SIE Securities Industry Essentials Exam (SIE) Questions and Answers

Under Federal Reserve Regulation T, customers must deposit at least 50% of the purchase price for margin trades. However, the minimum deposit requirement is $2,000, regardless of the 50% rule, if the account is below this threshold.

50% of $3,000 = $1,500.

Since $1,500 is less than the $2,000 minimum, the customer must deposit the full $2,000.

B is correct because $2,000 is the required minimum deposit.

A is incorrect because the $1,500 calculation does not meet the minimum.

C and D are incorrect because they exceed the minimum deposit requirement.

The Securities Investor Protection Corporation (SIPC) protects customers if a broker-dealer fails due to insolvency. Coverage applies to cash and securities in customer accounts, up to $500,000 total, including $250,000 for cash.

A is correct because SIPC’s purpose is to protect against losses arising from a broker-dealer’s insolvency.

B is incorrect because SIPC does not guarantee investment performance.

C is incorrect because SIPC does not cover market losses.

D is incorrect because futures contracts are not covered under SIPC.

Step by Step Explanation:

FINRA Rule 2210: Firms are prohibited from suggesting or implying FINRA's endorsement or approval in any advertising materials.

Approvals: Even if a principal or FINRA approves the content, such a statement remains impermissible.

Key Point: FINRA's role is to regulate, not to endorse firms or their marketing.

The sales load is calculated as a percentage of the POP, using the formula:

Sales load = (POP − NAV) ÷ POP × 100

POP = $15.50, NAV = $14.35.

Sales load = ($15.50 − $14.35) ÷ $15.50 × 100 = 8.50%.

C is correct because the calculation results in an 8.50% load.

A, B, and D are incorrect due to incorrect calculations.

Step by Step Explanation:

FINRA Rule 3240: Permits borrowing or lending arrangements between RRs and customers under specific conditions, including familial relationships, provided the arrangement complies with the firm’s policies.

Incorrect Options:

A: FINRA approval is not required; firm approval is.

B: A written agreement alone is insufficient without firm approval.

C: Commercially reasonable terms are not the sole criterion for permissibility.

FINRA Rule 5130 restricts participation in IPOs for certain individuals (e.g., restricted persons) to prevent potential conflicts of interest. Restricted persons include employees of broker-dealers and their immediate family members.

C is correct because the president of a local bank is not considered a restricted person under FINRA Rule 5130.

A is incorrect because employees (registered or not) of broker-dealers are restricted.

B is incorrect because immediate family members of broker-dealer employees are restricted, even if unemployed.

D is incorrect because the immediate family of a registered representative is restricted.

Step by Step Explanation:

529 Savings Plans: These plans allow tax-advantaged savings for education expenses. They can be used for both undergraduate and graduate studies, as well as certain K-12 expenses.

Contribution Limits: Contributions are subject to gift tax limits but have no specific statutory maximum under federal law.

Tax Treatment: Earnings grow tax-deferred and are tax-free if used for qualified education expenses.

Step by Step Explanation:

Escalation Requirement: The RR must promptly notify their supervisor or compliance department about the customer’s complaint as required by FINRA rules. Supervisors handle customer complaints according to firm procedures.

Incorrect Options:

B: Reimbursing the customer is not permissible without firm approval and may create compliance issues.

C: Complaints requiring Form U4 updates involve specific allegations such as fraud, not general dissatisfaction.

D: The RR should not contact FINRA directly; the firm will handle communications.

Step by Step Explanation:

Regulation D (Rule 506(b)): Allows offerings to an unlimited number of accredited investors and up to 35 non-accredited investors, provided certain disclosure requirements are met.

Incorrect Options:

A: Refers to Regulation S, which governs offshore offerings, not domestic exemptions.

B: There is no 40-investor limit in Regulation D.

C: The $5 million limit applies to Rule 504, not Rule 506(b).

Step by Step Explanation:

Liquidity Risk: Refers to the difficulty of selling a security quickly without significantly affecting its price. This is common in thinly traded securities or complex instruments.

Other Risks:

Credit Risk: Relates to the possibility of default by the issuer.

Market Risk: Pertains to overall price changes due to market conditions.

Prepayment Risk: Associated with mortgage-backed securities and early repayment of loans.

Step by Step Explanation:

ETF Expense Ratios: ETFs generally have lower expense ratios compared to mutual funds due to their passive management style.

Incorrect Options:

A: ETFs do not have sales loads; they are traded like stocks.

B: ETFs can be purchased on margin, like other equities.

C: ETFs are traded throughout the day at market prices, not NAV.

Mutual funds are traded based on forward pricing. Orders received after the market closes are executed at the NAV calculated at the next market close.

A is correct because it aligns with forward pricing rules.

B, C, and D are incorrect as they do not follow mutual fund trade practices.

Step by Step Explanation:

Call Option Writer: When writing (selling) a call option, the writer has the obligation to sell the underlying stock at the strike price if the buyer exercises the option.

Incorrect Options:

A & B: Only the option buyer has rights, not the writer.

D: Obligations to buy stock apply to put option writers, not call option writers.

The primary market deals with the issuance of new securities, which is regulated under the Securities Act of 1933. This act requires issuers to provide full disclosure of material information to investors to ensure transparency and fairness in new offerings.

A is correct because the Securities Act of 1933 governs initial offerings.

B is incorrect because the Securities Exchange Act of 1934 regulates secondary market trading.

C is incorrect because the Investment Advisers Act of 1940 pertains to investment advisers.

D is incorrect because the Investment Company Act of 1940 governs mutual funds and other investment companies.

Money market mutual funds invest in highly liquid, short-term debt instruments, such as Treasury bills, commercial paper, and certificates of deposit. While the funds aim to maintain a stable $1 NAV, this is not guaranteed.

C is correct because the fund’s investments are short term.

A is incorrect because the rate of return is not fixed; it varies with market interest rates.

B is incorrect because while the fund tries to maintain a $1 NAV, it is not guaranteed.

D is incorrect because yields do not always exceed those of savings accounts.

Step by Step Explanation:

DVP Process: Ensures that payment occurs simultaneously with the delivery of securities, mitigating counterparty risk. Cash payment is made before or at the time of delivery.

Incorrect Options:

A: The T+5 timeline is not standard for DVP.

C: Payment must occur at delivery, not after.

D: Settlement date agreements with the issuer are irrelevant for DVP.

Step by Step Explanation:

Settlement of the Transaction: Refers to the finalization of a trade, where the buyer pays for the securities, and the seller delivers them. For most securities, regular-way settlement occurs T+2 (trade date plus two business days).

Incorrect Options:

Clearing the Trade: Refers to matching trade details to prepare for settlement.

DVP Transactions: A specific type of settlement involving simultaneous payment and delivery, often used for institutional clients.

Corporate Action: Refers to events like stock splits or dividend declarations.

A statutory disqualification occurs if an RR has been convicted of certain crimes, violated securities laws, or been barred by a regulatory authority. Under FINRA rules, the RR cannot associate with a member firm in any capacity unless they obtain a waiver from FINRA.

B is correct because the disqualified person must obtain a waiver to continue employment.

A and C are incorrect because the RR is not allowed to associate with the firm in any capacity without a waiver.

D is incorrect because statutory disqualification directly affects the RR’s employment status.

Step by Step Explanation:

Cost Basis in Reverse Split: The total cost basis remains unchanged in a reverse stock split. Only the number of shares and price per share adjust.

Pre-Split: 1,000 shares at $5 each = $5,000.

Post-Split: 200 shares at $25 each = $5,000.

Incorrect Options:

A, B, and D: Do not reflect the unchanged total cost basis.

The cost basis of a stock represents the purchase price and does not include dividends received. Taxes paid on dividends also do not affect the cost basis.

Original purchase price per share = $20.00.

Dividends and taxes on dividends do not adjust the stock’s cost basis.

A is correct because the cost basis remains $20.00.

B, C, and D incorrectly assume that dividends or taxes change the cost basis.

Step by Step Explanation:

PIPE Offerings: Typically priced below the current market value to incentivize institutional investors to participate in these transactions.

Discount: The discounted price compensates for the potential illiquidity and risk associated with PIPE offerings.

POP/Market Value: These do not apply to private offerings structured as PIPE transactions.

When a firm acts in a principal capacity, it trades securities for its own account, buying or selling directly to or from its inventory. The firm’s role differs from an agency capacity, where it acts as an intermediary.

A is correct because principal capacity involves selling directly from the firm's inventory.

B, C, and D are incorrect because these scenarios describe agency transactions, where the firm facilitates trades between two parties.

FINRA’s Continuing Education (CE) requirements include the Regulatory Element, which must be completed:

Within 120 days of the second anniversary of a registered representative’s initial registration.

Every three years thereafter (changed to every two years as of 2023).

C is correct because registered persons must complete the CE Regulatory Element after their initial requirement and then every two years.

A and B are incorrect because CE is not required annually or semiannually.

D is incorrect because CE is not tied to customer complaints.

A stock dividend increases the number of shares owned without affecting the total cost basis. The new cost basis per share is calculated by dividing the original total investment by the new number of shares:

Original total investment = 100 shares × $50.00 = $5,000

After a 10% stock dividend, the investor owns 110 shares.

New cost basis = $5,000 ÷ 110 shares = $45.45 per share.

B is correct because it reflects the adjusted cost basis per share.

Step by Step Explanation:

FINRA Rule 3150: Permits firms to hold customer mail only with written instructions specifying the duration, which cannot exceed three months unless there are exceptional circumstances.

Incorrect Options:

A: Holding mail is not prohibited if done in compliance with FINRA rules.

C & D: Oral instructions or RR discretion are not sufficient; written authorization is mandatory.

Under the Insider Trading and Securities Fraud Enforcement Act of 1988, the SEC may impose a civil penalty of up to three times the profit gained or loss avoided (referred to as "treble damages") on individuals found guilty of insider trading.

B is correct because treble damages equal three times the profit or avoided loss.

A is incorrect because the penalty is not limited to one time the profit.

C and D are incorrect because the penalty is capped at three times, not six or ten times.

Restricted stock refers to securities acquired through private placements, such as those offered under Regulation D. These securities are not registered with the SEC and are subject to holding period restrictions before resale.

A is correct because Regulation D offerings involve private placements, resulting in restricted stock.

B is incorrect because IPOs involve publicly traded shares, not restricted stock.

C and D are incorrect because restricted stock is not obtained through warrants or exchange-traded options.

Step by Step Explanation:

Rebalancing: Ensures that a portfolio remains aligned with its target allocation. Without rebalancing, outperforming assets can become overweighted, increasing exposure to specific risks.

Incorrect Options:

Inflation: Impacts purchasing power but isn’t tied to rebalancing.

Marketability: Refers to liquidity and isn’t linked to allocation models.

Interest Rate Risk: Relates to fixed-income investments and isn’t directly addressed by allocation models.

Step by Step Explanation:

SEC Registration Statements: The SEC reviews registration statements for completeness and compliance but does not judge the merits, approve, or endorse the securities being offered.

Other Options:

A, B, and C: Misrepresent the SEC’s role in the registration process.

An unrealized gain occurs when the value of an asset increases but has not yet been sold. If the customer sells the stock, the unrealized gain becomes a realized gain.

B is correct because the increase in value without selling the stock is an unrealized gain.

A is incorrect because interest income refers to earnings from fixed-income securities.

C is incorrect because operating profit relates to a company’s earnings, not an investor’s portfolio.

D is incorrect because "out of the money" is a term used for options, not stocks.

Redeemable securities are those that can be sold back to the issuer.

D is correct because unit investment trusts (UITs) issue redeemable securities.

C is incorrect because closed-end fund shares are traded on secondary markets, not redeemable.

A and B do not meet the definition of redeemable securities.

Step by Step Explanation:

ADRs: Represent foreign securities but are issued in the U.S. and quoted in U.S. dollars, making them easier for American investors to trade.

Incorrect Options:

B: ADRs are quoted in U.S. dollars, not foreign currencies.

C & D: ADRs represent foreign securities held by U.S. banks, not foreign banks.

Step by Step Explanation:

Form U4 Reporting Requirements: Registered persons must disclose criminal charges (excluding minor traffic violations) and material changes such as residential address changes. Gambling-related misdemeanors are considered reportable.

Incorrect Options:

Speeding Ticket: Typically not reportable unless it involves a felony.

Business Telephone Number: Not material for Form U4.

Step by Step Explanation:

FINRA Rule 3220: This rule limits gifts to $100 per person annually to prevent conflicts of interest.

Aggregate Limit: There is no provision for exceeding the $100 annual limit, regardless of the number of gifts.

Purpose: The rule ensures that gifts do not influence decisions or create unethical relationships.

Step by Step Explanation:

Tenants in Common: In this arrangement, each tenant owns a fractional interest in the account's assets, which can be unequal depending on the agreement.

Income Distribution: Income is distributed based on ownership percentage, not necessarily equally.

Redemption Requests: Only the owner of the fractional interest has authority to request redemption for their portion.

Estate Taxation: Upon the death of a tenant, only their fractional interest is taxable in their estate.

Step by Step Explanation:

Temporary Hold Period: Under FINRA Rule 2165, a firm can initially place a hold on disbursements for up to 10 business days if financial exploitation is suspected.

Additional Holds: The period may be extended by an additional 10 business days if warranted and allowed by state law.

Incorrect Options:

A & B: These are shorter than the permissible period.

D: The initial hold period is capped at 10 business days.

A covered call involves selling a call option on a stock the investor already owns. The strategy generates income in the form of the premium collected for selling the call, providing additional returns on the stock position.

D is correct because the primary goal of a covered call is to generate income.

A is incorrect because covered calls do not hedge against large declines in the stock price.

B is incorrect because speculation involves taking higher risks, not a covered call’s conservative strategy.

C is incorrect because no strategy guarantees a profit.

Step by Step Explanation:

General Obligation (GO) Bonds: Backed by the full faith and credit of the issuing municipality, relying on its taxing power for repayment.

Revenue Bonds: Supported by revenues from a specific project or source.

Treasury Bonds: Issued by the federal government.

Corporate Bonds: Issued by corporations, not municipalities.

Step by Step Explanation:

Diversification: Spreads investments across multiple securities, industries, or asset classes to reduce exposure to a single security or sector.

Other Options:

Use of Leverage: Increases, not decreases, portfolio risk.

Dollar-Cost Averaging: Reduces timing risk but does not address concentration.

Dividend Reinvestment: Enhances returns but does not mitigate concentration risk.

Step by Step Explanation:

Discount Bonds: These are issued or traded below par value. Over time, their price moves closer to par as they approach maturity, assuming yields remain constant.

Other Options:

Par Value Changes: The par value of a bond does not change over time; only its price fluctuates.

Passive ETFs track an index and require minimal management, leading to lower expenses compared to actively managed ETFs.

D is correct because passive ETFs are cost-efficient and have lower fees.

A is incorrect because index ETFs have low turnover since they replicate an index.

B is incorrect because ETFs are priced continuously throughout the trading day.

C is incorrect as ETFs aim to match, not outperform, the index.

Each option contract represents 100 shares. A covered call involves selling a call option while holding an equivalent number of shares to deliver if the option is exercised.

The customer owns 1,000 shares.

Since 1 contract = 100 shares, the maximum number of contracts the customer can sell is:1,000 shares ÷ 100 shares/contract = 10 contracts.

B is correct because selling 10 contracts corresponds to 1,000 shares, fully covering the position.

Regulation S-P mandates that broker-dealers disclose how they collect, protect, and share customers’ nonpublic personal information. The privacy notice must include:

The categories of information collected.

The firm’s policies for safeguarding data.

Opt-out rights for sharing information with unaffiliated third parties.

D is correct because privacy notices must describe policies for protecting customer information.

A, B, and C are incorrect because they do not relate to the required elements of Regulation S-P privacy notices.

Variable annuity subaccounts are held in separate accounts, distinct from the insurance company’s general account. This separation protects subaccount assets from claims by creditors in case the insurance company becomes insolvent.

C is correct because the separate account ensures creditor protection.

A is incorrect as management fees for variable annuities are often higher.

B is incorrect because the subaccounts are not held at broker-dealers.

D is incorrect as subaccounts do not represent subordinated debt.

Step by Step Explanation:

Front Running Definition: Occurs when a broker executes a personal trade ahead of a customer’s order to profit from the anticipated market movement.

Thinly Traded Security: Front running is particularly impactful in low-liquidity securities.

Other Options:

Selling Away: Involves unapproved securities transactions outside the employing firm.

Insider Trading: Involves trading on material non-public information.

Market Manipulation: Encompasses activities like wash trading or spoofing, not specific to this scenario.

Step by Step Explanation:

Regular-Way Settlement: For equity securities, settlement occurs on a T+2 basis, meaning two business days after the trade date.

Calculation:

Trade Date (T): Thursday, August 2.

T+2 Settlement: Excludes weekends, so settlement falls on Monday, August 6.

Incorrect Options:

A: Reflects T+1, not the correct settlement cycle.

C & D: Extend beyond the standard T+2 cycle.