SIE Securities Industry Essentials Exam (SIE) Questions and Answers

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.

IRS Section 529 Guidance: IRS 529 Plans.

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.

FINRA Guidance on Market Strategies: FINRA Trading Basics.

Step by Step Explanation:

ADRs: Represent foreign securities but are issued in the U.S. and quoted in U.S. dollars, making them easier for American investors to trade.

Incorrect Options:

B: ADRs are quoted in U.S. dollars, not foreign currencies.

C & D: ADRs represent foreign securities held by U.S. banks, not foreign banks.

SEC Bulletin on ADRs: SEC ADR Overview.

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.

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

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.

MSRB Overview of Municipal Offerings: MSRB Offerings.

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.

SEC Investor Bulletin on Risks: SEC Risk Guidance.

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.

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

Layering is one of the classic stages of money laundering, so B is correct. Money laundering generally involves moving illicit proceeds through the financial system to make the funds appear legitimate. The process is commonly described in stages: placement (introducing illegal funds into the financial system), layering (creating complex layers of transactions to obscure the source and ownership), and integration (reintroducing the funds into the economy as seemingly legitimate assets). Layering specifically refers to using multiple transactions—often rapid, complex, and sometimes across different accounts, institutions, or jurisdictions—to break the audit trail. Examples include frequent wire transfers, moving funds through multiple accounts, buying and selling financial instruments to create transactional “noise,” or converting into different instruments to make tracing more difficult.

Choice A, hedging, is a legitimate investment risk management technique used to reduce exposure to market movements. Choice C, front running, is a prohibited trading practice involving trading ahead of customer orders or anticipated market-moving events for personal benefit. Choice D, insider trading, involves trading on material nonpublic information and is an anti-fraud violation. None of these are money laundering activities; they are unrelated concepts that appear elsewhere on the SIE (trading practices and prohibited activities).

On the SIE, AML questions frequently test your ability to recognize the terminology of money laundering and the role of broker-dealer AML programs, suspicious activity reporting, and red flags. “Layering” is a key vocabulary term and is strongly associated with attempts to conceal the origin of funds.

The annual interest on a bond is calculated based on the coupon rate and the bond’s par value.

Coupon rate = 4.0%.

Annual interest = $10,000 (par value) × 4.0% = $400.

A is correct because the coupon rate determines the annual interest.

B, C, and D are incorrect because they reflect incorrect calculations. The current yield, YTM, and tax-equivalent yield do not affect the bond’s fixed coupon payments.

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.

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

American Depositary Receipts (ADRs) allow U.S. investors to efficiently invest in foreign corporations without the need to trade on foreign exchanges. ADRs are traded on U.S. exchanges and represent shares of foreign companies.

D is correct because ADRs are designed for this purpose, simplifying currency exchange and reporting requirements for U.S. investors.

A is incorrect because directly purchasing an ETF on a foreign exchange requires additional steps, such as foreign account setup.

B is incorrect because options are derivative products, not direct investments in the stock.

C is less efficient because mutual funds may not provide direct exposure to the specific corporation.

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 correct because individual accounts require probate to transfer assets.

B is incorrect because irrevocable trusts bypass probate.

C is incorrect because TOD accounts allow direct transfer of assets to named beneficiaries without probate.

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

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.

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

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 correct because it adheres to FINRA’s $100 annual limit.

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

B is incorrect as there is no $200 limit.

D is incorrect as gifts are allowed within the $100 limit.

Step by Step Explanation:

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

Incorrect Options:

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

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

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

Bonds pay interest periodically (commonly semiannually). Between interest payment dates, interest accrues daily. When a bond is sold in the secondary market, the buyer will receive the full next interest payment from the issuer on the scheduled coupon date—even though the buyer did not hold the bond for the entire coupon period. To make this fair, the buyer compensates the seller for the portion of interest that accrued while the seller owned the bond. This compensation is called accrued interest, and it is paid by the buyer to the seller as part of the transaction’s total cost.

Operationally, in most bond trades the quoted price is “clean” (excluding accrued interest). The settlement amount is the “dirty” price: clean price + accrued interest. From the seller’s perspective, accrued interest is added to the net proceeds of the sale, which is exactly what choice D states. Therefore, the correct answer is D.

Choice A is incorrect because the buyer is not receiving accrued interest; the buyer is paying it. Choice B is incorrect because accrued interest is not deducted from the seller’s proceeds; it is added. Choice C is incorrect because the seller does not wait until the next coupon date to receive their earned interest—accrued interest is settled in the trade. The bond issuer pays the coupon to the holder of record as of the relevant record date, which will be the buyer after settlement; the seller is compensated at settlement via accrued interest.

This is a core SIE bond settlement concept: buyer pays seller accrued interest, and the seller’s proceeds include it.

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 correct because Regulation D offerings involve private placements, resulting in restricted stock.

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

C and D are incorrect because restricted stock is not obtained through warrants or exchange-traded options.

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.

SEC Mutual Fund Guide: SEC Mutual Funds.

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.

SEC and FINRA Bond Basics: SEC Discount Bonds.

An index ETF is designed to track a specific index—which may represent an asset class, market segment, style, sector, or country—so D is correct. Index ETFs are typically passively managed to replicate the performance of a chosen benchmark (e.g., a broad equity index, a sector index, or an international index). This product design feature is fundamental and widely tested on the SIE.

Choice C is incorrect because ETFs are not priced once daily like open-end mutual funds. ETFs trade on an exchange throughout the day and have intraday market prices. Choice B is incorrect because typical retail investors do not redeem ETF shares for cash directly with the issuer. The creation/redemption process is primarily for authorized participants, who transact in large blocks (creation units), usually exchanging baskets of securities. Retail investors buy and sell ETF shares in the secondary market through brokerage transactions. Choice A is incorrect because while ETFs have an indicative intraday value (often called intraday NAV or iNAV), the ETF’s market price can trade at small premiums or discounts based on supply/demand. It does not necessarily trade exactly at “intraday intrinsic value” at every moment, even though the arbitrage mechanism usually keeps deviations relatively small.

For SIE purposes, remember the core ETF distinctions: intraday trading, typically lower expense than many active mutual funds, an index-tracking objective for index ETFs, and a creation/redemption mechanism that supports price alignment with underlying value.

The most appropriate permitted initial step is to contact the customer directly to confirm the activity and, if needed, notify the customer’s trusted contact person, making D correct. FINRA guidance and firm practices around protecting seniors emphasize proactive steps to detect and respond to potential financial exploitation. A trusted contact is a person the customer authorizes the firm to contact if there are concerns about possible exploitation, diminished capacity, or suspicious activity. Reaching out to the customer helps verify whether the activity was authorized and consistent with their intentions, and involving the trusted contact (when appropriate and permitted) adds another protective layer.

Choice A is inappropriate because immediately closing an account is an extreme action that is not the standard first step and could harm the customer or disrupt legitimate needs. Choice B is also inappropriate because liquidating assets without authorization is generally impermissible absent a clear legal basis, proper discretion, or a valid protective hold process under firm policy and applicable rules. Choice C is not the correct initial step; while firms may have reporting obligations in certain circumstances, the immediate first response is typically internal escalation and customer contact rather than “reporting to FINRA and the SEC” as the first action.

On the SIE, this tests senior investor protection concepts: recognizing red flags, escalating internally, and using tools like the trusted contact to help protect vulnerable customers while respecting account authority and documentation requirements.

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

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

A, B, and C change less frequently.

Step by Step Explanation:

Cost Basis in Reverse Split: The total cost basis remains unchanged in a reverse stock split. Only the number of shares and price per share adjust.

Pre-Split: 1,000 shares at $5 each = $5,000.

Post-Split: 200 shares at $25 each = $5,000.

Incorrect Options:

A, B, and D: Do not reflect the unchanged total cost basis.

IRS Guidance on Stock Splits: IRS Stock Split 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.

SEC Bulletin on Penny Stocks: SEC Penny Stocks.

Step by Step Explanation:

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

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

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

SEC and FINRA Guidance on Sectors: Investopedia Sector Overview.

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.

SEC Guidance on Bond Ratings: SEC Bond Ratings.

Step by Step Explanation:

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

Incorrect Options:

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

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

A preliminary prospectus (often called a “red herring”) is used in a registered public offering—such as an IPO—before the final offering price and certain final terms are set. It typically contains extensive information about the issuer, including its business description, risk factors, intended use of proceeds, management, capitalization, and importantly, details about ownership and shareholdings (e.g., principal shareholders, insiders, and how ownership may change post-offering). That makes A (Ownership structure) the correct answer.

Choice B is incorrect because “anticipated trading volume” is not a standard required disclosure item in a preliminary prospectus. While a prospectus may discuss market and listing information, projected trading volume is speculative and generally not presented as a typical disclosure item. Choice C is incorrect because the SEC does not approve the merits of an offering; securities regulation is rooted in disclosure, not merit review. The SEC’s role is to require that material information is disclosed so investors can make informed decisions—not to judge whether the investment is “good.” Choice D is incorrect because FINRA does not “determine” a preliminary prospectus is accurate in that way; FINRA’s corporate financing review is focused on underwriting terms and arrangements for fairness/reasonableness under applicable rules, not certifying accuracy of issuer disclosures.

This question targets core SIE offering concepts: what a prospectus contains, what “red herring” means, and the principle that regulators require full and fair disclosure rather than guaranteeing investment quality.

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.

SEC PIPE Offering Guidance: SEC PIPE Offerings.

In a tenants in common account, 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 correct because ownership is divided, and the deceased’s share passes to their estate.

A is incorrect because partnerships have different agreements governing ownership transitions.

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

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

American Depositary Receipts (ADRs) provide U.S. investors with exposure to foreign companies, making D correct. An ADR is a negotiable receipt issued by a U.S. depository bank representing shares (or a fraction of shares) in a non-U.S. company. ADRs trade in U.S. markets and are typically priced and settle in U.S. dollars, which can make foreign investing more operationally convenient for U.S. investors while still offering exposure to the underlying foreign issuer’s business and its home-market risks.

Choice A (Treasury bills) are U.S. government debt instruments and do not provide foreign exposure. Choice B (municipal bonds) are issued by U.S. states, cities, and other municipal entities, so they are domestic. Choice C (SPY) is an ETF designed to track the S&P 500, which is a U.S. large-cap equity index; while some underlying companies may have international operations, SPY is not typically considered a direct “foreign investment exposure” vehicle in SIE terms. ADRs are the clean, direct answer because the underlying issuer is foreign.

On the SIE, ADRs are tested as an equity product type and as a method of gaining international exposure, along with related concepts such as currency considerations (even if ADRs trade in dollars, the underlying business may be exposed to currency and foreign political/economic risk), and the role of depository banks.

FINRA Rule 3260 requires that discretionary trades be approved by the customer in writing and reviewed by the supervising firm. The order ticket must indicate that discretion was exercised to ensure proper oversight.

B is correct because marking the order ticket ensures compliance with supervisory requirements.

A is incorrect because discretionary authority is not limited to market orders.

C is incorrect as discretionary trades do not require pre-approval for each trade but require prior written authorization.

D is incorrect because discretionary authority allows the RR to decide on price and timing without specific customer instructions.

The beta coefficient measures the sensitivity of a stock's returns relative to the overall market (usually the S&P 500). A beta of:

1.0 indicates the stock moves in line with the market.

Greater than 1.0 suggests the stock is more volatile than the market.

Less than 1.0 suggests the stock is less volatile.

D is correct because beta specifically compares the volatility of a stock to the market.

A is incorrect as beta does not measure the market’s volatility.

B is incorrect as beta considers both upside and downside movements.

C is incorrect as beta does not measure liquidity.

Under the Insider Trading and Securities Fraud Enforcement Act of 1988, the SEC may impose a civil penalty of up to three times the profit gained or loss avoided (referred to as "treble damages") on individuals found guilty of insider trading.

B is correct because treble damages equal three times the profit or avoided loss.

A is incorrect because the penalty is not limited to one time the profit.

C and D are incorrect because the penalty is capped at three times, not six or ten times.

Common stock typically provides the owner with voting rights on key corporate matters, making answer B correct. Common shareholders generally vote to elect the board of directors and may vote on significant corporate actions such as mergers, major reorganizations, or other proposals submitted for shareholder approval. Voting rights are a core distinguishing feature of common stock and are frequently tested on the SIE as part of understanding equity ownership and shareholder rights.

A warrant (choice A) is a derivative-like security that gives the holder the right to purchase the issuer’s stock at a specified price before expiration. Warrant holders do not have voting rights unless and until they exercise the warrant and become stockholders. Preferred stock (choice C) typically has characteristics closer to a hybrid: it pays a stated dividend and often has priority over common stock in dividends and liquidation, but it usually does not carry voting rights (though preferred may gain voting rights in special situations, such as when dividends are in arrears, depending on the issue terms). A corporate bond (choice D) is debt; bondholders are creditors, not owners, and generally do not vote on corporate governance matters (though bond covenants may provide protections and certain consent rights in specific restructuring situations).

The SIE emphasizes the relationship between security type and investor rights: equity ownership (common stock) comes with participation in corporate governance through voting, while debt instruments provide contractual cash flows and creditor protections but not ownership voting rights.

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.

SEC and FINRA Guidelines on Trusts: FINRA Trust Accounts.

Under FINRA Rule 2210, firms must avoid making predictions or projections of future investment performance.

B is correct because it involves prohibited predictive statements.

A, C, and D are acceptable under FINRA guidelines, as they do not involve prohibited content.

A stock dividend increases the number of shares owned without affecting the total cost basis. The new cost basis per share is calculated by dividing the original total investment by the new number of shares:

Original total investment = 100 shares × $50.00 = $5,000

After a 10% stock dividend, the investor owns 110 shares.

New cost basis = $5,000 ÷ 110 shares = $45.45 per share.

B is correct because it reflects the adjusted cost basis per share.

The RR’s actions are impermissible because an RR may not sign a document on behalf of a customer to satisfy documentation requirements, regardless of whether the signature is “digital” or on paper. Signing for a customer is essentially a falsification or “signature of convenience,” which is a serious compliance violation. Firms require customer signatures on certain disclosures to evidence that the customer received and acknowledged the risks and terms; if the customer is unavailable, the correct approach is to delay the transaction, obtain the proper signature, or follow firm-approved alternative procedures—not to sign for the customer. Therefore, C is correct.

Choice A is incorrect because the customer’s unavailability does not justify falsifying documentation. Choice B is incorrect because suitability and oral authorization do not permit the RR to execute a customer signature requirement; suitability does not waive documentation rules. Choice D is incorrect because the prohibition is not about the medium; signing on the customer’s behalf is improper whether digital or hard copy.

On the SIE, this ties to books and records integrity and prohibited practices: firms and associated persons must maintain accurate records and cannot create misleading documentation. Regulators treat record falsification as a major violation because it undermines supervision, customer protection, and regulatory examinations.

Hedge funds are typically the least liquid among the listed choices, so A is correct. Hedge funds are often structured as private investment pools available only to eligible investors (commonly with higher minimums and restrictions). A hallmark feature is limited liquidity: many hedge funds impose lock-up periods, allow redemptions only at specified intervals (monthly/quarterly), and may apply gates or redemption restrictions, particularly during market stress. Because investors often cannot freely exit on demand, hedge funds are generally considered illiquid compared to exchange-traded or daily redeemable products.

Listed options (choice B) are generally highly liquid when they trade on organized exchanges (especially for actively traded underlyings), with standardized terms and readily observable bid-ask markets—though liquidity can vary by strike/expiration and underlying. Open-end mutual funds (choice C) are typically very liquid because investors can redeem shares directly with the fund at NAV, generally on any business day (with proceeds delivered within standard timelines), subject to fund policies and possible fees. ETFs (choice D) trade intraday on exchanges like stocks, which usually provides substantial liquidity, and creation/redemption mechanisms help keep ETF market prices aligned with NAV.

This question is testing an SIE product comparison: which vehicle generally has the greatest restrictions on redemption and secondary-market exit. Private pooled vehicles like hedge funds commonly restrict access and exit, making them least liquid. Even if some hedge funds allow periodic withdrawals, they remain far less liquid than instruments that trade continuously on exchanges or redeem daily at NAV.

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.

SEC Municipal Bond Guide: SEC GO Bonds.

Certificates of Deposit (CDs) are time deposit accounts issued by banks, offering fixed interest rates for a specified term. CDs are insured by the FDIC up to $250,000 per depositor, but the issuing entity is the bank itself.

B is correct because banks issue CDs.

A is incorrect because the FDIC insures CDs but does not issue them.

C is incorrect because broker-dealers may facilitate the purchase of CDs but do not issue them.

D is incorrect because the Federal Reserve does not issue CDs; it manages monetary policy.

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.

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

Step by Step Explanation:

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

Incorrect Options:

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

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

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

SEC Guide on Secondary Offerings: SEC Secondary Offerings.

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.

SEC Investor Bulletin on Hedge Funds: SEC Hedge Funds.

Treasury securities (Treasury bills, notes, and bonds) are obligations of the U.S. government. A key testable feature is their tax treatment: interest earned on Treasuries is subject to federal income tax (though it is generally exempt from state and local income taxes). That makes choice B correct.

Choice A is incorrect because FDIC insurance applies to bank deposit products (e.g., bank CDs, savings accounts) held at insured depository institutions, within insurance limits. Treasury securities are not bank deposits; they are direct government securities, so “FDIC-insured” is not the right concept. Treasuries are considered to have very low credit risk due to U.S. government backing, but that is different from FDIC insurance.

Choice C is incorrect because Treasuries trade in both the primary market (when issued by the Treasury) and the secondary market (after issuance). In fact, Treasuries are among the most actively traded securities in the world, and secondary-market trading is a major source of liquidity and price discovery. Investors can buy newly issued Treasuries at auction (primary) or purchase existing Treasuries from other investors and dealers (secondary).

Choice D is incorrect because securities issued by states and municipalities are municipal securities (muni bonds/notes), not Treasury securities. Treasuries are issued by the U.S. Department of the Treasury, while municipal bonds are issued by states, cities, counties, and other political subdivisions or authorities.

On the SIE, this question targets product knowledge: issuer identity, trading markets, and tax characteristics of government vs. municipal vs. bank products.

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.

SEC Mutual Fund Basics: SEC Mutual Funds.

The correct answer is Monetarist, which centers on the idea that the money supply is a primary driver of economic activity, inflation, and overall growth. Monetarists argue that changes in the quantity of money in circulation significantly influence aggregate demand and price levels over time. In practice, this links closely to the role of a central bank (in the U.S., the Federal Reserve) in influencing economic conditions through monetary tools that affect the availability and cost of money and credit. For SIE purposes, the key takeaway is that monetarist thinking emphasizes controlling money supply growth to promote stable economic expansion and manage inflation.

This differs from Keynesian theory, which typically emphasizes fiscal policy (government spending and taxation) and total demand management as the main lever for stabilizing the economy, especially during recessions. While Keynesians also recognize monetary policy, they usually place more focus on government intervention through budget policy to influence employment and output. Supply-side approaches focus more on policies intended to increase production incentives (e.g., lowering taxes and reducing regulation to stimulate investment and labor supply), rather than treating money supply as the central driver. Demand-pull is not a broad “model” in the same sense; it is most commonly associated with a type of inflation where rising demand outpaces supply, pushing prices upward.

The FINRA SIE outline includes principal economic theories (including Keynesian and Monetarist) and tests candidates’ ability to identify which framework aligns with a described belief about what drives growth and market conditions.

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).

SEC Regulation D: SEC Regulation D.

A transfer agent is responsible for maintaining accurate records of shareholder purchases, redemptions, and account balances. They also handle the issuance and cancellation of shares and ensure shareholders receive appropriate distributions.

D is correct because maintaining shareholder records is a core duty of a transfer agent.

A is incorrect because underwriting is the responsibility of a broker-dealer.

B is incorrect because distributing the prospectus is handled by the fund’s distributor.

C is incorrect because custody of securities is the role of a custodian, not the transfer agent.

The correct answer is A (No filing required) based on the facts provided. A Currency Transaction Report (CTR) is generally triggered by currency transactions (cash) over the applicable threshold within a single business day. In this scenario, the customer deposited a cashier’s check and a money order, which are monetary instruments, not “currency” (cash). Therefore, even though the combined amount is $10,500, the deposits described are not cash deposits, so this does not automatically require a CTR.

A Suspicious Activity Report (SAR) is required when activity is suspicious and meets reporting criteria—such as transactions that appear designed to evade reporting requirements, have no apparent lawful purpose, involve potential money laundering, or otherwise raise red flags. Here, the amounts and instruments alone—$8,000 cashier’s check and $2,500 money order deposited the same day—do not necessarily indicate suspicious activity. Without additional facts (e.g., patterns of structuring, inconsistent customer profile, unusual source of funds, evasive behavior, or other AML red flags), the firm is not required to file a SAR solely on this activity.

Form W-9 is used to request a taxpayer identification number and certification for certain tax-reporting purposes, but it is not a standard “required filing” triggered by these deposits as described.

The SIE tests the ability to distinguish between currency-based reporting (CTR) and suspicion-based reporting (SAR), and to recognize that not every large or same-day deposit is automatically reportable without meeting the specific rule trigger.

Step by Step Explanation:

Form U4 Reporting Requirements: Registered persons must disclose criminal charges (excluding minor traffic violations) and material changes such as residential address changes. Gambling-related misdemeanors are considered reportable.

Incorrect Options:

Speeding Ticket: Typically not reportable unless it involves a felony.

Business Telephone Number: Not material for Form U4.

FINRA Form U4 Instructions: FINRA Form U4.

Treasury securities are among the most liquid investments, as they are backed by the U.S. government and trade actively in large volumes.

A is correct because Treasuries are highly liquid, making them easy to buy and sell.

B is incorrect because most Treasury securities are not callable.

C is incorrect because FDIC insurance applies to bank deposits, not Treasuries.

D is incorrect because U.S. government securities have negligible default risk.

Preferred stock may include convertible features that allow holders to exchange the preferred shares for another security of the issuing company—most commonly common stock—at a specified conversion ratio. That is why choice B is correct. Convertible preferred combines characteristics of equity income (a stated dividend) with the potential upside participation of common stock through the conversion privilege. The conversion feature is set by the issuer and described in the security’s terms at issuance.

Choice A is not the best answer because “common stock” itself is not typically described as “convertible” into other company issues; conversion features are commonly attached to preferred stock or bonds (convertible debentures), not standard common shares. Choice C, commercial paper, is a short-term unsecured corporate money market instrument; it is not typically issued with conversion features—its hallmark is short maturity and credit quality, not embedded equity options. Choice D, an ETF, is an investment company product whose shares represent an interest in a portfolio; ETFs are not typically “convertible” into other issues of the company in the way convertible preferred is.

This is a product-knowledge question aimed at understanding embedded features and how issuers structure securities. For SIE purposes, remember: convertibility is most commonly associated with preferred stock and certain corporate bonds, and it provides investors with an option-like feature that can change the security’s risk/return profile (income plus potential appreciation).

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 correct because treasury stock is stock reacquired by the issuer.

A is incorrect because authorized but unissued stock has never been issued.

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

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

A balance sheet provides a snapshot of a company’s financial position at a specific point in time by showing what the company owns and owes, and the residual value attributable to owners. The core balance sheet equation is Assets = Liabilities + Shareholders’ Equity. That is why the best description among the choices is “assets, debts, and the amount invested in the company”—assets correspond to resources owned, debts correspond to liabilities owed, and the “amount invested” corresponds to equity (often including paid-in capital and retained earnings). This aligns with how fundamental analysis uses financial statements to evaluate issuer health, leverage, and capitalization.

Choice A (revenues and expenses) describes an income statement, which measures operating performance over a period of time (e.g., a quarter or a year), not a point-in-time snapshot. Choice B is misleading: while a balance sheet is indeed “at a specific point in time,” it does not show “earnings” at a point in time. Earnings are generated over a period and appear on the income statement; the balance sheet may reflect accumulated earnings through retained earnings, but it is not an earnings statement. Choice C is incorrect because the balance sheet does not include the “number of investors” as a standard line item. Public companies disclose shares outstanding elsewhere, but investor count is not a balance sheet category.

For SIE purposes, the key is recognizing which statement answers which question: balance sheet = financial position (assets, liabilities, equity), income statement = profitability (revenue, expenses, net income), and cash flow statement = sources/uses of cash.

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.

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

Step by Step Explanation:

FINRA Rule 4530: Requires member firms to report certain events, including allegations of forgery, to FINRA promptly.

Incorrect Options:

Option B: Maintaining a record does not substitute for required reporting.

Option C: Arbitration isn’t required before reporting.

Option D: Reporting is mandatory irrespective of internal investigations.

FINRA Rule 4530 (Reporting Requirements): FINRA Rule 4530.

A marketing piece claiming FINRA “endorses” a broker-dealer is not permissible, so A is correct. FINRA is a self-regulatory organization that oversees broker-dealers; it does not “endorse” member firms as a marketing claim. Communications with the public must be fair and not misleading. Suggesting FINRA endorsement could mislead customers into thinking the regulator has approved the firm’s quality, products, or services, which conflicts with the disclosure-based framework and the principle that regulators do not provide merit-based approval of market participants.

Choice B is incorrect because principal approval does not make a misleading statement permissible. Principal approval is an internal supervisory step; it cannot legalize a false or misleading representation. Choice C is incorrect because FINRA does not provide written approvals to allow firms to claim endorsement; the concept itself is improper. Choice D is incorrect because the issue is not whether specific investments are mentioned; the misrepresentation is the claim of regulatory endorsement, which is misleading regardless of content.

SIE exam questions in this area test your ability to spot prohibited or misleading marketing language—especially anything implying government or regulator “approval,” “guarantee,” or “endorsement.” Similar logic applies to claims that the SEC approves a prospectus or the merits of an offering. The correct approach in communications is accurate, balanced disclosure—not implying that a regulator supports or recommends the firm.

Broker-dealers are subject to SEC recordkeeping and retention rules (commonly tested under Exchange Act recordkeeping requirements). Certain records must be preserved for long periods, and some must be kept for the life of the firm. Among the choices, corporate formation documents (e.g., articles of incorporation/charter, bylaws, partnership agreements, and similar foundational records) are the category most clearly associated with “lifetime” retention. These documents establish the firm’s legal existence, governance structure, and authority to conduct business, so regulators require them to remain available as long as the broker-dealer exists.

Trade blotters and customer confirmations are important operational records, but they are generally subject to multi-year retention requirements rather than “lifetime.” They help reconstruct trades, demonstrate compliance, and support customer reporting, yet the retention period is not typically “for the life of the firm.” Similarly, Forms U4 and U5 and other employee records are retained for specified periods and are updated as reportable events occur, but they are not generally described as “lifetime of the broker-dealer” records in the way corporate formation documents are.

On the SIE, this question is about understanding that recordkeeping rules distinguish between:

organizational/legal foundation records (kept for the life of the firm), and

transactional/operational records (kept for defined periods).

That distinction supports investor protection and regulatory supervision by ensuring that a firm’s legal identity and governance history remain accessible for examinations, enforcement, and customer protection purposes.

Treasury bills (T-bills) are short-term debt securities issued at a discount to par value. The difference between the purchase price and the par value represents the investor’s interest income, which is realized when the T-bill matures.

C is correct because T-bills are issued at a discount and mature at par.

A is incorrect because T-bills are not sold at par value.

B and D are incorrect because T-bills do not pay periodic interest; the return is based on the discount.

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.

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

Step by Step Explanation:

Hypothecation Agreement: Required for margin accounts, it authorizes the broker-dealer to use the customer's margin securities as collateral to secure loans for funding customer transactions.

Incorrect Options:

A: Sharing customer information is regulated under privacy rules (Regulation S-P).

B: Unauthorized trading violates securities laws.

C: Selling unpaid securities in cash accounts pertains to Regulation T, not hypothecation agreements.

FINRA Margin Account Rules: FINRA Rule 4210.

The event that can prevent an individual from being eligible to register is making false statements on Form U4. Form U4 (Uniform Application for Securities Industry Registration or Transfer) is the foundational disclosure document used for registration and oversight of associated persons. FINRA and other regulators rely on the accuracy and completeness of U4 information to evaluate the applicant’s background, disciplinary history, reportable events, and overall fitness. Submitting false information—or omitting required information—undermines the integrity of the registration process and can lead to denial of registration, disciplinary action, and, depending on the nature of the misstatement, potential statutory disqualification concerns.

By contrast, a low credit score is not, by itself, a FINRA bright-line disqualifier for registration. Financial responsibility matters, but FINRA does not set a universal “minimum credit score” eligibility standard. A previous bankruptcy filing is a reportable event that may require disclosure and could trigger enhanced review or supervision; however, bankruptcy alone does not automatically make a person ineligible to register. Similarly, having more than 10 customer complaints is not automatically disqualifying without a determination of wrongdoing. Complaints can be reportable and may lead to investigations, but the number alone is not the key legal/registration barrier presented in this question.

The SIE content emphasizes that misleading information or omissions in registration-related filings are serious compliance failures, because they directly impair regulators’ ability to protect investors and supervise industry participants.

A private securities transaction generally involves an associated person participating in the sale of securities outside the regular scope of their member firm’s business, often referred to as “selling away.” Under FINRA rules, such activity typically requires prior written notice to the firm and, if compensation is involved, firm approval and supervision. Participating in the sale of promissory notes to raise money for a small business is a classic example of a securities transaction that falls into this category, making D correct. Promissory notes can be securities depending on their structure and context, and selling them to investors outside firm supervision raises significant investor protection concerns.

Choices A, B, and C are generally outside business activities that may require disclosure to the firm, but they are not necessarily securities transactions. Selling insurance (especially term life and property/casualty) is typically an insurance activity, not a securities sale (though variable products are securities). Providing accounting/tax services is a professional service, not a securities transaction. Teaching a class is an outside activity, not a securities sale. These may require firm reporting under outside business activity rules, but they are not inherently private securities transactions.

SIE-wise, this question tests your ability to identify when an activity crosses the line from ordinary outside business activity into selling securities away from firm oversight. The high-risk, heavily tested example is the representative selling notes or other investments to customers through a separate business or personal arrangement—this requires firm preapproval and supervision.

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 correct as bond prices move inversely to interest rates.

A is incorrect because bond prices fluctuate with interest rate changes.

B is incorrect because bond prices revert to par only at maturity.

C is incorrect because prices do not appreciate when rates rise.

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 correct because cumulative voting allows all votes to be concentrated.

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

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

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

This arrangement is not permissible because it is a sales contest/incentive tied directly to the sale of a specific investment company’s products, and it is funded by the product sponsor (ABC). Even if described as “training and education,” the key facts make it a prohibited non-cash compensation practice: the reward is offered only to the top producers of ABC fund sales during the month, and the trip is to a beach resort—creating a strong incentive to recommend ABC funds to maximize eligibility for the reward. This type of incentive can improperly influence recommendations and creates a conflict of interest between the RR’s compensation motivations and the customer’s best interest. Therefore, B is the best answer.

Choice A is not the best reason. The issue is not merely that the incentive is offered by ABC instead of the BD; non-cash compensation rules restrict sales contests and special compensation arrangements regardless of who sponsors them when they are tied to the sale of specific securities. Choice C is incorrect because calling something “training and education” does not make it permissible when the eligibility is driven by production in that sponsor’s products. True training meetings may be permitted under tightly defined conditions, but they cannot be structured as a sales contest rewarding top sellers. Choice D is also incorrect because even strong supervision does not cure a prohibited compensation structure—supervision is required, but it does not override rules designed to prevent conflicted incentives.

The SIE tests recognition that product-specific sales contests and lavish non-cash incentives are problematic because they can lead to biased recommendations and undermine fair dealing and best interest obligations.

NASAA is the North American Securities Administrators Association, and its membership is made up of state, provincial, and territorial securities regulators (in the U.S., primarily the state securities administrators). That makes C correct. On the SIE, NASAA is tested as the umbrella organization representing state-level regulators, which are responsible for enforcing state securities laws (“blue sky” laws), registering certain securities offerings when applicable, and registering/licensing investment adviser representatives and other participants under state jurisdiction.

Choice A is incorrect because broker-dealers are regulated entities, not NASAA members. Broker-dealers register with the SEC and are members of self-regulatory organizations like FINRA, but they are not “members of NASAA.” Choice B is incorrect because stock exchanges are marketplaces and are often SROs themselves, but they are not NASAA members. Choice D is incorrect because SROs (such as FINRA or MSRB) are not NASAA members; NASAA represents state-level governmental regulators, not self-regulatory organizations.

This question reinforces an important SIE framework: U.S. securities regulation is shared among federal regulators (SEC), self-regulatory organizations (FINRA, MSRB, exchanges), and state regulators. NASAA serves as a coordinating body for state regulators, promoting uniformity through model rules, policy coordination, investor education, and cooperation among jurisdictions. Understanding NASAA’s membership helps you correctly assign regulatory roles—especially when questions involve blue sky laws, state registration requirements, and state-level enforcement.

A key characteristic of non-traded (non-exchange-listed) REITs is limited liquidity, making A correct. Unlike publicly traded REITs that trade on exchanges and can be sold during market hours, non-traded REIT shares do not have an active public secondary market. Investors often must rely on limited redemption programs (if offered) or wait for a liquidity event (such as listing, merger, or liquidation), which can take years. As a result, investors may face difficulty selling shares quickly or at a predictable price, which is the essence of liquidity risk.

Choice B is misleading because many non-traded REITs are still registered securities sold via broker-dealers; “non-traded” does not automatically mean “private.” Some non-traded REITs are registered but not exchange listed. Choice C is the opposite of non-traded: if it is listed on an exchange, it is a traded REIT. Choice D describes open-end funds that calculate a daily NAV for purchases/redemptions; non-traded REITs do not function like mutual funds with daily NAV transactions (even though some may provide periodic valuations, that is not the defining “strike daily NAV” feature tested on the SIE).

This question tests product knowledge and risk recognition: non-traded REITs may offer income potential and real estate exposure, but the trade-off is often reduced transparency, higher fees, and notably limited liquidity compared with exchange-traded REITs or ETFs.

Passive ETFs track an index and require minimal management, leading to lower expenses compared to actively managed ETFs.

D is correct because passive ETFs are cost-efficient and have lower fees.

A is incorrect because index ETFs have low turnover since they replicate an index.

B is incorrect because ETFs are priced continuously throughout the trading day.

C is incorrect as ETFs aim to match, not outperform, the index.

A shelf registration allows an issuer to register securities with the SEC and then sell them over time—rather than all at once—after the registration statement becomes effective. Under shelf registration rules (commonly associated with SEC Rule 415 in practice), the issuer can generally offer and sell registered securities on a delayed or continuous basis within a permitted window (often tested as “up to three years” for exam purposes). That description exactly matches choice A.

Choice B (primary offering) is too general; it refers to a sale of new securities by an issuer, but it does not specifically mean the issuer can sell them over time for up to three years. Choice C (standby underwriting) is a type of underwriting commitment often associated with rights offerings, where an underwriter agrees to purchase unsubscribed shares—again, not the filing mechanism described. Choice D (preliminary registration) is not the standard term for this process; while preliminary prospectuses exist, the shelf concept is a specific registration approach.

Shelf registration is significant because it provides issuers flexibility to access capital markets when conditions are favorable—issuing debt or equity in tranches without repeating a full registration process for each sale. It can reduce time-to-market and administrative burdens, and it allows for strategic financing (e.g., issuing when rates drop or when valuation improves). On the SIE, the main expectation is recognizing the definition and purpose: register now, sell later, within the allowed period.