SIE Securities Industry Essentials Exam (SIE) Questions and Answers

Step by Step Explanation:

Penny Stocks: These are low-priced, highly speculative stocks often issued by small or distressed companies. They generally have low liquidity, meaning they can be difficult to buy or sell without significantly impacting the price.

Incorrect Options:

Dividends: Penny stocks rarely pay dividends, unlike blue-chip stocks.

Price Stability: Penny stocks are highly volatile compared to blue-chip stocks.

Capitalization: Blue-chip companies are far better capitalized.

References:

SEC Bulletin on Penny Stocks: SEC Penny Stocks.

"Regular way" settlement refers to the standard settlement cycle for securities transactions, which is T+2 for most stocks and bonds. This timeline is set by regulators to ensure orderly processing of trades.

D is correctbecause regular way settlement follows the preset T+2 cycle.

Ais incorrect because cash settlement occurs the same day as the trade.

Bis not a recognized term for settlement types.

Cis incorrect because next-day settlement applies only to specific securities (e.g., Treasury securities).

The Options Clearing Corporation (OCC) is responsible for issuing and guaranteeing the performance of listed options contracts, including Long-term Equity Anticipation Securities (LEAPS), which are long-term options.

D is correctbecause LEAPS are a type of listed options contract cleared by the OCC.

Ais incorrect because listed stocks are not options contracts.

Bis incorrect because over-the-counter bonds are not cleared by the OCC.

Cis incorrect because ETFs are not options, though ETF options may be cleared by the OCC.

FINRA Rule 2360 requires that customers receive theOptions Disclosure Document (ODD), published by the Options Clearing Corporation (OCC), before they are approved to trade options. The ODD explains the risks and characteristics of options trading.

D is correctbecause the ODD is mandatory for options account approval.

Ais incorrect because a prospectus is not specific to options trading.

Bis incorrect because the MSRB Investor Brochure applies to municipal securities.

Cis incorrect because a margin disclosure statement is required only for margin accounts.

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.

References:

SEC Investor Bulletin on Asset Allocation: SEC Asset Allocation.

Step by Step Explanation:

Summary Prospectus Content: Must include key information such as the fund’s investment objectives, risks, fees, and past performance. This helps investors make informed decisions.

Incorrect Options:

A: Projected returns are speculative and not included in the prospectus.

C & D: Detailed portfolio holdings and control persons are included in the full prospectus, not the summary.

References:

SEC Rule 498 (Summary Prospectuses): SEC Prospectus Requirements.

Open-end mutual funds do not trade on secondary markets. Instead, shares are continuously issued or redeemed by the fund at the net asset value (NAV), calculated at the market close.

D is correctbecause investors purchase and redeem shares directly through the fund or authorized brokers.

Ais incorrect because mutual funds do not have a predetermined dissolution date.

Bis incorrect because mutual fund shares are priced at the NAV calculated once daily after the market closes.

Cis incorrect because secondary market trading applies to closed-end funds and ETFs, not open-end mutual funds.

When an economy operates near full capacity, additional money in circulation leads to inflation, as demand exceeds the economy’s ability to increase supply.

B is correctbecause inflation is the primary impact when supply cannot keep up with excess demand.

Ais incorrect because output does not significantly increase when capacity is already maximized.

Cis incorrect because velocity measures the rate at which money circulates, not the impact of oversupply.

Dis incorrect as unemployment is already low when the economy is at full capacity.

Step by Step Explanation:

Call Provision: This allows the issuer to redeem bonds before their maturity date, usually at a premium to the par value, which benefits the issuer in a declining interest rate environment.

Put Provision: Allows bondholders, not issuers, to sell the bond back to the issuer.

Conversion: Relates to convertible bonds that can be converted into equity.

Defeasement: Refers to the removal of a bond issuer’s obligation by setting aside cash or securities to cover the debt.

References:

SEC Guide on Callable Bonds: SEC Callable Bonds.

Step by Step Explanation:

Federal Funds Rate: The rate at which depository institutions lend reserves to each other overnight. It is set by the Federal Open Market Committee (FOMC).

Other Rates:

Prime Rate: Rate banks charge their most creditworthy customers.

Discount Rate: Rate the Federal Reserve charges banks for borrowing directly from it.

LIBOR: Interbank lending rate used internationally, now being phased out.

References:

Federal Reserve Explanation of Rates: Federal Funds Rate.

Step by Step Explanation:

Equity Index Options: These are cash-settled because the underlying asset is not a physical security but a theoretical value representing the index.

Incorrect Options:

Preferred Stock, Master Limited Partnerships, and ETFs: These involve physical delivery of the underlying asset upon exercise.

References:

Options Clearing Corporation (OCC) Guidelines:OCC Cash-Settled Options.

During the "quiet period" after filing the registration statement, issuers are restricted in what they can communicate to the public to avoid influencing the market.

C is correctbecause promotional statements, such as those supporting the company’s valuation, are prohibited during this time.

A,B, andDare factual, non-promotional statements and are permitted.

529 savings plans are state-sponsored education savings accounts that offer tax-advantaged growth. Key features include:

Contributions are not federally tax deductible (some states offer state-level deductions).

No income limitations for contributions.

The account owner, not the beneficiary, controls the plan.

Assets can be transferred tax-free to another family member’s 529 plan.

D is correctbecause tax-free rollovers are allowed for family members of the current beneficiary.

Ais incorrect as contributions are not universally tax deductible.

Bis incorrect as there are no income limitations for contributing.

Cis incorrect because the account owner, not the beneficiary, controls the assets.

Buying a put option gives the investor the right to sell a stock at a specific strike price, effectively setting a floor for potential losses if the stock price declines. This is a common risk-management strategy.

A is correctbecause buying puts limits downside risk while retaining the potential for upside gains.

Bis incorrect as buying puts is a bearish strategy, not one used during upward momentum.

Cis incorrect because selling call options does not hedge losses; it is a speculative or income-generating strategy.

Dis incorrect because buying calls is a bullish strategy, used during upward momentum, not downward.

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 correctbecause the cost basis remains $20.00.

B,C, andDincorrectly assume that dividends or taxes change the cost basis.

Step by Step Explanation:

National Securities Clearing Corporation (NSCC): A subsidiary of the Depository Trust & Clearing Corporation (DTCC), the NSCC handles the clearance and settlement of broker-to-broker equity, corporate bond, municipal bond, and UIT transactions.

Incorrect Options:

A: The SEC oversees regulatory compliance but does not settle trades.

B: FINRA is a self-regulatory organization, not a clearing entity.

C: The Federal Reserve manages monetary policy and banking but is not involved in securities settlement.

References:

DTCC Overview of NSCC:DTCC NSCC.

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 exceptionalcircumstances.

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.

References:

FINRA Rule 3150 (Holding of Customer Mail): FINRA Rule 3150.

FINRA Rule 4511 requires member firms to retain records, including electronic communications, in anon-rewriteable, non-erasable format(often referred to as WORM: Write Once, Read Many). This ensures that records cannot be altered or deleted once stored.

D is correctbecause firms must store records in a tamper-proof format.

A,B, andCare incorrect because these formats do not guarantee compliance with the tamper-proof requirements set forth by FINRA and the SEC.

Step by Step Explanation:

Closed-End Funds: Trade on exchanges like stocks, and the investor receives the bid price (market price) minus any applicable commissions.

Incorrect Options:

A & B: NAV applies to open-end mutual funds, not closed-end funds.

D: POP applies to initial sales of mutual fund shares.

References:

SEC Guidance on Closed-End Funds: SEC Closed-End Funds.

Step by Step Explanation:

Reverse Split Calculation: A 1-for-2 reverse split reduces the number of shares by half while doubling the price per share.

Pre-Split Holdings: 100 shares at $5.00 = $500.

Post-Split Holdings: 50 shares at $10.00 = $500.

Incorrect Options: The total value remains unchanged; only the number of shares and price per share adjust.

References:

FINRA Corporate Actions Guidance: FINRA Reverse Splits.

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).

References:

SEC Regulation D: SEC Regulation D.

Step by Step Explanation:

Secondary Offering: Involves the sale of shares by an existing shareholder, such as an insider, rather than the company itself issuing new shares.

Incorrect Options:

A: Rights offerings involve giving existing shareholders the opportunity to buy additional shares.

B: Private offerings are not registered with the SEC and involve limited investors.

C: An exempt offering refers to securities exempt from SEC registration, such as Regulation D offerings.

References:

SEC Guide on Secondary Offerings:SEC Secondary Offerings.

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.

References:

FINRA Guidelines on DVP/RVP Transactions: FINRA DVP Info.

Step by Step Explanation:

Prohibition on Signing Customer Names: It is never permissible to sign a customer's name without written authorization (POA) due to legal and ethical concerns. Unauthorized signing constitutes forgery and violates FINRA rules.

Incorrect Options:

A: Firm principal approval does not override this prohibition.

B: Verbal authorization is insufficient.

C: Discretionary authority does not allow unauthorized signing.

References:

FINRA Rule 4512 (Customer Account Information): FINRA Rule 4512.

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 $500,000total, including $250,000 for cash.

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

Bis incorrect because SIPC does not guarantee investment performance.

Cis incorrect because SIPC does not cover market losses.

Dis incorrect because futures contracts are not covered under SIPC.

Step by Step Explanation:

Warrants: These are long-term options issued by a company that give the holder the right to buy shares at a specific price before expiration. They are typically attached to bond or stock offerings to make them more attractive.

Incorrect Options:

A: Warrants do not pay interest.

B: Refers to callable bonds, not warrants.

D: Describes municipal bonds, not warrants.

References:

SEC Guide to Warrants and Options: SEC Warrants Information.

Step by Step Explanation:

Telemarketing Rules (FINRA Rule 3230): Require firms to check the National Do Not Call Registry before contacting individuals, even if those individuals provide their contact information voluntarily.

Incorrect Options:

A: Approval isn’t required for individual follow-ups; compliance with the registry is.

B: While calls must be limited to appropriate hours, the registry check is still mandatory.

C: Written consent does not override the registry requirement.

References:

FINRA Rule 3230 (Telemarketing): FINRA Rule 3230.

A secondary market transaction occurs when securities are bought and sold between investors, typically on an exchange.

C is correctbecause securities purchased on a registered exchange are secondary market transactions.

Ais incorrect as open-end mutual fund shares are purchased directly from the issuer.

Brefers to the primary market.

Dis also incorrect as private placements occur in the primary market.

Buying a call option gives the investor the right to purchase the stock at a fixed price (strike price). If the stock’s price rises significantly, the value of the call option increases, allowing the investor to profit.

B is correctbecause a call option profits directly from a stock price increase.

Ais incorrect because a put option profits from a stock price decline.

CandDare incorrect because selling options limits profit potential and exposes the seller to significant risk if the stock moves unfavorably.

Step by Step Explanation:

Negotiated Offering: Occurs when the issuer directly selects an underwriter and negotiates terms. Common in municipal bond issuances.

Incorrect Options:

A: Follow-on offerings apply to subsequent issuances of equity securities.

C: Competitive offerings involve multiple underwriters submitting bids.

D: Best-efforts offerings do not guarantee the sale of all securities.

References:

MSRB Overview of Municipal Offerings:MSRB Offerings.

Step by Step Explanation:

Rule 144 Holding Period: Restricted securities held by affiliates require a six-month holding period before sale, provided the issuer is subject to SEC reporting requirements.

Other Options:

Notification to FINRA (C) is incorrect; Form 144 is submitted to the SEC, not FINRA.

The 10% ADTV limitation (D) applies to the volume of shares sold, not the conditions for sale.

References:

SEC Rule 144 (Selling Restricted Securities): SEC Rule 144.

In cumulative voting, shareholders can allocate all their votes to a single candidate. The total number of votes is calculated by multiplying the number of shares owned by the number of seats available:

Total votes = 100 shares × 10 seats =1,000 votes.

The investor can allocate all votes to one candidate.

C is correctbecause cumulative voting allows all votes to be concentrated.

The cooling-off period begins after the registration statement is filed with the SEC and lasts for at least 20 days. During this time, the issuer and underwriters can market the securities but cannot finalize sales.

D is correctbecause marketing (e.g., roadshows) is permitted during the cooling-off period.

Ais incorrect because the final prospectus is distributed after the offering is effective.

BandCare incorrect because sales and deliveries are prohibited until the registration becomes effective.

Step by Step Explanation:

Government Bond Funds: Invest in government-backed securities, but the value of the fund itself is not guaranteed by the government, as these funds are subject to market risks.

Incorrect Options:

A: Diversification depends on the fund’s investment strategy.

B: Interest/dividend payments may fluctuate.

C: If interest rates fall, NAVs typically rise, not drop.

References:

SEC Guidance on Mutual Funds: SEC Government Bond Funds.

The announcement of negative regulatory changes introducesunsystematic risk, specific to the technology sector. Diversification into unrelated sectors can reduce exposure to this risk.

A is correctbecause uncorrelated holdings reduce portfolio risk.

Bis incorrect because adding more microchip companies increases exposure to sector-specific risk.

Cdoes not address the core issue of over-concentration.

Dis the opposite of mitigating risk.

FINRA prohibits the payment of referral fees or splitting of commissions with individuals who are not registered with a broker-dealer. However, taking a friend out to dinner as a gesture of gratitude is allowed, as it does not involve cash or monetary compensation directly tied to the referral.

C is correctbecause non-monetary expressions of gratitude (like a dinner) are permitted under FINRA rules.

Ais incorrect because commission splitting with unregistered individuals is prohibited.

Bis incorrect because paying referral fees is also prohibited without registration.

Dis incorrect because giving prepaid credit cards tied to commission income violates compensation rules.

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.

References:

FINRA Form U4 Instructions: FINRA Form U4.

Step by Step Explanation:

SIPC Coverage: Protects customers of brokerage firms against the loss of securities and cash due to broker-dealer insolvency, but it does not protect against market losses.

FDIC Coverage: Protects bank deposits (checking, savings, CDs) up to $250,000 per depositor, per institution.

Incorrect Options:

A: SIPC covers both securities and cash held at brokerage firms (within limits).

C & D: Money market mutual funds are not FDIC insured, and securities are not covered by the FDIC.

References:

SIPC Overview:SIPC Coverage.

FDIC Insurance:FDIC Coverage.

Step by Step Explanation:

FINRA Rule 3210: Requires registered representatives to obtain written consent from their employing broker-dealer before opening accounts at other financial institutions if securities transactions will occur.

Incorrect Options:

A, B, and C: These accounts are exempt because they do not involve direct securities transactions requiring monitoring.

References:

FINRA Rule 3210 (Accounts at Other Institutions): FINRA Rule 3210.

Step by Step Explanation:

Inverse Relationship: Bond prices and interest rates have an inverse relationship. When interest rates fall, existing bonds with higher coupon rates become more valuable, leading to an increase in market value.

Incorrect Options:

A: Market value decreases as interest rates increase.

C: Interest rates and bond values move inversely, not in the same direction.

D: Interest rates are not constant; they fluctuate over time.

References:

SEC Municipal Bonds Overview: SEC Municipal Bonds.

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.

References:

FINRA Rule 2165 (Financial Exploitation of Specified Adults): FINRA Rule 2165.

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 correctbecause it aligns with forward pricing rules.

B,C, andDare incorrect as they do not follow mutual fund trade practices.

Step by Step Explanation:

Consumer Discretionary Sector: Includes products and services that are not essential, such as luxury items, travel, and entertainment. Revenues increase as disposable income risesduring economic expansion.

Consumer Staples and Utilities: These sectors are defensive and less impacted by economic cycles.

Healthcare: Also less correlated with economic cycles due to its essential nature.

References:

SEC and FINRA Guidance on Sectors: Investopedia Sector Overview.

Step by Step Explanation:

Trust Accounts: Provide the account owner (trustee) full control over distributions and investment decisions. Suitable for complex estate planning needs.

Incorrect Options:

UTMA: Transfers control to the minor upon reaching the age of majority.

529 Plan: Used for educational savings, with limited control over distributions.

CD: A fixed-term deposit, not an account type for managing distributions.

References:

SEC and FINRA Guidelines on Trusts: FINRA Trust Accounts.

The federal funds rate, which is the interest rate banks charge each other for overnight loans, changes frequently due to daily fluctuations in bank reserves and market conditions.

D is correctas it is the most sensitive to short-term market forces.

A,B, andCchange less frequently.

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.

References:

FINRA Rule 5270 (Front Running of Block Transactions): FINRA Rule 5270.