Securities Industry Essentials (SIE) Exam — Questions and Answers

Question 1: Open market operations conducted by the Federal Reserve refer to:

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

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

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

Question 2: The Dow Jones Industrial Average (DJIA) is best described as a:

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

Correct answer: Price-weighted index of 30 large U.S. companies

The DJIA is a price-weighted index that tracks 30 large, publicly traded U.S. companies and is one of the oldest and most-cited market benchmarks.

Question 3: The Securities Act of 1933 primarily regulates:

Secondary market trading
The issuance of new securities (Correct answer)
Exchange operations
Broker-dealer conduct

Correct answer: The issuance of new securities

The Securities Act of 1933 governs the primary market by requiring full disclosure in connection with the offer and sale of new securities.

Question 4: Which type of stock gives shareholders priority over common stockholders when dividends are distributed?

Warrants
Common stock
Convertible bonds
Preferred stock (Correct answer)

Correct answer: Preferred stock

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

Question 5: JCB Company owns 5000 shares of issued stock in addition to 1000 shares of treasury stock. The right amount of common stock is represented by which of the following?

1000
6000
5000
4000 (Correct answer)

Correct answer: 4000

The amount of common stock outstanding refers to the shares currently held by investors, which are the shares that have been issued minus any shares the company has repurchased and holds as treasury stock. In this scenario, JCB Company has 5,000 shares of issued stock and 1,000 shares of treasury stock. Therefore, the number of outstanding common shares is 5,000 - 1,000 = 4,000 shares.

Question 6: Which market is known as the secondary market for trading existing shares among investors?

IPO market
Primary market
Over-the-counter market (Correct answer)
New issue market

Correct answer: Over-the-counter market

The over-the-counter (OTC) market is a secondary market where existing securities are traded between investors.

Question 7: The Consumer Price Index (CPI) is primarily used to measure:

The interest rate that the Federal Reserve charges member banks
The total value of goods and services exported by a country
Changes in the price level of a basket of consumer goods and services over time (Correct answer)
The total output of the manufacturing sector

Correct answer: Changes in the price level of a basket of consumer goods and services over time

The CPI tracks changes in the prices paid by urban consumers for a representative basket of goods and services, making it the primary measure of consumer inflation.

Question 8: A pattern day trader is defined as someone who executes how many or more day trades within five business days?

5
3
2
4 (Correct answer)

Correct answer: 4

FINRA Rule 4210 defines a pattern day trader as any customer who executes four or more day trades in five business days in a margin account.

Question 9: A churning violation occurs when a broker:

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

Correct answer: Excessively trades a customer's account primarily to generate commissions

Churning is the unethical practice of excessive trading in a customer's account primarily to generate commissions for the broker.

Question 10: A formal definition of a customer complaint, as per FINRA regulations, is:

An official complaint alleging a breach of SRO and/or federal laws and regulations (Correct answer)
Any of the aforementioned would qualify as a customer complaint.
An oral complaint alleging a breach of federal regulations, SRO, or both
An oral or written claim that SRO and/or federal laws and regulations have been broken

Correct answer: An official complaint alleging a breach of SRO and/or federal laws and regulations

According to FINRA Rule 4513, a customer complaint is formally defined as any written statement from a customer or someone acting on their behalf alleging a grievance. While firms must address all complaints, including oral ones, for reporting purposes, FINRA specifically requires an 'official' complaint to be in writing and allege a violation of SRO (Self-Regulatory Organization) rules or federal securities laws. This distinction is crucial for regulatory reporting and record-keeping.

Question 11: A joint tenancy with right of survivorship (JTWROS) account means:

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

Correct answer: Upon one owner's death, their share passes to the surviving owner(s)

In a JTWROS account, when one owner dies, ownership automatically passes to the surviving account holder(s) outside of probate.

Question 12: Which regulatory body oversees the operations of US stock exchanges and broker-dealers?

FDIC
Federal Reserve
OCC (Office of the Comptroller of the Currency)
SEC (Securities and Exchange Commission) (Correct answer)

Correct answer: SEC (Securities and Exchange Commission)

The SEC is the primary federal regulator of US securities markets, overseeing exchanges, broker-dealers, and investment advisers.

Question 13: The National Best Bid and Offer (NBBO) rule requires broker-dealers to:

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

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

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

Question 14: Which of the following correctly defines 'liquidity' in the context of securities?

The volatility of a security's price
The ease with which a security can be converted to cash without significant price impact (Correct answer)
The yield earned on a security over its lifetime
The creditworthiness of a security's issuer

Correct answer: The ease with which a security can be converted to cash without significant price impact

Liquidity refers to how quickly and easily a security can be bought or sold in the market without causing a significant change in its price.

Question 15: A stock trading 'ex-rights' means the shares are trading:

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

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

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

Question 16: Municipal bonds are issued by:

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

Correct answer: State and local governments

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

Question 17: A customer's account statement shows a 'long' position in 100 shares of XYZ. This means the customer:

Has an option to buy 100 shares at a set price
Owns 100 shares of XYZ (Correct answer)
Has borrowed and sold 100 shares expecting a price decline
Holds a futures contract on 100 shares

Correct answer: Owns 100 shares of XYZ

A long position means the investor owns the security outright and benefits if the price increases.

Question 18: Diversification of a portfolio is most effective at reducing which type of risk?

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

Correct answer: Non-systematic (unsystematic) risk

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

Question 19: A 529 plan is primarily used to save for:

Education expenses with tax-advantaged growth (Correct answer)
First-time home purchases
Healthcare costs
Retirement income

Correct answer: Education expenses with tax-advantaged growth

529 plans are state-sponsored education savings accounts where contributions grow tax-free and withdrawals for qualified education expenses are tax-free.

Question 20: Rule 144 governs the sale of:

Restricted and control securities (Correct answer)
Exchange-listed options
Municipal bonds in the secondary market
Foreign securities in US markets

Correct answer: Restricted and control securities

SEC Rule 144 establishes the conditions under which restricted and control securities can be publicly resold without registration.

Question 21: What is the par value of a standard corporate bond?

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

Correct answer: $1,000

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

Question 22: What information is required on a new account form under FINRA rules?

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

Correct answer: Customer's name, address, tax ID, investment objectives, financial situation, and risk tolerance

FINRA requires firms to collect comprehensive customer information including personal details, financial profile, and investment objectives for suitability purposes.

Question 23: Under Regulation T, the initial margin requirement for purchasing equity securities is:

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

Correct answer: 50%

Regulation T, set by the Federal Reserve, requires customers to deposit at least 50% of the purchase price of marginable securities.

Question 24: What is the term for a corporate action that increases the number of outstanding shares while reducing the price per share proportionally?

Forward stock split (Correct answer)
Stock dividend
Rights offering
Reverse stock split

Correct answer: Forward stock split

A forward stock split increases share count and lowers the price per share, keeping total market value the same.

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

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

Correct answer: Fiduciary standard

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

Question 26: In the event that a consumer complaint proceeds to an arbitration hearing, the panel's decision:

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

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

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

Question 27: A tenants in common (TIC) account differs from JTWROS in that:

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

Correct answer: Each TIC owner's share passes to their estate upon death, not to co-owners

In a TIC account, each owner's interest passes to their heirs through their estate, unlike JTWROS where it passes automatically to survivors.

Question 28: A bond that pays no periodic interest but is issued at a discount to face value is called a:

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

Correct answer: Zero-coupon bond

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

Question 29: Which of the following transactions would be exempt from SEC registration under Regulation D?

A secondary offering on NASDAQ
An IPO on the NYSE
A rights offering to existing shareholders
A private placement to accredited investors (Correct answer)

Correct answer: A private placement to accredited investors

Regulation D provides a safe harbor exemption from SEC registration for private placements sold to accredited investors.

Question 30: What is a power of attorney (POA) in a brokerage account context?

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

Correct answer: A written authorization for a third party to act on the account owner's behalf

A power of attorney authorizes a designated person to make investment decisions and transactions for another person's account.

Question 31: A put option gives the holder the right to:

Sell shares at the strike price (Correct answer)
Receive interest on the underlying bond
Buy shares at the strike price
Force a stock split

Correct answer: Sell shares at the strike price

A put option grants the holder the right to sell the underlying security at the strike price before expiration.

Question 32: What is the coupon rate of a bond?

The bond's yield to maturity
The annual interest rate stated on the bond at issuance (Correct answer)
The discount rate used to price the bond
The bond's current yield in the market

Correct answer: The annual interest rate stated on the bond at issuance

The coupon rate is the annual interest rate fixed at issuance, determining the periodic interest payments.

Question 33: Regular-way settlement for most equity securities occurs:

1 business day after the trade (T+1) (Correct answer)
Same day as the trade
3 business days after the trade (T+3)
2 business days after the trade (T+2)

Correct answer: 1 business day after the trade (T+1)

Following the SEC's 2024 transition to T+1 settlement, most equity securities must settle one business day after the trade date.

Question 34: Which economic development would most likely cause broad stock market prices to rise across multiple sectors?

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

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

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

Question 35: A customer who has a complaint against a broker-dealer may seek arbitration through:

FINRA's dispute resolution forum (Correct answer)
The Supreme Court only
The Federal Trade Commission
The Department of Justice

Correct answer: FINRA's dispute resolution forum

FINRA operates a dispute resolution forum where investors can bring arbitration or mediation claims against broker-dealers.

Question 36: Which of these situations requires the filing of a Form U5?

When a person who is registered retires
When a registered individual switches firms
For each of these situations, a Form U5 file would be necessary. (Correct answer)
When an individual's registration is cancelled

Correct answer: For each of these situations, a Form U5 file would be necessary.

A Form U5, or Uniform Termination Notice for Securities Industry Registration, must be filed whenever an individual's registration with a FINRA member firm is terminated for any reason. This includes situations such as resignation, retirement, being fired, or switching firms. The form provides essential information about the termination, including the reason, and is crucial for regulatory tracking of registered individuals.

Question 37: What is a Uniform Gifts to Minors Act (UGMA) account?

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

Correct answer: A custodial account holding assets for a minor, managed by an adult custodian

A UGMA account is a custodial account where an adult manages assets on behalf of a minor until the minor reaches adulthood.

Question 38: What is the 'suitability' obligation under FINRA rules?

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

Correct answer: Recommendations must be appropriate based on the customer's financial profile and objectives

FINRA's suitability rule requires that investment recommendations be appropriate for the specific customer based on their financial situation and goals.

Question 39: Reg BI (Regulation Best Interest) requires broker-dealers to:

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

Correct answer: Act in the best interest of retail customers when making recommendations

Reg BI requires broker-dealers to place retail customers' best interests first when making investment recommendations.

Question 40: Which type of investment company continuously offers shares and redeems them at NAV?

Unit investment trust
Open-end management company (mutual fund) (Correct answer)
Business development company
Closed-end fund

Correct answer: Open-end management company (mutual fund)

Open-end management companies (mutual funds) issue new shares and redeem existing shares at NAV on any business day.

Question 41: What must occur before a broker-dealer executes an options trade in a customer's account?

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

Correct answer: Options agreement must be signed and account must be approved for options trading

Options accounts require separate approval based on the customer's financial profile, and a signed options agreement before trading.

Question 42: Which document must be completed before a new brokerage account is opened?

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

Correct answer: New Account Form (customer profile)

A new account form collecting the customer's financial information, investment objectives, and risk tolerance must be completed before trading.

Question 43: What is a 'pink sheet' stock?

A stock trading on the NYSE Amex exchange
A government bond issued by a foreign country
An OTC security not listed on a formal exchange, typically with less regulatory oversight (Correct answer)
A preferred stock with a pink certificate

Correct answer: An OTC security not listed on a formal exchange, typically with less regulatory oversight

Pink sheet stocks trade over-the-counter outside major exchanges with minimal reporting requirements and less regulatory scrutiny.

Question 44: An investor who sells borrowed shares hoping to buy them back at a lower price is engaged in:

Margin buying
Arbitrage
Short selling (Correct answer)
Hedging

Correct answer: Short selling

Short selling involves borrowing and selling shares with the intent to repurchase them at a lower price and return them to the lender for a profit.

Question 45: Under FINRA's Best Execution rule, broker-dealers must:

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

Correct answer: Seek the most favorable terms reasonably available for customer orders

Best execution requires broker-dealers to use reasonable diligence to find the most favorable terms for customer order execution.

Question 46: A mutual fund that trades on an exchange throughout the day like a stock is called a(n):

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

Correct answer: Exchange-traded fund (ETF)

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

Question 47: Which regulatory body has jurisdiction over variable annuities and variable life insurance products?

State insurance regulators only
The Federal Reserve
FINRA only
Both the SEC and FINRA, as well as state insurance regulators (Correct answer)

Correct answer: Both the SEC and FINRA, as well as state insurance regulators

Variable products are considered both securities and insurance, so they fall under SEC/FINRA jurisdiction as well as state insurance regulation.

Question 48: A variable annuity differs from a fixed annuity in that:

Variable annuities have no surrender charges
Variable annuities are not regulated by the SEC
Variable annuities guarantee a fixed monthly payment
Variable annuity returns depend on the performance of underlying investment subaccounts (Correct answer)

Correct answer: Variable annuity returns depend on the performance of underlying investment subaccounts

Variable annuity payouts fluctuate based on the performance of selected subaccounts, while fixed annuities pay a guaranteed amount.

Question 49: What is the intrinsic value of a call option with a $50 strike price when the stock is trading at $55?

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

Correct answer: $5

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

Question 50: A Treasury Inflation-Protected Security (TIPS) adjusts its principal based on:

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

Correct answer: Changes in the Consumer Price Index (CPI)

TIPS adjust their principal value in line with CPI changes, protecting investors from inflation eroding their purchasing power.

Question 51: Interest rate risk most directly and significantly affects which type of investment?

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

Correct answer: Long-term fixed-rate bonds

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

Question 52: A registered representative who moves from one broker-dealer to another must:

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

Correct answer: Transfer registration via FINRA's CRD system

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

Question 53: A bond trading at a premium means its price is:

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

Correct answer: Above par value

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

Question 54: Which of the following is a characteristic of a Real Estate Investment Trust (REIT)?

REITs cannot be traded on stock exchanges
REITs must distribute at least 90% of taxable income to shareholders (Correct answer)
REITs are exempt from all federal taxes
REITs must invest at least 75% of assets in real estate

Correct answer: REITs must distribute at least 90% of taxable income to shareholders

To qualify as a REIT, the trust must distribute at least 90% of its taxable income to shareholders each year.

Question 55: An option is 'in the money' (ITM) when:

Exercising the option would produce a positive intrinsic value (Correct answer)
The holder has made a profit including the premium paid
The time value exceeds the premium paid
The underlying stock pays a dividend

Correct answer: Exercising the option would produce a positive intrinsic value

An option is in the money when exercising it would produce positive intrinsic value, regardless of the premium paid.

Question 56: What is the maximum loss for a buyer of a call option?

Unlimited loss
The premium paid for the option (Correct answer)
The difference between market price and strike price
Loss of the underlying stock's full value

Correct answer: The premium paid for the option

The maximum loss for an option buyer is limited to the premium paid, since the option can expire worthless.

Question 57: Under Regulation T, the Federal Reserve sets the initial margin requirement for equity purchases at:

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

Correct answer: 50%

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

Question 58: When interest rates rise, what happens to existing bond prices?

Bond yields fall
Bond prices remain unchanged
Bond prices fall (Correct answer)
Bond prices rise

Correct answer: Bond prices fall

Bond prices and interest rates have an inverse relationship — when rates rise, existing bond prices fall.

Question 59: Dark pools are best described as:

Private trading venues that do not display quotes publicly (Correct answer)
Derivatives trading platforms
Exchanges that specialize in penny stocks
After-hours trading systems

Correct answer: Private trading venues that do not display quotes publicly

Dark pools are private trading venues where large orders can be executed without showing quotes to the public market.

Question 60: Blue chip stocks are generally characterized by:

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

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

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

Question 61: Purchasing power risk (inflation risk) in investing refers to:

The risk that rising prices will erode the real value of investment returns over time (Correct answer)
The risk that interest rates will change and affect bond prices
The risk that a bond issuer will default on payments
The risk of being unable to sell an investment quickly at a fair price

Correct answer: The risk that rising prices will erode the real value of investment returns over time

Purchasing power risk is the danger that inflation will outpace investment returns, reducing the real (inflation-adjusted) value of the money earned or received.

Question 62: The Securities Act of 1933 primarily regulates:

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

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

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

Question 63: In addition to the official in-house continuing education programs that all FINRA member companies must set up for their registered people, FINRA has standards for registered representatives regarding CE that are known as:

Lawful-element CE
Regulatory-element CE (Correct answer)
CE for Firm-Element
Required-component CE

Correct answer: Regulatory-element CE

FINRA's continuing education (CE) requirements include two components: the Firm Element and the Regulatory Element. The Regulatory Element is mandated by FINRA and requires registered representatives to complete computer-based training within 120 days of their second registration anniversary and every three years thereafter. This ensures that representatives stay updated on regulatory changes, ethical requirements, and product knowledge relevant to their roles.

Question 64: Which regulatory body oversees the securities markets and has broad authority to enforce federal securities laws?

SEC (Correct answer)
FINRA
MSRB
SIPC

Correct answer: SEC

The SEC (Securities and Exchange Commission) is the primary federal regulator with broad authority to enforce securities laws.

Question 65: The process by which a company first sells shares to the public is known as a(n):

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

Correct answer: Initial public offering (IPO)

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

Question 66: Which of the following best describes the ex-dividend date?

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

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

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

Question 67: What is a 'fund of funds'?

A fund that only invests in IPOs
A closed-end fund that trades at a discount
A mutual fund that holds shares of other mutual funds or ETFs (Correct answer)
A fund that reinvests all dividends automatically

Correct answer: A mutual fund that holds shares of other mutual funds or ETFs

A fund of funds is a pooled investment that allocates capital across multiple underlying funds rather than directly in securities.

Question 68: A margin call is issued when:

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

Correct answer: The equity in a margin account falls below the maintenance margin requirement

A maintenance margin call requires the customer to deposit additional funds when account equity drops below the maintenance requirement.

Question 69: Under the Bank Secrecy Act, currency transaction reports (CTRs) must be filed for cash transactions exceeding:

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

Correct answer: $10,000

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

Question 70: What does EPS (Earnings Per Share) measure?

Total revenue divided by outstanding shares
Book value per share
Net income divided by total outstanding shares (Correct answer)
Dividends paid per share

Correct answer: Net income divided by total outstanding shares

EPS is calculated by dividing a company's net income by the number of outstanding shares.

Question 71: What does it mean to write (sell) a covered call?

Selling a call with no existing stock position
Selling a call option while owning the underlying shares (Correct answer)
Writing an option on an index rather than individual stock
Buying a call as protection against a short stock position

Correct answer: Selling a call option while owning the underlying shares

A covered call involves selling a call option while owning the underlying shares, providing income in exchange for capping upside.

Question 72: At what price are open-end mutual fund shares bought and sold?

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

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

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

Question 73: What is a 12b-1 fee?

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

Correct answer: An annual fee charged by mutual funds to cover marketing and distribution costs

A 12b-1 fee is an annual fund expense used for marketing and distribution, included in the fund's expense ratio.

Question 74: SIPC (Securities Investor Protection Corporation) protects investors against:

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

Correct answer: Broker-dealer insolvency and missing customer assets

SIPC covers up to $500,000 (including $250,000 in cash) per customer if a member broker-dealer becomes insolvent.

Question 75: What is the primary purpose of the USA PATRIOT Act requirement for customer identification programs (CIP)?

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

Correct answer: To verify customer identity and prevent money laundering

CIP requirements under the PATRIOT Act require firms to verify customer identity to combat money laundering and terrorist financing.

Question 76: Which of the following describes the primary market?

Where investors trade securities among themselves
Where securities are listed on exchanges
Where derivatives contracts are created
Where new securities are first issued to the public (Correct answer)

Correct answer: Where new securities are first issued to the public

The primary market is where issuers sell new securities directly to investors, with proceeds going to the issuer.

Question 77: FINRA would compel an investment manager to report on every activity listed below, with the exception of:

An employee of the company donates $2,000 to a local political campaign.
An employee of the company works for another financial institution, but they choose not to reveal this.
For a misdemeanor shoplifting charge, a firm employee is taken into custody.
A misdemeanor DUI offense results in the arrest of a firm employee. (Correct answer)

Correct answer: A misdemeanor DUI offense results in the arrest of a firm employee.

FINRA requires firms to report certain events to maintain regulatory oversight and protect investors. Misdemeanor charges involving theft (like shoplifting) and undisclosed outside business activities (working for another financial institution without disclosure) are typically reportable as they relate to an individual's integrity or potential conflicts of interest. While a misdemeanor DUI offense is a serious matter, a mere *arrest* for a misdemeanor DUI may not always trigger an immediate, direct reporting requirement by the firm to FINRA, unlike a formal charge or conviction for certain offenses, or violations of firm policy like undisclosed outside business activities. Personal political donations, unless tied to 'pay-to-play' rules or firm funds, are generally not reportable.

Question 78: A discretionary account allows a broker to:

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

Correct answer: Trade customer funds without prior approval for each transaction

Discretionary accounts grant the broker written authority to make trades without contacting the customer for each decision.

Question 79: What is the name of a stock order that won't be filled unless a stock hits or drops below a specific market price?

Put an end to the order
Limitation of order (Correct answer)
Order cancellation
Order of market

Correct answer: Limitation of order

A limit order is a type of stock order that specifies a maximum price an investor is willing to pay to buy a security or a minimum price they are willing to accept to sell a security. This means the order will only be filled if the stock reaches or drops below the specified buy limit price, or reaches or rises above the specified sell limit price. It provides price control but does not guarantee execution.

Question 80: Credit risk in the context of fixed income investing is best described as:

The risk that inflation will reduce the purchasing power of bond payments
The risk that a bond cannot be sold quickly in the secondary market
The risk that an issuer will fail to make scheduled principal or interest payments (Correct answer)
The risk that rising interest rates will lower the market price of a bond

Correct answer: The risk that an issuer will fail to make scheduled principal or interest payments

Credit risk (also called default risk) is the possibility that a bond issuer will be unable or unwilling to make the promised interest and principal payments.

Question 81: Options traded on US exchanges are standardized and guaranteed by which entity?

SIPC
FINRA
The SEC
Options Clearing Corporation (OCC) (Correct answer)

Correct answer: Options Clearing Corporation (OCC)

The Options Clearing Corporation (OCC) acts as the issuer and guarantor for all US listed options contracts.

Question 82: What is the key difference between open-end and closed-end mutual funds?

Open-end funds trade on stock exchanges; closed-end do not
Open-end funds continuously issue new shares; closed-end have a fixed number of shares (Correct answer)
Open-end funds invest only in stocks; closed-end invest in bonds
Closed-end funds are only sold to institutions

Correct answer: Open-end funds continuously issue new shares; closed-end have a fixed number of shares

Open-end funds (traditional mutual funds) create and redeem shares continuously, while closed-end funds issue a fixed number of shares traded on exchanges.

Question 83: A general obligation (GO) municipal bond is backed by:

Revenue from a specific project
The issuing government's taxing power (Correct answer)
Federal government guarantees
Collateralized mortgage pools

Correct answer: The issuing government's taxing power

GO bonds are backed by the full taxing authority of the issuing municipality, making them generally less risky than revenue bonds.

Question 84: Which of the above scenarios demonstrates an unsystematic risk?

Due to poor demand, American Airlines announced route cancellations, which dropped the value of its stock. (Correct answer)
The COVID-19 outbreak drives down stock prices by forcing many businesses to close.
Stock values fall after a hurricane significantly affects the majority of the east coast.
Oil businesses are impacted by the war in Ukraine, which lowers the value of their shares.

Correct answer: Due to poor demand, American Airlines announced route cancellations, which dropped the value of its stock.

Unsystematic risk, also known as specific risk or diversifiable risk, is unique to a particular company or industry. It can be mitigated through diversification of investments. The scenario where American Airlines' stock value drops due to poor demand and route cancellations is an example of unsystematic risk because it specifically affects that company, rather than the entire market or a broad sector.

Question 85: What does Gross Domestic Product (GDP) measure?

The total amount of government debt outstanding
The average income of all citizens in a country
The total market value of all goods and services produced in a country during a specific period (Correct answer)
The rate at which consumer prices are rising

Correct answer: The total market value of all goods and services produced in a country during a specific period

GDP measures the total market value of all finished goods and services produced within a country's borders during a specific time period.

Securities Industry Essentials (SIE) Exam

The FINRA Securities Industry Essentials (SIE) exam assesses basic knowledge of the securities industry, including types of products and their risks, the structure of the securities industry markets, and regulatory agencies and their functions. It is a corequisite for most FINRA representative-level qualification exams.

Questions

105 min

Time Limit

70%

To Pass

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