary authority under other arrangements — but nothing in a DVP arrangement does so.)

The Trap: Flipping DVP (buy side) and RVP (sell side) — reinforced by the custodian 'receiving' the shares on a purchase

• An account with third-party trading authorization: Confuses the custodian bank's settlement role with trading authority. Naming a bank as the settlement and safekeeping agent tells the broker-dealer where securities and money change hands; it is not a grant of authority to enter orders. Nothing in a DVP arrangement gives the custodian trading discretion.
• A margin arrangement: Misconception that paying at delivery involves an extension of credit. No credit is extended in a DVP arrangement — the institution pays in full at settlement, against delivery. Settling later than trade date is the normal settlement cycle, not a margin loan.
• Receive versus payment (RVP): Direction-flip trap. RVP — also called payment on delivery (POD) — is the mirror-image arrangement for SALES: the customer's agent delivers the securities out and receives the sale proceeds. RVP tempts here because the custodian is 'receiving' the shares, but the DVP/RVP labels are written from the delivering broker-dealer's side, not the custodian's. This scenario is a purchase, so it is DVP.

Verified against: FINRA Regulatory Notice 24-04 n.5 (COD/DVP = purchase by the customer

Answer: The loan consent agreement

The margin account paperwork has two mandatory agreements and one optional one. The credit agreement (spelling out the loan terms and how interest is charged on the debit balance) and the hypothecation agreement (pledging the customer's securities as collateral for the loan) are both required — a firm will not extend margin credit without the first, and cannot pledge the customer's securities to fund the loan without the second. The loan consent agreement is the optional piece: it merely allows the firm to lend the customer's securities out to other investors, such as short sellers, and the customer may refuse it and still open the account. The margin risk disclosure statement is not optional either, but note what makes it different: it is a disclosure the FIRM must deliver — prior to or at the time of opening, and at least annually thereafter under FINRA Rule 2264 for retail (non-institutional) customers — rather than a term the customer signs or negotiates. The line worth remembering: of the three agreements a margin customer signs, loan consent is the only one that can be declined.

The Trap: Treating loan consent as mandatory (or credit/hypothecation as optional); also mistaking the firm-delivered margin risk disclosure for something the customer can decline

• The credit agreement: Misconception that the interest-terms document is negotiable or optional. The credit agreement — which discloses the terms of the loan and how interest is charged on the debit balance — is required; a firm will not extend margin credit without it.
• The margin risk disclosure statement: Misconception that risk disclosures are mere formalities the customer can skip. FINRA Rule 2264 requires the firm to furnish this disclosure to a retail (non-institutional) customer prior to or at the time of opening the account, and at least once a calendar year thereafter.
• The hypothecation agreement: Misconception that pledging one's securities is an elective feature. The hypothecation agreement, which pledges the customer's securities as collateral for the margin loan, is required — the firm cannot pledge the securities to fund the loan without the customer's consent, so no firm will open the account without it.

Verified against: misconception 'loan consent as mandatory'. Verified 2026-07-17: FINRA Rule 2264 (finra.org) — margin disclosure statement to non-institutional customers prior to or at time of opening + not less than once a calendar year; institutional accounts (Rule 4512(c)) exempt per 2264(d). SEC Rule 15c3-3(b)(3) — separate written agreement required to borrow customer fully paid/excess margin securities (loan consent is elective).

Answer: At or before the opening of the account, and annually thereafter

FINRA Rule 2264 requires firms to deliver a margin disclosure statement — covering risks such as losing more than the amount deposited, the firm's ability to sell securities without notice to meet a call, and the fact that customers are not entitled to choose which securities are liquidated — at or before the opening of a margin account AND annually thereafter. Delivery only at opening misses the annual requirement; tying delivery to a maintenance call confuses a scheduled disclosure with an event-driven one. The 15-day answer borrows the deadline from a different account type entirely: it is the window for returning the signed options agreement after an options account is approved, and it has nothing to do with margin disclosure.

The Trap: Treating the margin risk disclosure as a one-time (opening-only) requirement

• Within 15 calendar days after the margin account is approved: Timing swap with the options account rules: the 15-day window applies to the customer's signed OPTIONS agreement, not to margin disclosure, which is due at or before opening.
• Only when the customer receives a maintenance (margin) call: Event-driven trap: the disclosure is a scheduled requirement (opening plus annually), not something triggered by a margin call.
• Only once, at the time the margin account is opened: One-time-disclosure trap: delivery at opening alone is not enough — the disclosure must also be provided annually.

Verified against: FINRA Rule 2264 (Margin Disclosure Statement)

Answer: 300 shares of an NYSE-listed industrial company

Regulation T defines which securities are 'margin securities,' and exchange-listed stock is squarely inside that definition — so the NYSE-listed industrial can be bought on margin, with the customer depositing the initial requirement (currently 50%). The other three are classic nonmarginable purchases, each for a different reason. A new issue: a firm that helped distribute the offering is barred from extending credit on it for 30 days after the distribution, so the customer pays in full. An open-end mutual fund: fund shares are sold continuously, and the firm selling them is part of that ongoing distribution, so it cannot extend credit at the point of purchase — but once the customer has owned the shares more than 30 days, they may be pledged as collateral in the margin account. An unlisted OTC stock: it is neither exchange-listed nor Nasdaq-listed, so it is simply not a margin security, has no loan value, and must be paid for in full. The distinction worth carrying into the exam is 'cannot BUY on margin' versus 'cannot ever COLLATERALIZE' — the mutual fund answer turns entirely on that difference, since the same shares that are off-limits today can back a margin loan a month from now.

The Trap: Believing new issues and mutual funds can be purchased on margin

• $10,000 of an open-end mutual fund: Mutual-fund trap: fund shares are continuously distributed, and the firm selling them participates in that distribution, so it may not extend credit on them at purchase. Shares the customer has owned more than 30 days may later serve as collateral.
• 2,000 shares of a low-priced domestic stock quoted only in the over-the-counter market, with no exchange or Nasdaq listing: OTC trap: an unlisted OTC equity is not a margin security under Regulation T, so it has no loan value and must be paid for in full.
• 500 shares of a new issue that the firm helped distribute as a member of the underwriting syndicate, which began trading two weeks ago: New-issue trap: a firm that participated in the distribution may not extend credit on that new issue for 30 days after the distribution, so this two-week-old issue must be paid for in full.

Verified against: Securities Exchange Act Sec. 11(d)(1) (30-day credit bar on distribution participants); SEC Rule 11d1-2, 17 CFR 240.11d1-2 (investment company shares owned >30 days exempt, may serve as collateral). NOTE: spec line 260's 'unless on the Fed's list' is stale — the Board's List of Marginable OTC Stocks expired January 1, 1999 and the OTC margin stock definition was removed from Reg T (63 FR, Oct. 27, 1998).

Answer: At or before the time the account is approved for options trading

The options account sequence under FINRA Rule 2360 runs in this order: (1) the firm delivers the options disclosure document (ODD) — 'Characteristics and Risks of Standardized Options' — at or before the time the account is approved for options trading; (2) a registered options principal approves the account; (3) trading may then begin; and (4) within 15 days after approval, the firm must obtain the customer's signed options agreement. Choice A swaps that 15-day agreement deadline onto the ODD — the most commonly confused pair in this topic. Watch two details there: the 15-day clock is a duty on the firm (to obtain the agreement), not on the customer, and it starts only at approval, by which time the ODD was already required. Choice B fails because a firm may not accept an options order until the account is approved, so 'by the first trade' would let the ODD arrive later than the rule permits. Choice C is wrong because the ODD covers the risks of every options strategy and goes to every customer approved for options, not just uncovered writers.

The Trap: Swapping the ODD delivery deadline (at/before approval) with the 15-day options agreement deadline

• At or before execution of the customer's first options trade: Sequencing trap. A firm may not accept an options order until the account has already been approved, and the ODD must be furnished at or before that approval. 'By the first trade' is therefore a later deadline than Rule 2360 allows — a firm that waited until execution would already have violated the rule at approval.
• Within 15 days after the account is approved for options trading: Classic timing swap. Two different duties carry a 15-day clock that starts at approval: the firm must send the customer's background and financial information for verification, and the firm must obtain the customer's signed options agreement. Neither is the ODD, which is due earlier — at or before approval.
• Only if the customer will be writing uncovered options: Misconception that the ODD applies only to high-risk strategies. The ODD describes the risks of all options strategies, and every customer approved for options trading must receive it regardless of approval level.

Verified against: Rule 2360(b)(16)(B) (no order accepted, and no account approved, unless the ODD has been furnished and the account approved); Rule 2360(b)(16)(C) (background/financial info sent for verification within 15 days of approval); Rule 2360(b)(16)(D) (member shall obtain customer's written agreement within 15 days after approval). Verified 2026-07-17 against finra.org rule text; no pending amendments found to these subsections.

Answer: Reverse churning

Fee-based (wrap) accounts generally make sense for investors who trade often enough that a single asset-based fee replaces what would otherwise be many commissions, or who want ongoing advice, monitoring, and rebalancing. Commission accounts generally suit buy-and-hold investors who trade rarely and need little servicing. Recommending a 1.5% annual wrap fee to a customer who places only two or three orders a year means she pays that fee every year for activity that would have cost only a few commissions — the classic reverse churning red flag. The SEC applies the term to infrequently traded wrap fee accounts that keep generating fees the account activity does not justify. Under Regulation Best Interest, a recommendation of an account type must be in the retail customer's best interest, and cost must always be considered. Cost is not the only factor, however: a wrap account is not automatically improper if it delivers monitoring or advisory services the customer actually needs and uses. That is why these facts raise a concern to be justified rather than an automatic violation — and on this profile, the burden of justification is heavy. Churning is the mirror-image abuse (excessive trading in a commission account to generate commissions), and freeriding is a cash-account payment violation — neither fits these facts. The 'always more economical' answer is exactly the sales pitch that reverse churning hides behind.

The Trap: Assuming fee-based accounts are always better/cheaper, or reversing churning and reverse churning

• Churning: Term-reversal trap: churning is EXCESSIVE trading in a commission account to generate commissions — the mirror-image fact pattern. Two or three orders a year is the opposite of excessive trading.
• Freeriding: Term-confusion trap: freeriding is buying securities in a cash account and selling them before paying, then covering the purchase with the sale proceeds — a Regulation T payment violation (90-day freeze) unrelated to account-type fees.
• Nothing improper, because a fee-based account is always more economical than paying commissions per trade: The documented 'fee-based is always cheaper/better' misconception. For a buy-and-hold investor placing two or three orders a year, an annual asset-based fee typically costs far more than the occasional commissions it replaces — the word 'always' is what makes this wrong.

Verified against: misconception 'fee-based always cheaper/better'; reverse churning. Verified against SEC Staff Bulletin: Standards of Conduct — Conflicts of Interest ('reverse churning' = infrequently traded wrap fee accounts) and SEC Staff Bulletin: Account Recommendations for Retail Investors (Reg BI applies to account-type recommendations; cost must always be considered but is not dispositive).

Answer: "Take $15,000 of my cash balance and buy whichever pharmaceutical stock you think is best."

Use the three A's: an order is discretionary when the representative selects the Asset, the Action (buy or sell), or the Amount. "Buy whichever pharmaceutical stock you think is best" leaves the ASSET to the representative, so under FINRA Rule 3260 the representative may not act on it without the customer's prior written trading authorization naming that individual, plus acceptance of the account by the firm as evidenced in writing by a designated principal. Once discretionary trading begins, each discretionary order must be marked as discretionary and approved promptly in writing by the principal, and the discretionary account itself must be reviewed at frequent intervals to detect and prevent trading that is excessive in size or frequency. The other three instructions specify all three A's. The rule expressly excepts discretion as to the price at which, or the time when, an order for a definite amount of a specified security is executed — that covers options A and C, which need no written authorization; note that such time/price authority is in effect only until the end of the business day on which the customer granted it, unless the customer provides a specific written instruction to the contrary, signed and dated. Option D involves no latitude whatsoever: a limit price set by the customer is an order condition the customer chose, not discretion. Watch the two elements option B is missing that the exception would require — it names neither a specific security nor a definite number of shares.

The Trap: Believing time/price latitude requires written discretionary authorization (missing that only Asset/Action/Amount = discretion)

• "Buy 100 shares of DEF at $42 or less, good for today.": A price condition is easily mistaken for price discretion, but this is simply a customer-directed day limit order. The customer specified the action, the asset, the amount, and the price — the representative exercises no latitude at all.
• "Buy 300 shares of XYZ for me today whenever the price looks attractive to you.": A common misconception is that time/price latitude requires written authorization. It does not. Asset, action, and amount are all customer-specified here, so choosing only the time and/or price of execution is not discretion — though that latitude lasts only until the end of the business day on which the customer gave it, unless the customer signs and dates a written instruction to the contrary.
• "Sell my 200 shares of ABC at the market before today's close.": Timing latitude within the day looks like discretion, but it isn't. The customer chose the action (sell), the asset (ABC), and the amount (200 shares); the representative decides only WHEN to execute today. Choosing only the time of execution on an order for a definite amount of a specified security is expressly excepted from the written-authorization requirement.

Verified against: FINRA Rule 3260 (Discretionary Accounts), paragraphs (b), (c), and (d)(1) — finra.org rulebook; SIE content outline, Section 3 (Trading, Customer Accounts and Prohibited Activities)

Answer: Contact the customer and obtain new instructions before entering any order

When a customer specifies the security, the action, and the amount and leaves only the time and/or price to the representative, no written authorization is needed — but under FINRA Rule 3260 that authority lasts only until the end of the business day on which the customer gave it, unless the customer signs and dates a specific written instruction to the contrary. Here the customer said "today" and nothing is on file, so Monday's instruction died at Monday's close. Entering the order Tuesday — however attractive the price — would mean choosing the day of a trade the customer never authorized, which is exercising discretion without the prior written authorization Rule 3260 requires: unauthorized trading. The correct step is simply to call the customer for fresh instructions. A principal's approval cannot substitute for the customer's authorization (the principal's role is to accept the discretionary account in writing and to promptly approve and review discretionary orders), and discretionary authorization can never be applied retroactively — the 15-day window belongs to the signed options agreement under FINRA Rule 2360, not to discretionary trading.

The Trap: Believing a time/price instruction carries over to later days (good-until-executed) instead of expiring at the end of the business day on which it was given

• Enter the order Tuesday and have the customer sign a written trading authorization within 15 days: Retroactive-authorization trap, borrowing the 15-day window from the options agreement rules (FINRA Rule 2360). Written discretionary authorization must exist BEFORE any discretionary trade, never after the fact.
• Enter the order Tuesday after obtaining a principal's approval of the order: Misconception that principal approval can substitute for customer authorization. A principal accepts the discretionary account in writing and promptly approves and reviews discretionary orders — but cannot revive an expired customer instruction or replace the customer's own written authorization.
• Enter the order Tuesday morning; because the customer left only time and price to the representative, the instruction remains in force until it is executed: Misconception that a time/price (not-held) instruction works like a GTC order. Under FINRA Rule 3260 the authority lasts only until the end of the business day on which the customer gave it — absent a specific written instruction signed and dated by the customer, and none exists here. Monday's instruction expired at Monday's close.

Verified against: discretionary trades require prior written authorization + principal acceptance; FINRA Rule 3260 (Discretionary Accounts), incl. 3260(d)(1) time/price end-of-business-day limit; FINRA Rule 2360(b)(16)(B) (15-day options agreement)