Securities Industry Essentials (SIE) Exam — Questions and Answers

Question 1: Under FINRA's Best Execution rule, broker-dealers must:

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

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 2: A mutual fund that trades on an exchange throughout the day like a stock is called a(n):

Exchange-traded fund (ETF) (Correct answer)
Open-end fund
Unit investment trust
Closed-end fund

Correct answer: Exchange-traded fund (ETF)

ETFs are investment funds that trade on stock exchanges throughout the trading day, unlike mutual funds which are priced once daily at NAV.

Question 3: The Securities Exchange Act of 1934 created the SEC and primarily regulates:

Insurance products
Secondary market trading and broker-dealers (Correct answer)
Commodity futures markets
New securities issuances

Correct answer: Secondary market trading and broker-dealers

The Securities Exchange Act of 1934 governs secondary market trading, broker-dealers, exchanges, and established the SEC.

Question 4: 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:

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

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

Preferred stock (Correct answer)
Convertible bonds
Common stock
Warrants

Correct answer: Preferred stock

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

Question 6: A rights offering allows existing shareholders to:

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

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 7: Convertible preferred stock can be exchanged for:

A fixed number of common shares (Correct answer)
Cash at redemption value
Corporate bonds at par
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 8: What is the 'time value' component of an option premium?

The dividend expected before expiration
The option's intrinsic value
The strike price minus current stock price
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 9: To combat rising inflation, the Federal Reserve would most likely:

Sell government securities on the open market (Correct answer)
Purchase government securities on the open market
Lower the discount rate charged to member banks
Lower the reserve requirement for member banks

Correct answer: Sell government securities on the open market

Selling government securities withdraws money from the banking system, reducing the money supply and raising interest rates, which slows inflation.

Question 10: FINRA would compel an investment manager to report on every activity listed below, with the exception of:

An employee of the company donates $2,000 to a local political campaign.
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.

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 11: A limit order is an instruction to buy or sell a security:

At a specific price or better (Correct answer)
Only at the closing price
Only if trading volume exceeds a threshold
Immediately at the best available market price

Correct answer: At a specific price or better

A limit order specifies the maximum price a buyer will pay (or minimum price a seller will accept) and will only execute at that price or better.

Question 12: Which type of mutual fund share class typically has a front-end sales load?

Class I shares
Class C shares
Class A shares (Correct answer)
Class B shares

Correct answer: Class A shares

Class A shares typically charge a front-end sales load, deducted from the initial investment at the time of purchase.

Question 13: Which document must be completed before a new brokerage account is opened?

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

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 14: A margin call is issued when:

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

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 15: The Securities Act of 1933 primarily regulates:

Secondary market trading and exchanges
Commodity futures trading
Investment adviser conduct
The issuance of new securities in the primary market (Correct answer)

Correct answer: The issuance of new securities in the primary market

The Securities Act of 1933 focuses on new securities offerings, requiring registration and disclosure of material information.

Question 16: Regular-way settlement for most equity securities occurs:

1 business day after the trade (T+1) (Correct answer)
Same day as the trade
2 business days after the trade (T+2)
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 17: What is the par value of a standard corporate bond?

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

Correct answer: $1,000

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

Question 18: A Treasury Inflation-Protected Security (TIPS) adjusts its principal based on:

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

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 19: Which type of investment risk cannot be eliminated through diversification because it affects the entire market?

Credit risk
Liquidity risk
Business risk
Systematic risk (Correct answer)

Correct answer: Systematic risk

Systematic (market) risk affects all securities in the market and cannot be diversified away because it stems from broad economic factors that impact all investments.

Question 20: Blue chip stocks are generally characterized by:

Large, well-established companies with stable earnings (Correct answer)
Small market capitalization and new companies
Penny stock pricing under $5
High volatility and high growth potential

Correct answer: Large, well-established companies with stable earnings

Blue chip stocks represent financially stable, large-cap companies with long track records of reliable performance.

Question 21: What is a Uniform Gifts to Minors Act (UGMA) account?

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

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

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

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

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

Correct answer: 50%

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

Question 24: A joint tenancy with right of survivorship (JTWROS) account means:

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

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 25: The Investment Advisers Act of 1940 requires investment advisers to act in their clients' best interests under the:

Disclosure standard
Fiduciary standard (Correct answer)
Best execution standard
Suitability standard

Correct answer: Fiduciary standard

Investment advisers registered under the Investment Advisers Act of 1940 are held to a fiduciary standard, requiring them to put clients' interests ahead of their own.

Question 26: The National Best Bid and Offer (NBBO) rule requires broker-dealers to:

Route orders to the largest market maker
Execute all trades through the NYSE
Charge a minimum commission on all trades
Execute customer orders at the best available prices across all exchanges (Correct answer)

Correct answer: Execute customer orders at the best available prices across all exchanges

The NBBO rule requires broker-dealers to execute customer orders at the best available bid or offer price across all trading venues.

Question 27: What is the 'spread' in a securities quote?

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

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 28: A discretionary account allows a broker to:

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

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

FINRA (Correct answer)
MSRB
SIPC
CFTC

Correct answer: FINRA

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

Question 30: Under the Securities Act of 1933, the registration statement filed with the SEC for a new securities offering includes:

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

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 31: Breakpoints in mutual fund investing refer to:

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

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

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

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 33: Diversification of a portfolio is most effective at reducing which type of risk?

Interest rate risk
Non-systematic (unsystematic) risk (Correct answer)
Inflation risk
Systematic (market) risk

Correct answer: Non-systematic (unsystematic) risk

Diversification reduces non-systematic risk — company or industry-specific risks — because losses in one holding tend to be offset by gains in others when risks are uncorrelated.

Question 34: Regulation NMS (National Market System) was designed primarily to:

Promote fair competition and best execution across equity markets (Correct answer)
Increase government control of stock exchanges
Restrict algorithmic trading
Limit the number of registered exchanges

Correct answer: Promote fair competition and best execution across equity markets

Regulation NMS modernized equity market rules to promote competition, transparency, and best execution by requiring orders be routed to the market with the best price.

Question 35: Which answer accurately sums up a margin account?

Brokerage costs are not payable by investors.
Investors make their stock portfolios more resilient.
Traders need to understand the minimum balance requirements.
Brokers lend money to investors, who use it for trading. (Correct answer)

Correct answer: Brokers lend money to investors, who use it for trading.

A margin account is a brokerage account that allows an investor to borrow money from their broker-dealer to purchase securities. The securities bought with the borrowed funds serve as collateral for the loan. This leverage can amplify returns but also increases potential losses, as investors are still responsible for repaying the loan plus interest, regardless of the investment's performance.

Question 36: What risk do bond investors face when interest rates fall and they must reinvest coupon payments at lower rates?

Credit risk
Liquidity risk
Inflation risk
Reinvestment risk (Correct answer)

Correct answer: Reinvestment risk

Reinvestment risk is the risk that future coupon payments will be reinvested at lower interest rates than originally expected.

Question 37: Reg BI (Regulation Best Interest) requires broker-dealers to:

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

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 38: The following are some of the main reasons why investors engage in passive ETF investing:

make quick profits on large purchases of shares made at a discount to the S&P Index.
make quick profits by trading aggressively and then holding onto stocks for a while till their value rises and then trading them.
have longer-term gains and save more money than you would from alternative trading methods' higher fees. (Correct answer)
have greater returns over an extended period of time, notwithstanding additional costs associated with alternative trading methods.

Correct answer: have longer-term gains and save more money than you would from alternative trading methods' higher fees.

Investors engage in passive ETF investing primarily to achieve longer-term gains by tracking a market index rather than actively trying to outperform it. This strategy typically involves lower trading activity and, consequently, lower management fees compared to actively managed funds or frequent trading methods. The goal is to benefit from market growth over time while minimizing costs, which often leads to better net returns in the long run.

Question 39: Municipal bonds are issued by:

State and local governments (Correct answer)
Foreign governments
The US federal government
Federal agencies like Fannie Mae

Correct answer: State and local governments

Municipal bonds are issued by state, city, county, and other local government entities to fund public projects.

Question 40: Which US Treasury security has a maturity of more than 10 years?

Treasury note
Treasury STRIP
Treasury bill
Treasury bond (Correct answer)

Correct answer: Treasury bond

Treasury bonds have maturities of 20 to 30 years, making them the longest-duration US government securities.

Question 41: A registered representative who moves from one broker-dealer to another must:

Wait 90 days before conducting business
Transfer registration via FINRA's CRD system (Correct answer)
File a Form ADV with the SEC
Surrender all licenses and start fresh

Correct answer: Transfer registration via FINRA's CRD system

Registered representatives transfer their FINRA registrations through the Central Registration Depository (CRD) when changing firms.

Question 42: Which type of order guarantees execution but not price?

Stop order
Stop-limit order
Market order (Correct answer)
Limit order

Correct answer: Market order

A market order guarantees execution at the best available current price but does not guarantee a specific price.

Question 43: What information is required on a new account form under FINRA rules?

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

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 44: What is the intrinsic value of a call option with a $50 strike price when the stock is trading at $55?

$0
$55
$5 (Correct answer)
$50

Correct answer: $5

Intrinsic value for a call equals stock price minus strike price when in the money: $55 - $50 = $5.

Question 45: What is the primary purpose of the USA PATRIOT Act requirement for customer identification programs (CIP)?

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

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 46: The process by which a company first sells shares to the public is known as a(n):

Rights offering
Initial public offering (IPO) (Correct answer)
Secondary offering
Private placement

Correct answer: Initial public offering (IPO)

An IPO is when a company sells its shares to the public for the first time, transitioning from a private to a public company.

Question 47: 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 a bond issuer will default on payments
The risk that interest rates will change and affect bond prices
The risk that rising prices will erode the real value of investment returns over time (Correct answer)

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

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

Correct answer: $10,000

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

Question 49: An investor buys a Treasury bond in the secondary market from another investor. This transaction occurs on the:

Primary market
Third market
New issue market
Secondary market (Correct answer)

Correct answer: Secondary market

When securities trade between investors after the initial offering, those transactions occur on the secondary market.

Question 50: A general obligation (GO) municipal bond is backed by:

Collateralized mortgage pools
Federal government guarantees
The issuing government's taxing power (Correct answer)
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 51: An Initial Public Offering (IPO) occurs when a company:

Declares its first dividend
Lists its shares on a stock exchange for the first time (Correct answer)
Buys back shares from the public
Issues bonds to the public for the first time

Correct answer: Lists its shares on a stock exchange for the first time

An IPO is when a private company first offers its shares to the public on a stock exchange.

Question 52: A long straddle position is profitable when the underlying stock:

Pays a large dividend
Increases slightly in value
Moves significantly in either direction (Correct answer)
Trades sideways near the strike price

Correct answer: Moves significantly in either direction

A long straddle (buying both a call and put at the same strike) profits from large price moves in either direction.

Question 53: A pattern day trader is defined as someone who executes how many or more day trades within five business days?

2
3
4 (Correct answer)
5

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 54: A stock trading 'ex-rights' means the shares are trading:

Without the right to receive the upcoming rights offering (Correct answer)
Without short-selling restrictions
Without dividend eligibility
Without voting rights

Correct answer: Without the right to receive the upcoming rights offering

When stock trades ex-rights, buyers do not receive the subscription rights associated with the upcoming rights offering.

Question 55: Interest rate risk most directly and significantly affects which type of investment?

Long-term fixed-rate bonds (Correct answer)
Commodity futures contracts
Common equity shares of growth companies
Short-term commercial real estate leases

Correct answer: Long-term fixed-rate bonds

Long-term fixed-rate bonds are most sensitive to interest rate changes because their fixed payments are locked in for many years, making price swings larger when rates move.

Question 56: What does 'yield to maturity' (YTM) represent?

The bond's current price divided by par
The total return if the bond is held until maturity (Correct answer)
The annual coupon payment divided by par value
The spread over Treasury rates

Correct answer: The total return if the bond is held until maturity

YTM represents the total annualized return an investor earns if the bond is held to maturity and all payments are reinvested.

Question 57: Which agency's bonds carry an implicit (not explicit) government guarantee?

Fannie Mae (FNMA) (Correct answer)
FDIC
Federal Reserve
US Treasury

Correct answer: Fannie Mae (FNMA)

Government-sponsored enterprises (GSEs) like Fannie Mae carry an implied but not legally guaranteed government backing.

Question 58: In the event that a consumer complaint proceeds to an arbitration hearing, the panel's decision:

may be challenged whenever one wants; there is no deadline
either party may file an appeal within 25 days of the decision.
is final and enforceable against all parties; an appeal is not available. (Correct answer)
either party may file an appeal within 30 days of the decision.

Correct answer: is final and enforceable against all parties; an appeal is not available.

FINRA arbitration decisions are generally final and binding on all parties involved. Unlike court decisions, there are extremely limited grounds for appeal, typically only in cases of fraud, arbitrator misconduct, or if the arbitrators exceeded their authority. This finality is a key characteristic of the arbitration process, designed to provide a swift and conclusive resolution to disputes.

Question 59: Which of the following best describes the ex-dividend date?

The date the shareholder record list is finalized
The first date a buyer of stock is NOT entitled to the declared dividend (Correct answer)
The date the board declares the dividend
The date the dividend is paid to shareholders

Correct answer: The first date a buyer of stock is NOT entitled to the declared dividend

Purchasing stock on or after the ex-dividend date means the buyer will not receive the upcoming dividend.

Question 60: What is the 'suitability' obligation under FINRA rules?

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

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 61: Open market operations conducted by the Federal Reserve refer to:

Regulating the hours that stock exchanges are open
The Fed's purchase or sale of U.S. government securities to influence the money supply (Correct answer)
Issuing new U.S. Treasury bonds to fund the federal deficit
Setting margin requirements for securities purchases

Correct answer: The Fed's purchase or sale of U.S. government securities to influence the money supply

Open market operations involve the Federal Reserve buying or selling U.S. government securities to expand or contract the money supply and influence interest rates.

Question 62: Under Regulation T, the initial margin requirement for purchasing equity securities is:

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

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 63: A bond that pays no periodic interest but is issued at a discount to face value is called a:

Floating-rate bond
Zero-coupon bond (Correct answer)
Convertible bond
Callable bond

Correct answer: Zero-coupon bond

Zero-coupon bonds make no periodic interest payments and are sold at a discount, with the investor earning the difference at maturity.

Question 64: The bid price in a security quote represents:

The price at which a dealer will sell the security
The price at which a dealer will buy the security (Correct answer)
The average of buy and sell prices
The last traded price of the security

Correct answer: The price at which a dealer will buy the security

The bid price is the highest price a buyer (dealer) is willing to pay to purchase the security from an investor.

Question 65: A churning violation occurs when a broker:

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

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

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

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 67: Which of the following is NOT a characteristic of common stock?

Limited liability
Guaranteed dividend payments (Correct answer)
Voting rights
Residual claim on assets

Correct answer: Guaranteed dividend payments

Common stockholders are not guaranteed dividends; dividends are paid at the discretion of the board of directors.

Question 68: 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.

Statutory disqualification (Correct answer)
Misdemeanor
Refusal to register
Retraction

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 69: At what price are open-end mutual fund shares bought and sold?

At the current market trading price
At a fixed price set at fund launch
At a price set by the broker
At the next calculated Net Asset Value (NAV) (Correct answer)

Correct answer: At the next calculated Net Asset Value (NAV)

Open-end mutual funds transact at the NAV calculated after the trading day ends (forward pricing rule).

Question 70: A tenants in common (TIC) account differs from JTWROS in that:

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

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 71: What is a 12b-1 fee?

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

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

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

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 73: A bond trading at a premium means its price is:

Equal to its yield to maturity
Equal to par value
Below par value
Above par value (Correct answer)

Correct answer: Above par value

A bond trades at a premium when its price exceeds par value, typically because its coupon rate is above current market rates.

Question 74: The general relationship between risk and expected return in investments holds that:

Risk and expected return have no meaningful relationship
Lower-risk investments always deliver the best long-term returns
Higher-risk investments must offer higher potential returns to attract investors (Correct answer)
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 75: An investor buys a stock for $40 and sells it after 8 months for $55. This gain is taxed as a:

Short-term capital gain (Correct answer)
Long-term capital gain
Tax-exempt gain
Ordinary income dividend

Correct answer: Short-term capital gain

Short-term capital gains apply to assets held for one year or less (here 8 months) and are taxed at ordinary income rates.

Question 76: 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?

6000
5000
1000
4000 (Correct answer)

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

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

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 78: Net Asset Value (NAV) per share is calculated as:

Total liabilities divided by shares outstanding
(Total assets minus total liabilities) divided by shares outstanding (Correct answer)
Total assets divided by total shares outstanding
Market price minus book value per share

Correct answer: (Total assets minus total liabilities) divided by shares outstanding

NAV per share equals the fund's total assets minus its liabilities, divided by the number of outstanding shares.

Question 79: What is a callable bond?

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

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 80: Callable preferred stock allows the issuer to:

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

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 81: Delta in options pricing measures:

The sensitivity of the option to interest rate changes
The rate of change in option price per $1 change in the underlying asset (Correct answer)
The rate of change in option price relative to time decay
The implied volatility of the underlying stock

Correct answer: The rate of change in option price per $1 change in the underlying asset

Delta measures how much an option's price changes for every $1 move in the underlying security's price.

Question 82: SIPC (Securities Investor Protection Corporation) protects investors against:

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

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 83: What is a warrant in the context of securities?

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

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 84: What is the difference between a broker and a dealer?

Brokers only handle government securities
Brokers trade for their own account; dealers trade for customers
Brokers act as agents for customers; dealers trade for their own account as principals (Correct answer)
Dealers are regulated by FINRA; brokers are not

Correct answer: Brokers act as agents for customers; dealers trade for their own account as principals

A broker acts as an agent executing trades on behalf of customers, while a dealer trades as a principal from its own inventory.

Question 85: Which economic development would most likely cause broad stock market prices to rise across multiple sectors?

A sustained increase in consumer price inflation
A significant increase in the national unemployment rate
A reduction in interest rates by the Federal Reserve (Correct answer)
A sharp decline in corporate earnings across industries

Correct answer: A reduction in interest rates by the Federal Reserve

Declining interest rates reduce borrowing costs for businesses, increase the present value of future earnings, and make stocks more attractive relative to bonds, driving prices higher.

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

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