SIE Regulatory Framework 5 — Questions and Answers
Question 1: A broker-dealer that only transmits customer orders to a carrying firm for execution and clearing is called a(n):
- Market maker
- Introducing broker (Correct answer)
- Prime broker
- Specialist firm
Correct answer: Introducing broker
An introducing broker handles customer accounts and order entry but relies on a carrying (clearing) firm for custody of assets and trade settlement.
Question 2: Under the Bank Secrecy Act, broker-dealers must file a Currency Transaction Report (CTR) when a customer conducts a cash transaction exceeding:
- $5,000
- $10,000 (Correct answer)
- $25,000
- $50,000
Correct answer: $10,000
The Bank Secrecy Act requires a CTR for any cash transaction exceeding $10,000, and structuring transactions to avoid this threshold is illegal.
Question 3: Which of the following best describes the role of the Options Clearing Corporation (OCC)?
- It sets margin requirements for stock purchases
- It acts as guarantor and central counterparty for listed options trades (Correct answer)
- It registers new options products with the SEC
- It handles customer complaints about options transactions
Correct answer: It acts as guarantor and central counterparty for listed options trades
The OCC acts as the central counterparty and guarantor for all exchange-listed options contracts, ensuring performance of obligations.
Question 4: An investment adviser with assets under management below $110 million must generally register with:
- The SEC
- FINRA
- The state securities regulator where they operate (Correct answer)
- The Federal Reserve
Correct answer: The state securities regulator where they operate
Investment advisers with less than $110 million in AUM are generally required to register with their state securities administrator rather than the SEC.
Question 5: Regulation NMS (National Market System) was designed primarily to:
- Increase government control of stock exchanges
- Promote fair competition and best execution across equity markets (Correct answer)
- Restrict algorithmic trading
- Limit the number of registered exchanges
Correct answer: Promote fair competition and best execution across equity markets
Regulation NMS modernized equity market rules to promote competition, transparency, and best execution by requiring orders be routed to the market with the best price.
Question 6: When a broker-dealer acts as a dealer (principal) in a transaction, it:
- Acts as an agent and charges a commission
- Buys or sells securities from its own inventory and charges a markup or markdown (Correct answer)
- Must disclose the trade to a stock exchange
- Is prohibited from profiting on the transaction
Correct answer: Buys or sells securities from its own inventory and charges a markup or markdown
When acting as a principal, a dealer buys or sells from its own inventory and profits through a markup (on sales) or markdown (on purchases) rather than a commission.
Question 7: The Investment Advisers Act of 1940 requires investment advisers to act in their clients' best interests under the:
- Suitability standard
- Fiduciary standard (Correct answer)
- Best execution standard
- Disclosure standard
Correct answer: Fiduciary standard
Investment advisers registered under the Investment Advisers Act of 1940 are held to a fiduciary standard, requiring them to put clients' interests ahead of their own.
SIE Regulatory Framework 5
A broker-dealer that only transmits customer orders to a carrying firm for execution and clearing is called a(n):