Prohibited Activities Practice Questions for the SIE

Answer: Freeriding; the account must be frozen for 90 days, during which any purchase requires cash in full up front

Buying securities in a cash account and paying for them with the proceeds of their own sale — instead of depositing funds — is freeriding, a violation of Federal Reserve Regulation T. The mandated consequence is a 90-day freeze: the account may still trade, but every purchase during the freeze requires full cash up front. Option A is the classic name trap — freeriding (a customer payment violation) is routinely confused with front running (a manipulation in which a firm or rep trades ahead of a known customer or block order). Option B presents the violation itself as a defense: under Reg T, sale proceeds cannot substitute for payment of the original purchase. Option D is a stale-materials trap — the pattern-day-trader $25,000 minimum-equity requirement was eliminated effective June 2026 in favor of an intraday margin approach, so any material teaching it as a current rule is out of date; it also never applied to cash-account payment violations. Source: Federal Reserve Regulation T; FINRA guidance on cash-account freeriding.

The Trap: freeriding-vs-front-running (name-similarity confusion; sale proceeds treated as valid payment)

• Front running; the firm must restrict the account and report the representative: Name-similarity trap: front running is a manipulation committed by a firm or rep trading ahead of a known customer or block order. It is not a customer payment violation and does not fit this fact pattern.
• No violation occurred, because the sale proceeds were more than sufficient to cover the purchase price: Proceeds-as-payment myth: this option describes the very essence of the violation as if it were a defense. Regulation T requires the purchase to be paid for with funds, not with the proceeds of selling the unpaid-for security.
• A pattern day trading violation, requiring the customer to deposit and maintain $25,000 in account equity: Stale-materials trap: the pattern-day-trader $25,000 minimum was eliminated effective June 2026 (replaced by an intraday-margin framework), and it never governed cash-account payment violations in any case.

Verified against: Federal Reserve Board Regulation T (freeriding — cash account payment violation and 90-day freeze)

Answer: Prohibited — a member or associated person may not guarantee a customer against loss in the customer's account

Guaranteeing a customer against loss is prohibited under FINRA Rule 2150(b), full stop. The reason is structural: the promise removes the customer's real economic risk on paper while the representative almost certainly lacks the capital to honor it, so it distorts suitability and misleads the customer about the investment. Note the contrast that generates every wrong answer here. FINRA Rule 2150(c) permits an associated person to SHARE in a customer's account, but only with prior written authorization from both the customer and the member firm, and only in direct proportion to the associated person's financial contribution — with immediate-family accounts exempt from the proportionality piece. Those conditions are what make choices B, C, and D sound plausible: each borrows a real condition from the sharing rule and misapplies it to the guarantee ban. Keep the two straight: sharing is conditionally allowed; guaranteeing against loss is not.

The Trap: Believing a guarantee against loss can be cured by written consent, family status, or proportionality (importing the sharing rule's conditions)

• Permitted, provided the reimbursement is proportionate to the representative's own financial contribution to the account: Imports the sharing rule's direct-proportionality condition onto a guarantee — the classic cross-contamination of two adjacent parts of the same rule.
• Permitted, provided the representative obtains prior written authorization from both the customer and the firm: Targets the documented guarantee-vs-sharing confusion: students import the sharing rule's dual written-authorization condition into the guarantee prohibition, which has no such cure.
• Permitted, provided the customer is an immediate family member of the representative: Targets the same confusion pair from the other side: the immediate-family exception belongs to the sharing rule's proportionality requirement, not to the guarantee ban.

Verified against: SIE 3.3.1 · FINRA Rule 2150(b) (prohibition against guarantees); contrast Rule 2150(c) (sharing in accounts)

Answer: Prior written authorization from both the customer and the member firm, with the representative sharing only in direct proportion to their financial contribution to the account

FINRA Rule 2150(c)(1) sets three conditions that generally must all be met before an associated person may share in the profits or losses of a customer's account: (1) prior written authorization from the member firm employing the associated person, (2) prior written authorization from the customer, and (3) sharing only in direct proportion to the financial contributions the associated person made to the account. (One narrow exception, Rule 2150(c)(2), waives only the proportionality condition when the account belongs to the associated person's immediate family — the two written authorizations still apply.) Because the stem describes an ordinary customer, all three conditions apply, so Choice A is correct. Choice B keeps the customer's consent but drops the firm's — the firm's authorization exists so a supervisor can evaluate the conflict of interest, and it is not optional. Choice C keeps both consents but drops proportionality for any account and in any amount; without it, a representative could contribute 5% of the capital and take 50% of the gains, which is exactly the abuse the rule targets. Choice D over-corrects: sharing is conditionally permitted, whereas guaranteeing a customer against loss under Rule 2150(b) is prohibited outright. Learning those two as a matched pair — one conditional, one absolute — resolves most questions in this area.

The Trap: Forgetting one of the three conditions (usually firm authorization or direct proportionality), or treating sharing as absolutely prohibited like a guarantee

• Prior written authorization from both the customer and the firm, after which the parties may agree to share profits and losses in any proportion they choose: Targets dropping the direct-proportionality condition — the most frequently forgotten of the three requirements. Proportionality is not optional for an ordinary customer account.
• Prior written authorization from the customer only, since the account belongs to the customer: Targets the common omission of the member-firm authorization — students remember the customer's consent because the account is the customer's, and drop the firm's supervisory consent.
• Nothing will suffice — sharing in a customer's account is prohibited under all circumstances: Targets the guarantee-vs-sharing confusion in reverse: students who correctly learn that guaranteeing against loss is absolutely banned over-generalize the absolute ban to sharing, which is conditionally permitted.

Verified against: SIE 3.3.1 · FINRA Rule 2150(c) (sharing in accounts); Rule 2150(b) (guarantees)

Answer: Permitted — accounts of immediate family members are exempt from the requirement that sharing be in direct proportion to financial contributions

FINRA Rule 2150(c)(1) normally requires three things before an associated person may share in a customer's account: prior written authorization from the firm, prior written authorization from the customer, and sharing in direct proportion to the associated person's financial contribution. Rule 2150(c)(2) then carves out one narrow exception: accounts of the associated person's IMMEDIATE FAMILY are exempt from the direct-proportionality limitation. Note precisely what that exception does and does not do. It relieves the 10%-contribution/50%-share mismatch, which is why the arrangement here is acceptable. It does NOT relieve the written-authorization requirements — which is why choice C reaches the right verdict but for the wrong reason: had the representative actually skipped the authorizations as C suggests, the arrangement would be a violation. Choice B misses the exception entirely; choice D confuses conditionally permitted sharing with the absolute prohibition on guaranteeing a customer against loss under Rule 2150(b). For this rule, 'immediate family' is defined broadly, covering parents, in-laws, spouse, children, and any relative to whose support the associated person contributes, directly or indirectly.

The Trap: Over-extending the immediate-family exception to the entire sharing rule rather than to the proportionality condition alone

• Prohibited — an associated person may not share in a customer's account under any circumstances: Targets the guarantee-vs-sharing confusion: applying the absolute ban that governs guaranteeing against loss to sharing, which is conditionally permitted.
• Prohibited — an associated person must share in direct proportion to their financial contribution in every customer account, without exception: Targets students who learn the three sharing conditions but never learn the immediate-family carve-out from proportionality.
• Permitted — and because her father is immediate family, neither his written authorization nor the firm's was required in the first place: Targets over-extension of the family exception: students assume 'immediate family' exempts the arrangement from the whole rule, when it exempts only the proportionality condition.

Verified against: SIE 3.3.1 · FINRA Rule 2150(c)(1)–(2) (sharing in accounts; immediate-family exemption from proportionality)

Answer: Conversion — the improper use of a customer's funds, prohibited regardless of the representative's intent to repay

FINRA Rule 2150(a) prohibits any member or associated person from making improper use of a customer's securities or funds. Taking a customer's money for one's own purposes is CONVERSION, and it is complete the moment the funds are taken — the intent to repay, an actual repayment, and the absence of any loss to the customer are all irrelevant to whether the rule was violated. This is one of the most severely sanctioned violations in the industry and routinely results in a bar. Distinguish it from COMMINGLING, which is mixing customer assets with the firm's own or another customer's assets rather than taking them. Choices B, C, and D each offer a different fictional cure — repayment, after-the-fact paperwork, and supervisory blessing. None exists. Also note what this is not: borrowing from a customer is governed separately by FINRA Rule 3240, and even a genuine, consensual loan would require the firm's written procedures to permit it and the arrangement to fall within a permitted category. Helping yourself to the account without the customer's knowledge is not borrowing at all.

The Trap: Believing intent to repay, later repayment, or after-the-fact consent cures conversion of customer funds

• Permitted, because it is effectively a short-term loan that will be repaid with the customer made whole: Targets the 'no harm, no foul' misconception — students treat restoration of the funds as curing the violation, when the taking itself is the violation.
• Permitted, provided the representative obtains the customer's written authorization after the fact: Targets the 'paperwork cures it' misconception, importing the sharing rule's written-authorization logic into a context where no authorization is contemplated.
• Permitted only if the representative discloses the withdrawal to their branch manager before replacing the funds: Targets the 'supervisory approval cures it' misconception — students assume the firm's notice-and-approval framework can bless conduct the rules prohibit outright.

Verified against: SIE 3.3.1 · FINRA Rule 2150(a) (improper use of customers' securities or funds)

Answer: Commingling is mixing customer assets with the firm's own assets or another customer's assets; conversion is taking customer assets for one's own use

FINRA Rule 2150(a) bars making improper use of a customer's securities or funds, and it captures two distinct behaviors that are easy to swap. COMMINGLING is improper MIXING — pooling fully paid customer securities with the firm's proprietary positions, or depositing customer funds into a firm or personal account rather than keeping them properly segregated. It matters because segregation is what makes customer property identifiable and protected if the firm fails. CONVERSION is improper TAKING — using a customer's money or securities for one's own benefit. An easy way to keep them straight: commingle = mingle = mix; convert = make it yours. Choice B simply reverses the two definitions. Choice C invents a consent cure that the rule does not provide; the customer's signature cannot authorize a firm to abandon segregation. Choice D applies a 'no harm, no foul' test that the rules reject — the violation is complete when the assets are mishandled, whether or not the customer ends up whole.

The Trap: Reversing the definitions of commingling (improper mixing) and conversion (improper taking)

• Both are permitted so long as the customer suffers no financial loss and the assets are restored: Targets the 'no harm, no foul' misconception — students treat absence of customer loss as the test, when the improper handling itself is the violation.
• Commingling is taking a customer's assets for one's own use; conversion is mixing a customer's assets with the firm's assets: Targets the direct definitional reversal — the two terms are learned together and students routinely swap them.
• Commingling is permitted if the customer gives written consent; conversion is prohibited in all cases: Targets the 'written consent cures it' misconception, importing the sharing rule's authorization logic into the improper-use prohibition.

Verified against: SIE 3.3.1 · FINRA Rule 2150(a) (improper use of customers' securities or funds)

Answer: Decline to sign, and instead arrange for the customer to sign the form herself through an acceptable method such as electronic signature

Signing a customer's name is forgery, and it falsifies a firm record. It violates FINRA Rule 2010's requirement that members and associated persons observe high standards of commercial honor and just and equitable principles of trade, and it corrupts the books and records the firm is required to keep accurately. The trap here is the belief that the customer's permission cures it. It does not — and this is precisely how the fact pattern usually appears in real disciplinary cases: a well-meaning representative signing 'as a favor' for a cooperative, fully consenting client, and being barred for it. The reason the consent is irrelevant is that the signature is a representation to the firm and to third parties that the customer personally executed the document; a verbal go-ahead cannot make that representation true. Choice C makes matters worse rather than better — the memo documents the falsification. Choice D fails for the same reason as B: no one else may sign in the customer's place. The correct action is procedural: get the customer's own signature by a method the firm accepts, such as electronic signature or a scanned or couriered original, and if the deadline is genuinely at risk, escalate to a supervisor for a legitimate solution.

The Trap: Believing a customer's verbal permission (or a memo to file, or supervisory sign-off) makes it acceptable to sign the customer's name

• Sign the customer's name and document the verbal authorization in a memo to the file: Incorrect. A memo recording the verbal authorization does not legitimize the signature — it instead creates a record showing the representative knowingly falsified the form. Documentation cannot cure a forged signature; it only evidences the violation.
• Sign the customer's name, since the customer gave express verbal permission to do so: Incorrect. The customer's verbal permission does not turn signing her name into a permissible favor. The signature is a representation that she personally executed the document, and her go-ahead over the phone cannot make that representation true. Signing it is forgery under FINRA Rule 2010.
• Ask the branch manager to sign on the customer's behalf, since a supervisor may act for a customer in an emergency: Incorrect. No one at the firm, at any level, may sign a customer's name for her. A branch manager signing in the customer's place commits the same forgery — supervisory rank does not create an exception.

Verified against: SIE 3.3.1 · FINRA Rule 2010 (standards of commercial honor); books-and-records accuracy requirements

Answer: Shares of an equity initial public offering at the public offering price

FINRA Rule 5130 — the new-issue rule — is built to stop industry insiders from taking allocations of hot IPOs that should go to public customers. Its scope is narrower than most students assume, and nearly every wrong answer in this area is a scope error. The rule reaches NEW ISSUES, meaning initial public offerings of EQUITY securities, purchased at the PUBLIC OFFERING PRICE. That means it does not reach new debt offerings (choice B), it does not reach purchases made in the secondary market after the issue starts trading (choice C), and it does not reach mutual fund shares, which are continuously offered rather than sold in an IPO (choice D). So a restricted person who wants exposure to a hot IPO is free to buy it in the open market on day one at whatever the market charges — what they cannot do is take an allocation at the offering price. A three-part filter handles most items: equity, initial public offering, offering price. If any one of those is missing, Rule 5130 is not your issue.

The Trap: Over-broadening the new-issue rule to debt offerings, secondary-market purchases, or mutual funds instead of equity IPOs at the offering price

• Shares of the issuer in the secondary market once the new issue begins trading: Targets the documented scope misconception that the restriction follows the stock into the aftermarket; the rule addresses the offering-price purchase, not later secondary-market trading.
• Any newly issued security, including newly issued corporate and municipal bonds: Targets the documented scope misconception that the rule reaches debt offerings; it applies to equity IPOs, not new debt issues.
• Shares of any mutual fund distributed by the person's own member firm: Targets the scope misconception that continuously offered investment company shares are new issues; they are outside the rule's definition.

Verified against: SIE 3.3.1 · FINRA Rule 5130 (restrictions on the purchase and sale of initial equity public offerings)

Answer: A registered representative employed by a FINRA member broker-dealer

FINRA Rule 5130 defines restricted persons as, broadly: member firms and their associated persons; certain immediate family members of those persons; portfolio managers buying for their own accounts; finders and fiduciaries of the managing underwriter; and owners of broker-dealers at the 10% level. A registered representative of a member firm sits squarely in the first and largest category, making choice A correct. Each distractor is a classic misread. Choice B reflects the belief that every relative is swept in — the family prong centers on immediate family, and reaches more attenuated relationships only where there is material support or a shared household, neither of which exists for an out-of-state cousin receiving no support. Choice C inverts the rule's purpose: public customers, including wealthy ones, are precisely the people new issues are supposed to reach; a big account does not make someone an insider. Choice D tests the ownership threshold — 10%, not 5%. Remember the rule's logic: it targets people positioned to divert hot new issues to themselves, not customers who happen to be rich or relatives who happen to be related.

The Trap: Assuming all relatives, or large/favored customers, are restricted persons; misremembering the broker-dealer ownership threshold as 5% rather than 10%

• An individual who owns a 5% equity interest in a FINRA member broker-dealer: Targets the ownership-threshold trap: the rule's owner prong reaches broker-dealer owners at the 10% level, and 5% falls below it.
• The adult cousin of a registered representative, who lives in another state and receives no financial support from the representative: Targets the documented 'all relatives are banned' misconception; the family prong reaches immediate family, and for more distant relationships turns on material support or a shared household.
• A retail customer with a $2 million account at the managing underwriter: Targets the misconception that large or favored customers are restricted; account size is irrelevant — public customers are exactly who the rule reserves new issues for.

Verified against: SIE 3.3.1 · FINRA Rule 5130 (restricted persons)

Answer: If the beneficial interests of restricted persons in the account do not exceed 10% of the account in the aggregate

Pooled vehicles — partnerships, hedge funds, investment clubs — routinely have a mix of restricted and non-restricted investors, and a rule that blocked the whole account whenever a single restricted person had any interest would punish the innocent majority. So FINRA Rule 5130 provides a DE MINIMIS exemption: the account may buy a new issue as long as restricted persons' beneficial interests do not exceed 10% of the account in the aggregate. Note the word aggregate — you total all restricted persons' interests, rather than testing each one individually. Choice B is the all-or-nothing instinct the exemption was written to defeat. Choice C swaps in a number from the neighboring rule: Rule 5131, which governs spinning, uses a 25% threshold in its own de minimis test for covered persons. The two rules travel together, so keep the numbers attached to the right one — 10% for the new-issue rule (5130), 25% in the spinning rule's exemption (5131). Choice D reaches for a consent cure; unlike the sharing rule, the new-issue rule offers no waiver mechanism, because its object is protecting the integrity of public allocations rather than protecting any individual who might consent.

The Trap: Treating any restricted-person interest as tainting the whole account, or substituting the spinning rule's 25% threshold for the new-issue rule's 10% de minimis

• If the beneficial interests of restricted persons in the account do not exceed 25% of the account in the aggregate: Targets confusion with the separate spinning rule (Rule 5131), whose own de minimis test uses a 25% threshold — an adjacent number that displaces the correct one.
• It may not participate at all — any beneficial interest held by a restricted person disqualifies the entire account: Targets the 'any interest taints the account' misconception, which ignores the de minimis exemption built for mixed accounts.
• If each restricted person signs a written waiver acknowledging the conflict and consenting to the allocation: Targets the 'written consent cures it' misconception carried over from the sharing rule; Rule 5130 has no consent-based cure.

Verified against: SIE 3.3.1 · FINRA Rule 5130 (de minimis exemption for accounts with restricted-person interests)