FINRA SIE Securities Industry Essentials Exam (SIE) Exam Practice Test

Step by Step Explanation:

Credit Downgrade: Increases perceived risk, causing bond prices to drop and yields to rise.

Yield-Price Relationship: Yields move inversely to bond prices. Lower prices lead to higher yields as investors demand more return for increased risk.

References:

SEC Guidance on Bond Ratings: SEC Bond Ratings.

Step by Step Explanation:

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

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

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

References:

SEC PIPE Offering Guidance: SEC PIPE Offerings.

Step by Step Explanation:

Interest Rate Risk: Treasury securities are sensitive to changes in interest rates. When rates rise, Treasury prices fall, exposing investors to price risk.

Incorrect Options:

Credit Risk: Virtually nonexistent for Treasuries, as they are backed by the U.S. government.

Liquidity Risk: Treasuries are highly liquid.

Prepayment Risk: Applies to mortgage-backed securities, not Treasuries.

References:

SEC Bond Risk Disclosures: SEC Treasury Risks.

Step by Step Explanation:

Bullish Position: Buying ABC stock aligns with the expectation that the stock’s price will rise, allowing the investor to profit.

Incorrect Options:

A: Buying puts is a bearish strategy.

C: Selling calls benefits from stable or declining prices.

D: Selling short is a bearish strategy anticipating a price drop.

References:

FINRA Guidance on Market Strategies: FINRA Trading Basics.

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:

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

Other Options:

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

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

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

References:

SEC Guidance on Diversification: SEC Diversification.

Step by Step Explanation:

Right of Accumulation: Allows an investor to combine the value of existing investments within the same fund family to qualify for a breakpoint (reduced sales charge) on new purchases.

Current Holdings: $80,000

New Purchase: $50,000

Total: $130,000, qualifying for the $100,000 breakpoint.

Incorrect Options:

B: Contributions from all funds within the same family can be aggregated.

C: A new letter of intent is unnecessary; right of accumulation applies automatically.

D: Discounts apply immediately, not retroactively.

References:

FINRA Guidance on Breakpoints: FINRA Breakpoints.

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.

Step by Step Explanation:

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

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

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

References:

FINRA Rule 3220 (Influencing or Rewarding Employees of Others): FINRA Rule 3220.

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.

Step by Step Explanation:

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

Other Risks:

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

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

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

References:

SEC Investor Bulletin on Risks: SEC Risk Guidance.

Step by Step Explanation:

Outside Business Activity Definition: Per FINRA Rule 3270, an OBA involves compensated business activities outside the scope of the RR’s role at their firm. Passive investments are excluded because they do not require active involvement.

Incorrect Options:

A, B, and C: Selling real estate, selling insurance, and refereeing are considered OBAs as they involve active participation and compensation.

References:

FINRA Rule 3270 (Outside Business Activities): FINRA Rule 3270.

Step by Step Explanation:

Ex-Dividend Date Pricing: On the ex-dividend date, the mutual fund's price is adjusted downward by the amount of the dividend.

Closing Price: $10.00

Dividend: $0.25

Adjusted Opening Price: $10.00 - $0.25 = $9.75.

Incorrect Options:

A: $9.25 subtracts more than the dividend amount.

C: $10.00 does not reflect the dividend adjustment.

D: $10.25 adds to the price rather than subtracting the dividend.

References:

SEC Guidance on Mutual Fund Pricing: SEC Mutual Funds.

Step by Step Explanation:

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

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

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

References:

IRS Section 529 Guidance: IRS 529 Plans.

Step by Step Explanation:

Turnover Ratio: Indicates how frequently the fund manager buys and sells securities. A high turnover ratio may result in higher capital gains distributions, impacting tax efficiency.

Incorrect Options:

B: Sales charges affect cost but not tax efficiency.

C: Commission details are unrelated to the fund’s tax efficiency.

D: Projections of distributions are speculative and not disclosed under regulations.

References:

SEC Mutual Fund Guide: SEC Mutual Funds.

Step by Step Explanation:

Suspicious Activity: The use of multiple money orders, lack of investment activity, and request to wire funds to another firm raise red flags for potential money laundering.

FINRA Rules: The RR should escalate the issue by reporting internally and potentially filing a Suspicious Activity Report (SAR).

Incorrect Options:

A: Denying the request without investigation may violate customer instructions.

B: Freezing the account requires a valid legal or regulatory basis.

D: Processing the request without investigation could facilitate illegal activity.

References:

FINRA Anti-Money Laundering (AML) Guidance: FINRA AML Rules.

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:

Variable Life Insurance: The cash value depends on the performance of the underlying investment options.

Fluctuating Market Conditions: Since the cash value is linked to market performance, fluctuations directly impact its value.

Beneficiary/Death Benefit Changes: These do not directly impact the cash value unless they involve additional costs or changes to premiums.

References:

SEC Bulletin on Variable Life Insurance: SEC Variable Insurance.

Step by Step Explanation:

Expense Ratio: Class A shares typically have lower ongoing expense ratios but higher front-end sales charges. Class C shares often have higher ongoing expense ratios but no front-end charges.

Incorrect Options:

B: NAV is determined daily and does not vary by share class.

C: All share classes invest in the same underlying portfolio.

D: Purchase timing is the same for all share classes.

References:

SEC Guidance on Mutual Fund Share Classes: SEC Fund Classes.

Step by Step Explanation:

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

Other Options:

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

References:

SEC Bulletin on Registration Statements: SEC Registration Process.

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:

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

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

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

References:

FINRA Rule 2210 (Communications with the Public): FINRA Rule 2210.

Step by Step Explanation:

Nonpublic Information: A customer’s net worth is nonpublic personal information that requires confidentiality under Regulation S-P.

Incorrect Options:

A, B, and D: Names, addresses, and phone numbers may be public unless linked to specific financial or personal details.

References:

SEC Regulation S-P (Privacy of Consumer Financial Information): SEC Regulation S-P.

Step by Step Explanation:

Breakeven Calculation: For covered call writing, breakeven is the stock purchase price minus the premium received.

Purchase Price = $50

Premium Received = $8

Breakeven = $50 - $8 = $42.

Other Options:

B, C, and D: Incorrect because they do not reflect the proper calculation of stock price minus the premium.

References:

Options Clearing Corporation (OCC) Education: OCC Options Guidance.

Step by Step Explanation:

Private Securities Transactions: Under FINRA Rule 3280, RRs must obtain written approval from their employing firm before participating in the sale of securities outside the firm.

Promissory Notes: These are typically considered securities, requiring prior approval.

Incorrect Options:

A & C: Notification alone is insufficient; written approval is required.

D: Promissory notes are generally treated as securities under federal law.

References:

FINRA Rule 3280 (Private Securities Transactions): FINRA Rule 3280.