Securities Industry Essentials (SIE) Exam — Questions and Answers

Question 1: Which type of investment company continuously offers shares and redeems them at NAV?

Unit investment trust
Closed-end fund
Business development company
Open-end management company (mutual fund) (Correct answer)

Correct answer: Open-end management company (mutual fund)

Open-end management companies (mutual funds) issue new shares and redeem existing shares at NAV on any business day.

Question 2: Which self-regulatory organization (SRO) has primary responsibility for overseeing broker-dealers in the United States?

FINRA (Correct answer)
SIPC
MSRB
CFTC

Correct answer: FINRA

FINRA (Financial Industry Regulatory Authority) is the primary SRO responsible for regulating broker-dealers under SEC oversight.

Question 3: When interest rates rise, what happens to existing bond prices?

Bond prices rise
Bond prices fall (Correct answer)
Bond prices remain unchanged
Bond yields fall

Correct answer: Bond prices fall

Bond prices and interest rates have an inverse relationship — when rates rise, existing bond prices fall.

Question 4: A general obligation (GO) municipal bond is backed by:

The issuing government's taxing power (Correct answer)
Federal government guarantees
Collateralized mortgage pools
Revenue from a specific project

Correct answer: The issuing government's taxing power

GO bonds are backed by the full taxing authority of the issuing municipality, making them generally less risky than revenue bonds.

Question 5: What is the primary purpose of the USA PATRIOT Act requirement for customer identification programs (CIP)?

To ensure customers meet accredited investor standards
To prevent tax evasion on investment gains
To verify customer identity and prevent money laundering (Correct answer)
To prevent market manipulation

Correct answer: To verify customer identity and prevent money laundering

CIP requirements under the PATRIOT Act require firms to verify customer identity to combat money laundering and terrorist financing.

Question 6: A margin call is issued when:

The equity in a margin account falls below the maintenance margin requirement (Correct answer)
A broker wants to promote additional trading
A customer exceeds the maximum position size
A stock in the account pays a dividend

Correct answer: The equity in a margin account falls below the maintenance margin requirement

A maintenance margin call requires the customer to deposit additional funds when account equity drops below the maintenance requirement.

Question 7: The Municipal Securities Rulemaking Board (MSRB) has rulemaking authority over:

All fixed-income securities markets
Municipal securities dealers and advisors (Correct answer)
Corporate bond underwriters only
Federal government bond dealers

Correct answer: Municipal securities dealers and advisors

The MSRB creates rules for broker-dealers and municipal advisors who deal in municipal securities, though it relies on FINRA and the SEC for enforcement.

Question 8: Which of the following describes the primary market?

Where securities are listed on exchanges
Where derivatives contracts are created
Where new securities are first issued to the public (Correct answer)
Where investors trade securities among themselves

Correct answer: Where new securities are first issued to the public

The primary market is where issuers sell new securities directly to investors, with proceeds going to the issuer.

Question 9: Which of the following best describes the role of the Options Clearing Corporation (OCC)?

It handles customer complaints about options transactions
It registers new options products with the SEC
It sets margin requirements for stock purchases
It acts as guarantor and central counterparty for listed options trades (Correct answer)

Correct answer: It acts as guarantor and central counterparty for listed options trades

The OCC acts as the central counterparty and guarantor for all exchange-listed options contracts, ensuring performance of obligations.

Question 10: What is the 'spread' in a securities quote?

The commission charged by the broker
The difference between the bid and ask prices (Correct answer)
The difference between the stock's 52-week high and low
The difference between par value and market price

Correct answer: The difference between the bid and ask prices

The spread is the difference between the ask price (what dealers sell at) and the bid price (what dealers buy at), representing the dealer's compensation.

Question 11: Which regulatory body oversees the securities markets and has broad authority to enforce federal securities laws?

SIPC
SEC (Correct answer)
FINRA
MSRB

Correct answer: SEC

The SEC (Securities and Exchange Commission) is the primary federal regulator with broad authority to enforce securities laws.

Question 12: Candidates must include information regarding their OBAs (also known as: ) on the Form U4.

accounts outside of brokerages
Other commercial endeavors
official commercial operations
Outside of the realm of business (Correct answer)

Correct answer: Outside of the realm of business

OBAs stand for 'Outside Business Activities.' FINRA requires registered representatives to disclose all outside business activities on their Form U4, which is the Uniform Application for Securities Industry Registration or Transfer. This disclosure allows the member firm to assess potential conflicts of interest, ensure compliance with regulations, and supervise the representative's activities adequately.

Question 13: Under Regulation T, the Federal Reserve sets the initial margin requirement for equity purchases at:

75%
100%
25%
50% (Correct answer)

Correct answer: 50%

Regulation T requires investors to deposit at least 50% of the purchase price when buying securities on margin.

Question 14: Which of the following is a lagging economic indicator?

Stock market prices
Average duration of unemployment (Correct answer)
Manufacturer's new orders for consumer goods
Building permits

Correct answer: Average duration of unemployment

Average duration of unemployment is a lagging indicator because it reflects the aftermath of economic changes rather than predicting them.

Question 15: Under SEC Rule 144, how long must an affiliate hold restricted securities before selling them in the public market?

2 years
30 days
6 months (Correct answer)
1 year

Correct answer: 6 months

SEC Rule 144 requires affiliates to hold restricted securities for at least six months before selling them publicly.

Question 16: Which of the following is the Federal Reserve's primary tool for implementing monetary policy?

Setting federal income tax rates
Adjusting the federal funds rate (Correct answer)
Controlling government spending levels
Imposing import tariffs on foreign goods

Correct answer: Adjusting the federal funds rate

The Federal Reserve primarily uses the federal funds rate — the rate at which banks lend to each other overnight — as its main tool to influence monetary conditions.

Question 17: A tenants in common (TIC) account differs from JTWROS in that:

TIC accounts cannot be held by more than two people
TIC owners must hold equal shares
TIC accounts are only for retirement assets
Each TIC owner's share passes to their estate upon death, not to co-owners (Correct answer)

Correct answer: Each TIC owner's share passes to their estate upon death, not to co-owners

In a TIC account, each owner's interest passes to their heirs through their estate, unlike JTWROS where it passes automatically to survivors.

Question 18: What is a 'pink sheet' stock?

An OTC security not listed on a formal exchange, typically with less regulatory oversight (Correct answer)
A preferred stock with a pink certificate
A government bond issued by a foreign country
A stock trading on the NYSE Amex exchange

Correct answer: An OTC security not listed on a formal exchange, typically with less regulatory oversight

Pink sheet stocks trade over-the-counter outside major exchanges with minimal reporting requirements and less regulatory scrutiny.

Question 19: Regular-way settlement for most equity securities occurs:

2 business days after the trade (T+2)
Same day as the trade
1 business day after the trade (T+1) (Correct answer)
3 business days after the trade (T+3)

Correct answer: 1 business day after the trade (T+1)

Following the SEC's 2024 transition to T+1 settlement, most equity securities must settle one business day after the trade date.

Question 20: A joint tenancy with right of survivorship (JTWROS) account means:

Owners can designate different beneficiaries for their share
Each owner can only access their proportional share
Upon one owner's death, their share passes to the surviving owner(s) (Correct answer)
The account is subject to probate upon any owner's death

Correct answer: Upon one owner's death, their share passes to the surviving owner(s)

In a JTWROS account, when one owner dies, ownership automatically passes to the surviving account holder(s) outside of probate.

Question 21: What is the par value of a standard corporate bond?

$100
$1,000 (Correct answer)
$10,000
$500

Correct answer: $1,000

The standard par value (face value) for a corporate bond is $1,000, which is repaid at maturity.

Question 22: JCB Company owns 5000 shares of issued stock in addition to 1000 shares of treasury stock. The right amount of common stock is represented by which of the following?

5000
1000
4000 (Correct answer)
6000

Correct answer: 4000

The amount of common stock outstanding refers to the shares currently held by investors, which are the shares that have been issued minus any shares the company has repurchased and holds as treasury stock. In this scenario, JCB Company has 5,000 shares of issued stock and 1,000 shares of treasury stock. Therefore, the number of outstanding common shares is 5,000 - 1,000 = 4,000 shares.

Question 23: Options traded on US exchanges are standardized and guaranteed by which entity?

SIPC
The SEC
FINRA
Options Clearing Corporation (OCC) (Correct answer)

Correct answer: Options Clearing Corporation (OCC)

The Options Clearing Corporation (OCC) acts as the issuer and guarantor for all US listed options contracts.

Question 24: FINRA would compel an investment manager to report on every activity listed below, with the exception of:

For a misdemeanor shoplifting charge, a firm employee is taken into custody.
A misdemeanor DUI offense results in the arrest of a firm employee. (Correct answer)
An employee of the company works for another financial institution, but they choose not to reveal this.
An employee of the company donates $2,000 to a local political campaign.

Correct answer: A misdemeanor DUI offense results in the arrest of a firm employee.

FINRA requires firms to report certain events to maintain regulatory oversight and protect investors. Misdemeanor charges involving theft (like shoplifting) and undisclosed outside business activities (working for another financial institution without disclosure) are typically reportable as they relate to an individual's integrity or potential conflicts of interest. While a misdemeanor DUI offense is a serious matter, a mere *arrest* for a misdemeanor DUI may not always trigger an immediate, direct reporting requirement by the firm to FINRA, unlike a formal charge or conviction for certain offenses, or violations of firm policy like undisclosed outside business activities. Personal political donations, unless tied to 'pay-to-play' rules or firm funds, are generally not reportable.

Question 25: A discretionary account allows a broker to:

Trade customer funds without prior approval for each transaction (Correct answer)
Charge higher commissions than standard accounts
Open accounts for minors without custodian approval
Bypass suitability requirements

Correct answer: Trade customer funds without prior approval for each transaction

Discretionary accounts grant the broker written authority to make trades without contacting the customer for each decision.

Question 26: Political contributions made by covered associates of member firms are restricted under FINRA pay-to-play regulations. For covered associates with voting rights at the time of the donation, the maximum contribution is set at:

In line with federal law
$350 annually
$350 for every election (Correct answer)
No restriction

Correct answer: $350 for every election

FINRA's pay-to-play rules, specifically MSRB Rule G-37, restrict political contributions made by municipal finance professionals (MFPs) and other covered associates to municipal officials. For covered associates who have voting rights in the jurisdiction where the contribution is made, the de minimis exception allows a maximum contribution of $250 per election. However, for covered associates without voting rights, the limit is $350 per election, which is the correct answer here.

Question 27: A broker-dealer that holds customer securities and cash is considered a:

Carrying firm (Correct answer)
Discount broker
Introducing firm
Market maker

Correct answer: Carrying firm

A carrying firm (also called a clearing firm) maintains custody of customer assets and handles settlement of trades.

Question 28: A futures contract obligates the buyer to:

Sell the underlying asset immediately at market price
Purchase the underlying asset at a specified price on a future date (Correct answer)
Have the option to buy at a fixed price
Pay a premium for the right to sell

Correct answer: Purchase the underlying asset at a specified price on a future date

Unlike options, futures contracts create a binding obligation to buy the underlying asset at the agreed price on the delivery date.

Question 29: What is the 'time value' component of an option premium?

The option's intrinsic value
The strike price minus current stock price
The dividend expected before expiration
The portion of premium beyond intrinsic value reflecting time until expiration (Correct answer)

Correct answer: The portion of premium beyond intrinsic value reflecting time until expiration

Time value is the premium above intrinsic value, reflecting the probability the option will gain more value before expiration.

Question 30: Which of the following is considered a money market instrument?

30-year Treasury bond
Municipal revenue bond
Commercial paper (Correct answer)
Convertible preferred stock

Correct answer: Commercial paper

Commercial paper is a short-term unsecured debt instrument issued by corporations, making it a money market instrument.

Question 31: What is a warrant in the context of securities?

A guarantee of dividend payment
A type of bond coupon
A long-term option to buy shares at a fixed price (Correct answer)
A court order to freeze assets

Correct answer: A long-term option to buy shares at a fixed price

A warrant is a long-term security giving the holder the right to purchase shares at a set price before expiration.

Question 32: Expansionary fiscal policy is best described as:

Increasing taxes and reducing government spending to reduce deficits
Decreasing taxes and/or increasing government spending to stimulate the economy (Correct answer)
Raising the federal funds rate to slow borrowing
The Federal Reserve selling Treasury securities to reduce the money supply

Correct answer: Decreasing taxes and/or increasing government spending to stimulate the economy

Expansionary fiscal policy uses lower taxes and/or higher government spending to inject money into the economy and stimulate growth, especially during recessions.

Question 33: What information is required on a new account form under FINRA rules?

Only the customer's name and tax ID
Only financial information verified by an accountant
References from two existing brokerage clients
Customer's name, address, tax ID, investment objectives, financial situation, and risk tolerance (Correct answer)

Correct answer: Customer's name, address, tax ID, investment objectives, financial situation, and risk tolerance

FINRA requires firms to collect comprehensive customer information including personal details, financial profile, and investment objectives for suitability purposes.

Question 34: A callable bond gives the issuer the right to:

Redeem the bond before its maturity date (Correct answer)
Extend the bond's maturity date
Convert the bond into equity shares
Adjust the coupon rate based on market rates

Correct answer: Redeem the bond before its maturity date

A callable bond allows the issuer to repurchase and retire the bond before its stated maturity, typically when interest rates decline.

Question 35: What is a Uniform Gifts to Minors Act (UGMA) account?

A retirement account for minors
A trust account requiring court oversight
A college savings account with tax benefits
A custodial account holding assets for a minor, managed by an adult custodian (Correct answer)

Correct answer: A custodial account holding assets for a minor, managed by an adult custodian

A UGMA account is a custodial account where an adult manages assets on behalf of a minor until the minor reaches adulthood.

Question 36: Filling out Form U4 is necessary for those who want to register with FINRA; FINRA reviews and approves the forms. Candidates who have specific issues on their record—referred to as follows in FINRA rules—will not be authorized.

Retraction
Misdemeanor
Refusal to register
Statutory disqualification (Correct answer)

Correct answer: Statutory disqualification

Candidates who have specific issues on their record, such as certain felony convictions, financial misconduct, or regulatory violations, are subject to what FINRA rules refer to as 'statutory disqualification.' This means they are automatically barred from becoming or remaining registered with FINRA, as these issues indicate a potential risk to investors or the integrity of the securities industry. FINRA reviews Form U4 submissions to identify such disqualifying events.

Question 37: Items valued at no more than the following are the maximum gifts or gratuities that registered representatives may provide to consumers in a given year:

$250
$1,000
$500
$100 (Correct answer)

Correct answer: $100

FINRA Rule 3220, regarding Gifts and Gratuities, limits the value of gifts or gratuities that registered representatives may give to customers or other associated persons to $100 per person per year. This rule is in place to prevent undue influence, maintain ethical standards, and ensure that business decisions are not swayed by excessive gifts.

Question 38: A tombstone advertisement for a new securities offering is permitted during the waiting period because it:

Is limited to basic factual information and directs investors to the prospectus (Correct answer)
Solicits orders from investors
Contains a full prospectus
Is filed separately with FINRA

Correct answer: Is limited to basic factual information and directs investors to the prospectus

Tombstone ads are permitted during the cooling-off period because they only provide limited factual information and direct readers to obtain a prospectus.

Question 39: What is payment for order flow (PFOF)?

Commissions paid by customers for trade execution
Charges for late settlement of securities
Compensation paid to broker-dealers by market makers for routing customer orders to them (Correct answer)
Fees paid by exchanges to attract listing companies

Correct answer: Compensation paid to broker-dealers by market makers for routing customer orders to them

PFOF is a practice where market makers compensate broker-dealers for routing customer orders to them for execution.

Question 40: The Consumer Price Index (CPI) is primarily used to measure:

The total value of goods and services exported by a country
The interest rate that the Federal Reserve charges member banks
The total output of the manufacturing sector
Changes in the price level of a basket of consumer goods and services over time (Correct answer)

Correct answer: Changes in the price level of a basket of consumer goods and services over time

The CPI tracks changes in the prices paid by urban consumers for a representative basket of goods and services, making it the primary measure of consumer inflation.

Question 41: Short selling requires investors to borrow securities because:

Short selling is only permitted on margin
They are selling securities they do not currently own (Correct answer)
SEC rules require collateral for all trades
They must hold the securities for 30 days before selling

Correct answer: They are selling securities they do not currently own

Short sellers borrow securities to sell them first, expecting to buy them back cheaper later and return the borrowed shares.

Question 42: Under Regulation T, the initial margin requirement for purchasing equity securities is:

50% (Correct answer)
100%
25%
75%

Correct answer: 50%

Regulation T, set by the Federal Reserve, requires customers to deposit at least 50% of the purchase price of marginable securities.

Question 43: What is the name of a stock order that won't be filled unless a stock hits or drops below a specific market price?

Order cancellation
Order of market
Limitation of order (Correct answer)
Put an end to the order

Correct answer: Limitation of order

A limit order is a type of stock order that specifies a maximum price an investor is willing to pay to buy a security or a minimum price they are willing to accept to sell a security. This means the order will only be filled if the stock reaches or drops below the specified buy limit price, or reaches or rises above the specified sell limit price. It provides price control but does not guarantee execution.

Question 44: An investor who sells borrowed shares hoping to buy them back at a lower price is engaged in:

Short selling (Correct answer)
Hedging
Arbitrage
Margin buying

Correct answer: Short selling

Short selling involves borrowing and selling shares with the intent to repurchase them at a lower price and return them to the lender for a profit.

Question 45: What is the 'suitability' obligation under FINRA rules?

Brokers must guarantee a minimum return on recommendations
All customers must be offered the same investment options
Recommendations must be appropriate based on the customer's financial profile and objectives (Correct answer)
Firms must offer the lowest-cost products available

Correct answer: Recommendations must be appropriate based on the customer's financial profile and objectives

FINRA's suitability rule requires that investment recommendations be appropriate for the specific customer based on their financial situation and goals.

Question 46: Which document must be completed before a new brokerage account is opened?

Options Disclosure Document
New Account Form (customer profile) (Correct answer)
SIPC membership form
Regulation T margin agreement

Correct answer: New Account Form (customer profile)

A new account form collecting the customer's financial information, investment objectives, and risk tolerance must be completed before trading.

Question 47: Variable life insurance differs from whole life insurance primarily because:

Variable life has no death benefit
Variable life cash value depends on investment subaccount performance (Correct answer)
Variable life requires no premiums
Variable life only covers accidental death

Correct answer: Variable life cash value depends on investment subaccount performance

Variable life insurance ties the policy's cash value to investment subaccounts, so its value fluctuates with market performance.

Question 48: What is the coupon rate of a bond?

The bond's yield to maturity
The bond's current yield in the market
The annual interest rate stated on the bond at issuance (Correct answer)
The discount rate used to price the bond

Correct answer: The annual interest rate stated on the bond at issuance

The coupon rate is the annual interest rate fixed at issuance, determining the periodic interest payments.

Question 49: What is a power of attorney (POA) in a brokerage account context?

A document allowing a minor to trade independently
A written authorization for a third party to act on the account owner's behalf (Correct answer)
A permission form for options trading
A court order to freeze an account

Correct answer: A written authorization for a third party to act on the account owner's behalf

A power of attorney authorizes a designated person to make investment decisions and transactions for another person's account.

Question 50: A Treasury Inflation-Protected Security (TIPS) adjusts its principal based on:

Changes in the Consumer Price Index (CPI) (Correct answer)
Changes in the federal funds rate
Changes in corporate bond spreads
Changes in GDP growth

Correct answer: Changes in the Consumer Price Index (CPI)

TIPS adjust their principal value in line with CPI changes, protecting investors from inflation eroding their purchasing power.

Question 51: A call option gives the holder the right to:

Sell shares at the strike price
Short-sell the underlying stock
Buy shares at the strike price (Correct answer)
Receive dividends from the underlying stock

Correct answer: Buy shares at the strike price

A call option grants the holder the right, but not the obligation, to buy the underlying security at the strike price before expiration.

Question 52: Which of the following is a characteristic of a Real Estate Investment Trust (REIT)?

REITs cannot be traded on stock exchanges
REITs are exempt from all federal taxes
REITs must invest at least 75% of assets in real estate
REITs must distribute at least 90% of taxable income to shareholders (Correct answer)

Correct answer: REITs must distribute at least 90% of taxable income to shareholders

To qualify as a REIT, the trust must distribute at least 90% of its taxable income to shareholders each year.

Question 53: What is a callable bond?

A bond that pays variable interest
A bond backed by collateral
A bond the issuer can redeem before maturity (Correct answer)
A bond that can be converted to stock

Correct answer: A bond the issuer can redeem before maturity

A callable bond allows the issuer to redeem the bond before its stated maturity date, usually when interest rates decline.

Question 54: Convertible preferred stock can be exchanged for:

A fixed number of common shares (Correct answer)
Corporate bonds at par
Cash at redemption value
Government securities

Correct answer: A fixed number of common shares

Convertible preferred stock can be exchanged for a predetermined number of common shares at the holder's option.

Question 55: A variable annuity differs from a fixed annuity in that:

Variable annuities guarantee a fixed monthly payment
Variable annuities have no surrender charges
Variable annuity returns depend on the performance of underlying investment subaccounts (Correct answer)
Variable annuities are not regulated by the SEC

Correct answer: Variable annuity returns depend on the performance of underlying investment subaccounts

Variable annuity payouts fluctuate based on the performance of selected subaccounts, while fixed annuities pay a guaranteed amount.

Question 56: A customer's account statement shows a 'long' position in 100 shares of XYZ. This means the customer:

Owns 100 shares of XYZ (Correct answer)
Has an option to buy 100 shares at a set price
Has borrowed and sold 100 shares expecting a price decline
Holds a futures contract on 100 shares

Correct answer: Owns 100 shares of XYZ

A long position means the investor owns the security outright and benefits if the price increases.

Question 57: Which of the above scenarios demonstrates an unsystematic risk?

Stock values fall after a hurricane significantly affects the majority of the east coast.
Oil businesses are impacted by the war in Ukraine, which lowers the value of their shares.
The COVID-19 outbreak drives down stock prices by forcing many businesses to close.
Due to poor demand, American Airlines announced route cancellations, which dropped the value of its stock. (Correct answer)

Correct answer: Due to poor demand, American Airlines announced route cancellations, which dropped the value of its stock.

Unsystematic risk, also known as specific risk or diversifiable risk, is unique to a particular company or industry. It can be mitigated through diversification of investments. The scenario where American Airlines' stock value drops due to poor demand and route cancellations is an example of unsystematic risk because it specifically affects that company, rather than the entire market or a broad sector.

Question 58: What is accrued interest in bond trading?

Interest earned since the last coupon payment, owed to the seller (Correct answer)
The penalty for calling a bond early
The discount below par value
The premium paid above par value

Correct answer: Interest earned since the last coupon payment, owed to the seller

Accrued interest is the interest earned by the bond seller from the last coupon date to the settlement date, paid by the buyer.

Question 59: Purchasing power risk (inflation risk) in investing refers to:

The risk of being unable to sell an investment quickly at a fair price
The risk that rising prices will erode the real value of investment returns over time (Correct answer)
The risk that a bond issuer will default on payments
The risk that interest rates will change and affect bond prices

Correct answer: The risk that rising prices will erode the real value of investment returns over time

Purchasing power risk is the danger that inflation will outpace investment returns, reducing the real (inflation-adjusted) value of the money earned or received.

Question 60: Which of these describes an Exchange-traded fund's (ETF) drawback?

exchanged via the public market
Expenses of trading versus stocks (Correct answer)
Has to release holdings every day
better tax efficiency compared to alternative investments, such as mutual funds

Correct answer: Expenses of trading versus stocks

While Exchange-Traded Funds (ETFs) offer many advantages like diversification and often lower expense ratios than mutual funds, they do have a drawback related to trading costs. Unlike mutual funds, which are typically bought and sold once a day at their net asset value, ETFs are traded on exchanges throughout the day like individual stocks. This means that each purchase or sale of an ETF incurs trading expenses, such as commissions or bid-ask spreads, which can add up for frequent traders.

Question 61: What distinguishes a hedge fund from a registered mutual fund?

Hedge funds are not registered with the SEC and are limited to accredited investors (Correct answer)
Hedge funds must publish daily NAV
Hedge funds are only allowed to invest in fixed income
Hedge funds are prohibited from using leverage

Correct answer: Hedge funds are not registered with the SEC and are limited to accredited investors

Hedge funds operate as private funds exempt from SEC registration and restrict participation to accredited investors.

Question 62: Under FINRA's Best Execution rule, broker-dealers must:

Execute all trades on the NYSE
Match any competitor's price
Seek the most favorable terms reasonably available for customer orders (Correct answer)
Execute large orders before small ones

Correct answer: Seek the most favorable terms reasonably available for customer orders

Best execution requires broker-dealers to use reasonable diligence to find the most favorable terms for customer order execution.

Question 63: Under Regulation S-P, broker-dealers must provide customers with a privacy notice:

Only upon request
Only when information is shared with third parties
Every five years
Annually and at account opening (Correct answer)

Correct answer: Annually and at account opening

Regulation S-P requires financial institutions to deliver privacy notices at account opening and annually thereafter.

Question 64: Breakpoints in mutual fund investing refer to:

Investment thresholds that qualify investors for reduced sales loads on Class A shares (Correct answer)
The point at which a fund closes to new investors
Fees charged when switching between funds in a family
NAV levels that trigger automatic rebalancing

Correct answer: Investment thresholds that qualify investors for reduced sales loads on Class A shares

Breakpoints are investment levels at which Class A mutual fund sales loads are reduced as a reward for larger investments.

Question 65: A stop order (stop-loss order) becomes a market order when:

The security's price reaches or passes the stop price (Correct answer)
The security's price reaches the limit price
The order is not filled within one trading day
Volume exceeds the order size

Correct answer: The security's price reaches or passes the stop price

A stop order is triggered and becomes a market order when the security's price reaches the designated stop price.

Question 66: Callable preferred stock allows the issuer to:

Suspend dividends indefinitely
Redeem the shares at a specified price (Correct answer)
Convert shares into bonds
Force conversion into common stock at any time

Correct answer: Redeem the shares at a specified price

Callable preferred stock can be redeemed (bought back) by the issuer at a predetermined call price.

Question 67: Under the Securities Act of 1933, the registration statement filed with the SEC for a new securities offering includes:

A guarantee of the offering price by underwriters
The issuer's trading history for the past 10 years
Insider trading records of all executives
A prospectus disclosing material information about the offering (Correct answer)

Correct answer: A prospectus disclosing material information about the offering

The registration statement includes a prospectus that provides material disclosures to help investors make informed decisions.

Question 68: The general relationship between risk and expected return in investments holds that:

Higher-risk investments must offer higher potential returns to attract investors (Correct answer)
Lower-risk investments always deliver the best long-term returns
Risk and expected return have no meaningful relationship
Higher-risk investments tend to offer lower potential returns to compensate investors

Correct answer: Higher-risk investments must offer higher potential returns to attract investors

Investors demand higher potential returns as compensation for accepting greater risk; without this risk premium, rational investors would choose safer alternatives.

Question 69: Reg BI (Regulation Best Interest) requires broker-dealers to:

Act in the best interest of retail customers when making recommendations (Correct answer)
Act only in a fiduciary capacity at all times
Recommend only no-load mutual funds
Eliminate all sales commissions

Correct answer: Act in the best interest of retail customers when making recommendations

Reg BI requires broker-dealers to place retail customers' best interests first when making investment recommendations.

Question 70: What is the role of a market maker?

To provide liquidity by continuously quoting bid and ask prices (Correct answer)
To execute trades only for institutional investors
To set the official closing price of securities
To regulate trading activity on exchanges

Correct answer: To provide liquidity by continuously quoting bid and ask prices

Market makers provide liquidity by posting continuous bid (buy) and ask (sell) prices, profiting from the bid-ask spread.

Question 71: A churning violation occurs when a broker:

Delays execution of customer orders
Recommends the same security to multiple customers
Excessively trades a customer's account primarily to generate commissions (Correct answer)
Trades securities at a loss to generate tax benefits

Correct answer: Excessively trades a customer's account primarily to generate commissions

Churning is the unethical practice of excessive trading in a customer's account primarily to generate commissions for the broker.

Question 72: A rights offering allows existing shareholders to:

Sell their shares at a premium
Purchase additional shares at a discount before new investors (Correct answer)
Convert preferred shares to common shares
Receive extra dividends

Correct answer: Purchase additional shares at a discount before new investors

A rights offering gives existing shareholders the privilege to buy new shares at a discount to maintain their ownership percentage.

Question 73: What is the key difference between open-end and closed-end mutual funds?

Open-end funds continuously issue new shares; closed-end have a fixed number of shares (Correct answer)
Open-end funds trade on stock exchanges; closed-end do not
Closed-end funds are only sold to institutions
Open-end funds invest only in stocks; closed-end invest in bonds

Correct answer: Open-end funds continuously issue new shares; closed-end have a fixed number of shares

Open-end funds (traditional mutual funds) create and redeem shares continuously, while closed-end funds issue a fixed number of shares traded on exchanges.

Question 74: What is the term for a corporate action that increases the number of outstanding shares while reducing the price per share proportionally?

Reverse stock split
Rights offering
Forward stock split (Correct answer)
Stock dividend

Correct answer: Forward stock split

A forward stock split increases share count and lowers the price per share, keeping total market value the same.

Question 75: The USA PATRIOT Act requires broker-dealers to implement a Customer Identification Program (CIP) primarily to:

Combat money laundering and terrorism financing (Correct answer)
Increase market liquidity
Reduce trading commissions
Standardize account fees

Correct answer: Combat money laundering and terrorism financing

The CIP requirement of the USA PATRIOT Act mandates identity verification of customers to prevent money laundering and terrorism financing.

Question 76: What must occur before a broker-dealer executes an options trade in a customer's account?

The trade must be approved by FINRA in advance
Options agreement must be signed and account must be approved for options trading (Correct answer)
The customer must have a minimum of $100,000 in the account
The customer must be an accredited investor

Correct answer: Options agreement must be signed and account must be approved for options trading

Options accounts require separate approval based on the customer's financial profile, and a signed options agreement before trading.

Question 77: SIPC (Securities Investor Protection Corporation) protects investors against:

Market losses from bad investments
Fraud committed by the issuer of securities
Losses on options strategies
Broker-dealer insolvency and missing customer assets (Correct answer)

Correct answer: Broker-dealer insolvency and missing customer assets

SIPC covers up to $500,000 (including $250,000 in cash) per customer if a member broker-dealer becomes insolvent.

Question 78: What is a 12b-1 fee?

A penalty for early withdrawal from an annuity
A redemption fee charged when selling fund shares
A transaction fee for buying ETF shares
An annual fee charged by mutual funds to cover marketing and distribution costs (Correct answer)

Correct answer: An annual fee charged by mutual funds to cover marketing and distribution costs

A 12b-1 fee is an annual fund expense used for marketing and distribution, included in the fund's expense ratio.

Question 79: What does it mean to write (sell) a covered call?

Selling a call with no existing stock position
Buying a call as protection against a short stock position
Writing an option on an index rather than individual stock
Selling a call option while owning the underlying shares (Correct answer)

Correct answer: Selling a call option while owning the underlying shares

A covered call involves selling a call option while owning the underlying shares, providing income in exchange for capping upside.

Question 80: Which term describes the difference between the bid and ask prices of a security?

Spread (Correct answer)
Margin
Discount
Premium

Correct answer: Spread

The bid-ask spread is the difference between the price a buyer will pay (bid) and the price a seller will accept (ask).

Question 81: Which type of stock gives shareholders priority over common stockholders when dividends are distributed?

Warrants
Convertible bonds
Preferred stock (Correct answer)
Common stock

Correct answer: Preferred stock

Preferred stockholders receive dividends before common stockholders and have priority in liquidation.

Question 82: FINRA's Rule 3220 was created primarily to:

forbid non-monetary remuneration.
forbid presents and gratuities from one business to another. (Correct answer)
control rival corporations' securities exchanges.
control company expenditures.

Correct answer: forbid presents and gratuities from one business to another.

FINRA Rule 3220, also known as the Gifts and Gratuities Rule, was established to prevent undue influence and maintain fair business practices within the securities industry. It primarily forbids member firms or their associated persons from giving gifts or gratuities exceeding $100 per year to employees of other firms if the gift is related to the business of the recipient's employer. This rule aims to ensure that business decisions are made objectively, free from the sway of excessive gifts.

Question 83: The Dow Jones Industrial Average (DJIA) is best described as a:

Broad market index of 500 stocks weighted by market cap
Equal-weighted index of NYSE-listed stocks
Price-weighted index of 30 large U.S. companies (Correct answer)
GDP-weighted index of global equities

Correct answer: Price-weighted index of 30 large U.S. companies

The DJIA is a price-weighted index that tracks 30 large, publicly traded U.S. companies and is one of the oldest and most-cited market benchmarks.

Question 84: A pattern day trader is defined as someone who executes how many or more day trades within five business days?

2
5
3
4 (Correct answer)

Correct answer: 4

FINRA Rule 4210 defines a pattern day trader as any customer who executes four or more day trades in five business days in a margin account.

Question 85: Under the Bank Secrecy Act, currency transaction reports (CTRs) must be filed for cash transactions exceeding:

$10,000 (Correct answer)
$25,000
$5,000
$1,000

Correct answer: $10,000

Financial institutions must file a CTR for any single cash transaction or series of related transactions exceeding $10,000.

Securities Industry Essentials (SIE) Exam

The FINRA Securities Industry Essentials (SIE) exam assesses basic knowledge of the securities industry, including types of products and their risks, the structure of the securities industry markets, and regulatory agencies and their functions. It is a corequisite for most FINRA representative-level qualification exams.

Questions

105 min

Time Limit

70%

To Pass

Checking for saved progress...

Exam Rules

You can skip questions and return to them later
Flag questions for review before submitting
No feedback shown until you submit the entire exam
Unanswered questions count as wrong — answer everything
10 pretest questions are mixed in and don't affect your score
Timer auto-submits when time runs out
Your progress is auto-saved every 30 seconds