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

Step by Step Explanation:

Backing Away: Refers to the failure of a market maker to honor a firm quote when a customer attempts to trade at that price. It is a violation of market rules.

Incorrect Options:

Freeriding: Involves selling securities before paying for them in a cash account.

Interpositioning: Involves unnecessary intermediaries in trades, which can harm customers.

Market Manipulation: Covers a range of deceptive practices, such as wash trading or spoofing, not specific to honoring quotes.

References:

FINRA Rule 5220 (Firm Quote Rule): FINRA Rule 5220.

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:

Regulatory Element Requirement: Newly registered persons must complete the Continuing Education (CE) Regulatory Element on the second anniversary of their initial registration and every three years thereafter.

Incorrect Options:

A: The requirement begins on the second anniversary, not the following calendar year.

D: The cycle is every three years, not five.

References:

FINRA Rule 1240 (Continuing Education): FINRA Rule 1240.

Accounts held individually are subject to probate, which is the legal process of administering the decedent’s estate. Probate determines the distribution of assets according to the deceased’s will or state intestacy laws.

A is correctbecause individual accounts require probate to transfer assets.

Bis incorrect because irrevocable trusts bypass probate.

Cis incorrect because TOD accounts allow direct transfer of assets to named beneficiarieswithout probate.

Dis incorrect because JTWROS accounts transfer ownership to the surviving account holder automatically.

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

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

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

CandDare incorrect because restricted stock is not obtained through warrants or exchange-traded options.

Step by Step Explanation:

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

Other Options:

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

References:

SEC and FINRA Bond Basics: SEC Discount Bonds.

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

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

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

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

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

Currency devaluation reduces the value of a country’s currency relative to others, making its exports cheaper and more competitive internationally. This stimulates demand for the country’s goods and services.

D is correctbecause devaluation reduces export costs, encouraging foreign buyers.

Ais incorrect because devaluation can increase inflation by raising the cost of imported goods.

Bis incorrect because GDP often rises due to increased export demand.

Cis incorrect because imports become more expensive after devaluation, reducing demand.

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.

A FINRA member is a broker-dealer that is registered with FINRA and regulated by a national securities association. Individuals employed by the member firm (e.g., registered representatives) are associated persons, not members themselves.

D is correctbecause FINRA membership applies to broker-dealers, not individuals.

A,B, andCare incorrect because they refer to individuals or roles within member firms, not the firms themselves.

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

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

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

Nonqualified deferred compensation (NQDC) plans allow employees to defer income until a future date.

D is correctbecause NQDC funds remain part of the company’s general assets, which creditors may claim if the company goes bankrupt.

Ais incorrect as NQDC plans are not subject to ERISA rules.

Bis incorrect because these plans do not require IRS review.

Cis incorrect as NQDC assets are not required to be held in escrow.

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.

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

C is correctbecause the fund’s investments are short term.

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

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

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

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

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

The investor can allocate all votes to one candidate.

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

Step by Step Explanation:

403(b) Accounts: These tax-advantaged retirement plans are specifically for employees of public schools, tax-exempt organizations, and certain other nonprofit employers, such ashospitals.

Incorrect Options:

Volunteer Workers: Ineligible unless they are also employees.

Small Business Owners and Military Personnel: These groups typically qualify for other retirement plans, not 403(b).

References:

IRS Publication 571 (403(b) Plans): IRS 403(b) Guidance.

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

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

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

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

AandBare incorrect because CE is not required annually or semiannually.

Dis incorrect because CE is not tied to customer complaints.

Step by Step Explanation:

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

Calculation:

Trade Date (T): Thursday, August 2.

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

Incorrect Options:

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

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

References:

FINRA and SEC Settlement Rules: SEC Settlement Rules.

Step by Step Explanation:

Low Liquidity: Hedge funds often impose lock-up periods and restrict redemptions, leading to low liquidity for investors.

Incorrect Options:

B: Hedge funds typically have high minimum investment requirements, often $1 million or more.

C: Hedge funds employ diverse strategies, not just fixed income.

D: Hedge funds are generally opaque about their strategies and holdings to protect their competitive advantage.

References:

SEC Investor Bulletin on Hedge Funds: SEC Hedge Funds.

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

A is correctbecause uncorrelated holdings reduce portfolio risk.

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

Cdoes not address the core issue of over-concentration.

Dis the opposite of mitigating risk.

In atenants in commonaccount, each owner has a distinct percentage of ownership. Upon the death of one owner, their share does not transfer to the surviving owner(s); instead, it becomes part of the deceased’s estate.

C is correctbecause ownership is divided, and the deceased’s share passes to their estate.

Ais incorrect because partnerships have different agreements governing ownership transitions.

Bis incorrect because trust corporations are governed by trust agreements, not estate processes.

Dis incorrect because JTWROS accounts pass ownership directly to the surviving account holder(s).

XYZ bonds have a yield higher than the coupon rate, indicating that their market price has decreased due to concerns about the issuer's creditworthiness.

A is correctbecause the high yield suggests elevated credit risk.

Bis incorrect because domestic utility companies are unlikely to face political risk.

Cis irrelevant as the bonds are denominated in U.S. dollars.

Dis incorrect as prepayment risk is associated with callable bonds, not noncallable bonds.

Step by Step Explanation:

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

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

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

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

References:

FINRA Guidelines on Joint Accounts: FINRA Joint Accounts.

Under FINRA Rule 2150, registered representatives may share in profits and losses in a customer’s account if:

The customer provides written consent.

The arrangement is approved by the RR’s firm.

The sharing is proportional to the RR's financial contribution.

C is correctbecause it aligns with FINRA requirements.

A,B, andDare incorrect because they do not meet the necessary conditions for sharing.

Open-end mutual funds are redeemable securities, meaning investors can sell their shares back to the fund at the NAV.

D is correctbecause mutual funds allow redemption at NAV.

A,B, andCare not redeemable securities.

Step by Step Explanation:

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

Incorrect Options:

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

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

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

References:

FINRA and SEC Guidelines on Settlement: SEC Settlement Process.

Federal Reserve Regulation T mandates that customers must pay for purchases in a cash account within two business days of settlement (T+4). If payment is not made, the brokerage firm must liquidate the securities and place the account on a 90-day restriction.

C is correctbecause the customer’s account is frozen for 90 days, during which all trades must be paid for in advance.

Ais incorrect as closing transactions are still permitted but require prepayment.

Bis incorrect because the restriction lasts for 90 days, not 30.

Dis incorrect as only the delinquent account, not related accounts, is frozen.

Step by Step Explanation:

Tender Offer Definition: A tender offer is an offer to purchase a certain number of shares from shareholders, typically at a price above the current market value. This is often part of mergers, acquisitions, or corporate takeovers.

Stock Split: A stock split increases the number of shares but decreases the price per share without affecting the total value of an investor's holdings.

Redemption: Redemption refers to the repayment of a bond or preferred stock at maturity or at a predetermined date.

Class Action: A class action is a lawsuit filed by a group of people with similar grievances.

References:

SEC Rule 14e on tender offers: SEC Tender Offers.

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

C is correctbecause the separate account ensures creditor protection.

Ais incorrect as management fees for variable annuities are often higher.

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

Dis incorrect as subaccounts do not represent subordinated debt.

Step by Step Explanation:

Open-End Mutual Funds: Shares are purchased directly from the fund or its underwriter at the current Net Asset Value (NAV), plus any applicable sales charges.

Custodian: Holds the fund's assets but does not sell shares.

NYSE and Shareholders: Open-end funds do not trade on exchanges or between individual shareholders.

References:

SEC Mutual Fund Basics: SEC Mutual Funds.

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:

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:

Priority in Bankruptcy: Preferred stockholders have a higher claim on a company’s assets than common stockholders during liquidation. Common stockholders are residual claimants.

Dividend Priority: Preferred stockholders are entitled to fixed dividends before common stockholders receive any dividends.

Incorrect Options:

A & B: Common and preferred stocks are treated differently in bankruptcy and dividend payments.

C: Common stock dividends are subordinate to preferred stock dividends.

References:

SEC Guidance on Stockholder Rights:SEC Stock Rights.

Step by Step Explanation:

Securitization: The process of pooling financial assets, such as mortgage loans, and creating asset-backed securities that investors can buy.

Incorrect Options:

B: Hypothecation refers to pledging assets as collateral.

C & D: Loan and claim processing are administrative terms, not related to the creation of securities.

References:

SEC Guidance on Asset-Backed Securities: SEC ABS Info.

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:

European-Style Options: Can only be exercised on their expiration date, unlike American-style options, which can be exercised any time before expiration.

Incorrect Options:

A: Not accurate; the exercise must occur specifically on the expiration date.

C: Options cannot be exercised after expiration.

D: The expiration date depends on the option contract, not a specific weekday.

References:

Options Clearing Corporation (OCC) Guidelines:OCC European Options.

Step by Step Explanation:

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

Incorrect Options:

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

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

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

References:

SEC and FINRA Guidelines on Trusts: FINRA Trust Accounts.

A private securities transaction involves the sale of securities outside the scope of a registered representative’s employment with their member firm. Such transactions must be disclosed to and approved by the firm under FINRA Rule 3280.

B is correctbecause raising money for a startup involves the sale of securities and must be reported as a private securities transaction.

Ais incorrect because soliciting charitable donations does not involve securities.

Cis incorrect because selling term life insurance policies is not a securities transaction.

Dis incorrect because investing personal money does not involve soliciting or selling securities to others.

Step by Step Explanation:

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

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

Treasury Bonds: Issued by the federal government.

Corporate Bonds: Issued by corporations, not municipalities.

References:

SEC Municipal Bond Guide: SEC GO Bonds.

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

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

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

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

When interest rates rise, the price of fixed-rate corporate bonds falls because the bond's coupon payments become less attractive compared to new bonds issued at higher rates.

D is correctas bond prices move inversely to interest rates.

Ais incorrect because bond prices fluctuate with interest rate changes.

Bis incorrect because bond prices revert to par only at maturity.

Cis incorrect because prices do not appreciate when rates rise.

Treasury stock refers to shares that were issued by a company and subsequently repurchased by the company. These shares are held in the company’s treasury and are not considered outstanding.

C is correctbecause treasury stock is stock reacquired by the issuer.

Ais incorrect because authorized but unissued stock has never been issued.

Bis incorrect because restricted stock refers to shares issued with restrictions on transferability, not reacquired stock.

Dis incorrect because it incorrectly refers to government securities, not corporate stock.

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:

REIT Requirements: REITs must invest at least 75% of their total assets in real estate to qualify for favorable tax treatment under IRS regulations.

90% Rule: Refers to the distribution requirement for taxable income, not asset allocation.

100% Rule: There is no requirement to allocate 100% of assets to real estate.

References:

IRS Publication 542 (Real Estate Investment Trusts):IRS REIT Guidelines.

Step by Step Explanation:

Balance Sheet Definition: Shows a company’s financial position at a specific point in time, listing assets, liabilities, and shareholders' equity (net worth).

Other Financial Statements:

Profit and Loss Statement: Summarizes revenues and expenses over a period.

Cash Flow Statement: Tracks cash inflows and outflows.

References:

SEC Guide to Financial Statements: SEC Financials.

When bond yields rise, the price of existing bonds falls. This inverse relationship exists because the fixed coupon payments of the bonds become less attractive compared to new bonds issued at higher yields.

B is correctbecause the bond’s market value decreases as its yield increases.

Ais incorrect because bond values decrease, not increase, with rising yields.

Cis incorrect because the face value (par value) remains unchanged.

Dis incorrect because changes in yield directly affect the bond’s market price.

Step by Step Explanation:

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

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

Incorrect Options:

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

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

References:

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

Step by Step Explanation:

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

Incorrect Options:

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

C: Competitive offerings involve multiple underwriters submitting bids.

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

References:

MSRB Overview of Municipal Offerings:MSRB Offerings.

FINRA Rule 3220 prohibits member firms from giving gifts exceeding $100 per individual per year to ensure that gifts do not influence business conduct. The rule applies to gifts given in connection with the firm’s business.

C is correctbecause it adheres to FINRA’s $100 annual limit.

Ais incorrect because the total value of gifts must also not exceed $100 annually.

Bis incorrect as there is no $200 limit.

Dis incorrect as gifts are allowed within the $100 limit.