Securities Industry Essentials (SIE) Exam — Questions and Answers

Question 1: Net Asset Value (NAV) per share is calculated as:

Total liabilities divided by shares outstanding
Market price minus book value per share
(Total assets minus total liabilities) divided by shares outstanding (Correct answer)
Total assets divided by total shares outstanding

Correct answer: (Total assets minus total liabilities) divided by shares outstanding

NAV per share equals the fund's total assets minus its liabilities, divided by the number of outstanding shares.

Question 2: An investor who sells borrowed shares hoping to buy them back at a lower price is engaged in:

Arbitrage
Hedging
Short selling (Correct answer)
Margin buying

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 3: Which of the following is considered a leading economic indicator?

Prime interest rate
Building permits issued (Correct answer)
Outstanding commercial loans
Average duration of unemployment

Correct answer: Building permits issued

Building permits are a leading indicator because they signal future construction activity and economic expansion before it occurs.

Question 4: What is a power of attorney (POA) in a brokerage account context?

A court order to freeze an account
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

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 5: A stop order (stop-loss order) becomes a market order when:

The security's price reaches the limit price
The security's price reaches or passes the stop price (Correct answer)
The order is not filled within one trading day
Volume exceeds the order size

Correct answer: The security's price reaches or passes the stop price

A stop order is triggered and becomes a market order when the security's price reaches the designated stop price.

Question 6: What is the accumulation phase of an annuity?

The period during which premiums are paid and the account value grows (Correct answer)
The period during which surrender charges apply only
The period after the annuitant's death when beneficiaries receive payments
The period during which the annuity makes payments to the annuitant

Correct answer: The period during which premiums are paid and the account value grows

The accumulation phase is when the investor contributes money and the annuity value grows before distributions begin.

Question 7: Which of the following entities protects customers of FINRA member broker-dealers if the firm fails?

MSRB
SEC
SIPC (Correct answer)
FDIC

Correct answer: SIPC

SIPC (Securities Investor Protection Corporation) protects customers of failed broker-dealers by covering up to $500,000 in securities and cash.

Question 8: A rights offering allows existing shareholders to:

Sell their shares at a premium
Purchase additional shares at a discount before new investors (Correct answer)
Convert preferred shares to common shares
Receive extra dividends

Correct answer: Purchase additional shares at a discount before new investors

A rights offering gives existing shareholders the privilege to buy new shares at a discount to maintain their ownership percentage.

Question 9: An option is 'in the money' (ITM) when:

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

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 10: In a company liquidation, which security holders are paid LAST?

Common stockholders (Correct answer)
General creditors
Preferred stockholders
Secured bondholders

Correct answer: Common stockholders

In liquidation, common stockholders have the lowest priority and are paid only after all creditors and preferred shareholders.

Question 11: A registered representative who moves from one broker-dealer to another must:

Transfer registration via FINRA's CRD system (Correct answer)
Surrender all licenses and start fresh
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 12: A long straddle position is profitable when the underlying stock:

Moves significantly in either direction (Correct answer)
Pays a large dividend
Increases slightly in value
Trades sideways near the strike price

Correct answer: Moves significantly in either direction

A long straddle (buying both a call and put at the same strike) profits from large price moves in either direction.

Question 13: A bond trading at a premium means its price is:

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

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 14: Political contributions made by covered associates of member firms are restricted under FINRA pay-to-play regulations. For covered associates with voting rights at the time of the donation, the maximum contribution is set at:

$350 annually
No restriction
$350 for every election (Correct answer)
In line with federal law

Correct answer: $350 for every election

FINRA's pay-to-play rules, specifically MSRB Rule G-37, restrict political contributions made by municipal finance professionals (MFPs) and other covered associates to municipal officials. For covered associates who have voting rights in the jurisdiction where the contribution is made, the de minimis exception allows a maximum contribution of $250 per election. However, for covered associates without voting rights, the limit is $350 per election, which is the correct answer here.

Question 15: A Treasury Inflation-Protected Security (TIPS) adjusts its principal based on:

Changes in corporate bond spreads
Changes in the Consumer Price Index (CPI) (Correct answer)
Changes in the federal funds rate
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 16: What is a Uniform Gifts to Minors Act (UGMA) account?

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

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 17: What is a 'naked' (uncovered) call option?

A call on a stock that pays no dividend
Selling a call without owning the underlying stock (Correct answer)
Buying a call with no hedge
A call option with no time value

Correct answer: Selling a call without owning the underlying stock

A naked call is written (sold) without owning the underlying shares, creating theoretically unlimited risk if the stock rises sharply.

Question 18: What is the primary market?

Where foreign securities are listed
Where investors trade securities among themselves
The largest stock exchange by volume
Where newly issued securities are sold for the first time (Correct answer)

Correct answer: Where newly issued securities are sold for the first time

The primary market is where new securities are first issued and sold, with proceeds going to the issuing company.

Question 19: Under the Investment Company Act of 1940, a mutual fund must redeem shares at:

A discount set by the fund
Net Asset Value (NAV) (Correct answer)
A premium to NAV
The prior day's closing price

Correct answer: Net Asset Value (NAV)

Open-end investment companies (mutual funds) must redeem shares at the current NAV, calculated after receipt of a redemption request.

Question 20: Treasury Inflation-Protected Securities (TIPS) protect investors against inflation because their:

Principal adjusts with changes in the Consumer Price Index (Correct answer)
Coupon payments are tax-free
Maturity shortens during inflationary periods
Interest rate increases when inflation rises

Correct answer: Principal adjusts with changes in the Consumer Price Index

TIPS have their principal value adjusted based on changes in the CPI, so the interest paid and maturity value rise with inflation.

Question 21: Under the Bank Secrecy Act, currency transaction reports (CTRs) must be filed for cash transactions exceeding:

$10,000 (Correct answer)
$5,000
$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 22: Diversification of a portfolio is most effective at reducing which type of risk?

Interest rate risk
Non-systematic (unsystematic) risk (Correct answer)
Inflation risk
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 23: A pattern day trader is defined as someone who executes how many or more day trades within five business days?

5
3
4 (Correct answer)
2

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 24: The USA PATRIOT Act requires broker-dealers to implement a Customer Identification Program (CIP) primarily to:

Reduce trading commissions
Combat money laundering and terrorism financing (Correct answer)
Increase market liquidity
Standardize account fees

Correct answer: Combat money laundering and terrorism financing

The CIP requirement of the USA PATRIOT Act mandates identity verification of customers to prevent money laundering and terrorism financing.

Question 25: A customer's account statement shows a 'long' position in 100 shares of XYZ. This means the customer:

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

Correct answer: Owns 100 shares of XYZ

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

Question 26: Which of the following is NOT a function of the Securities Investor Protection Corporation (SIPC)?

Providing up to $500,000 in coverage per customer
Insuring against investment losses from market declines (Correct answer)
Returning missing customer cash and securities
Liquidating failed broker-dealers

Correct answer: Insuring against investment losses from market declines

SIPC protects customers when a broker-dealer fails, but it does not protect against investment losses due to market fluctuations.

Question 27: The 'ask' price in a securities quotation represents:

The last price at which the security traded
The price the dealer will sell the security to investors (Correct answer)
The average of the highest and lowest daily price
The price the dealer will pay to buy the security

Correct answer: The price the dealer will sell the security to investors

The ask (or offer) price is the price at which a dealer is willing to sell a security to a buyer.

Question 28: A corporation issues new shares directly to existing shareholders in proportion to their current holdings through a:

Private placement
Rights offering (Correct answer)
Secondary offering
Stock split

Correct answer: Rights offering

A rights offering gives existing shareholders the right to purchase additional shares at a set price, usually below market, proportional to their current holdings.

Question 29: Under Regulation T, the initial margin requirement for purchasing equity securities is:

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

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 30: Which type of mutual fund share class typically has a front-end sales load?

Class C shares
Class I shares
Class A shares (Correct answer)
Class B shares

Correct answer: Class A shares

Class A shares typically charge a front-end sales load, deducted from the initial investment at the time of purchase.

Question 31: What is the 'suitability' obligation under FINRA rules?

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
All customers must be offered the same investment options

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 32: A discretionary account allows a broker to:

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

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 33: 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
Order of market
Order cancellation
Limitation of order (Correct answer)

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 34: Which term describes the difference between the bid and ask prices of a security?

Discount
Premium
Spread (Correct answer)
Margin

Correct answer: Spread

The bid-ask spread is the difference between the price a buyer will pay (bid) and the price a seller will accept (ask).

Question 35: Reg BI (Regulation Best Interest) requires broker-dealers to:

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

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 36: Which of the following describes the risk of losing money on an investment as a result of changes in the economy?

Risk of currency fluctuations
Risk of the market (Correct answer)
Risk to equity
Risk of interest rates

Correct answer: Risk of the market

The risk of losing money on an investment as a result of changes in the overall economy is known as market risk, also referred to as systematic risk. This type of risk affects all investments in the market to some degree and cannot be eliminated through diversification. Factors like recessions, political instability, or changes in interest rates are examples of economic shifts that contribute to market risk.

Question 37: Cumulative preferred stock means that if a dividend is missed, it must be:

Paid immediately by law
Waived permanently
Converted to common stock
Paid before any common dividends in the future (Correct answer)

Correct answer: Paid before any common dividends in the future

Cumulative preferred dividends that are skipped accumulate as arrears and must be paid before any common dividends.

Question 38: Which regulatory body oversees the operations of US stock exchanges and broker-dealers?

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

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 39: Which entity sets the pattern day trader rule requiring a minimum equity of $25,000?

The Treasury Department
The Federal Reserve Board
The SEC
FINRA (Correct answer)

Correct answer: FINRA

FINRA Rule 4210 establishes the pattern day trader requirement of maintaining at least $25,000 in equity for accounts that day-trade frequently.

Question 40: A general obligation (GO) municipal bond is backed by:

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

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

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

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 42: 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 prevent market manipulation
To ensure customers meet accredited investor standards
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 43: A margin call is issued when:

A broker wants to promote additional trading
The equity in a margin account falls below the maintenance margin requirement (Correct answer)
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 44: Expansionary fiscal policy is best described as:

The Federal Reserve selling Treasury securities to reduce the money supply
Increasing taxes and reducing government spending to reduce deficits
Decreasing taxes and/or increasing government spending to stimulate the economy (Correct answer)
Raising the federal funds rate to slow borrowing

Correct answer: Decreasing taxes and/or increasing government spending to stimulate the economy

Expansionary fiscal policy uses lower taxes and/or higher government spending to inject money into the economy and stimulate growth, especially during recessions.

Question 45: Duration measures a bond's sensitivity to:

Reinvestment risk
Credit risk changes
Inflation risk
Changes in interest rates (Correct answer)

Correct answer: Changes in interest rates

Duration measures how much a bond's price will change in response to a 1% change in interest rates.

Question 46: What is the 'spread' in a securities quote?

The difference between the stock's 52-week high and low
The difference between the bid and ask prices (Correct answer)
The commission charged by the broker
The difference between par value and market price

Correct answer: The difference between the bid and ask prices

The spread is the difference between the ask price (what dealers sell at) and the bid price (what dealers buy at), representing the dealer's compensation.

Question 47: A joint tenancy with right of survivorship (JTWROS) account means:

The account is subject to probate upon any owner's death
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)

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

For a misdemeanor shoplifting charge, a firm employee is taken into custody.
An employee of the company works for another financial institution, but they choose not to reveal this.
An employee of the company donates $2,000 to a local political campaign.
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 49: At what price are open-end mutual fund shares bought and sold?

At the current market trading price
At a price set by the broker
At a fixed price set at fund launch
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 50: At expiration, an option that is 'out of the money' will typically:

Expire worthless (Correct answer)
Be assigned to the seller
Be automatically converted to shares
Be exercised at a loss

Correct answer: Expire worthless

An out-of-the-money option has no intrinsic value at expiration and will expire worthless, causing the buyer to lose the premium.

Question 51: What is a callable bond?

A bond that can be converted to stock
A bond the issuer can redeem before maturity (Correct answer)
A bond that pays variable interest
A bond backed by collateral

Correct answer: A bond the issuer can redeem before maturity

A callable bond allows the issuer to redeem the bond before its stated maturity date, usually when interest rates decline.

Question 52: Which risk refers to the chance that a bond issuer will be unable to make interest or principal payments?

Credit (default) risk (Correct answer)
Liquidity risk
Reinvestment risk
Market risk

Correct answer: Credit (default) risk

Credit risk (also called default risk) is the risk that an issuer will fail to make timely interest or principal payments on its debt.

Question 53: Interest rate risk most directly and significantly affects which type of investment?

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

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 54: Which agency's bonds carry an implicit (not explicit) government guarantee?

Fannie Mae (FNMA) (Correct answer)
FDIC
Federal Reserve
US Treasury

Correct answer: Fannie Mae (FNMA)

Government-sponsored enterprises (GSEs) like Fannie Mae carry an implied but not legally guaranteed government backing.

Question 55: What must occur before a broker-dealer executes an options trade in a customer's account?

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
The trade must be approved by FINRA in advance
The customer must be an accredited investor

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 56: During which phase of the business cycle does unemployment typically reach its highest level?

Peak
Recovery
Expansion
Trough (Correct answer)

Correct answer: Trough

Unemployment peaks at the trough of the business cycle, the lowest point of economic activity, before the economy begins to recover.

Question 57: Which document must be completed before a new brokerage account is opened?

SIPC membership form
New Account Form (customer profile) (Correct answer)
Regulation T margin agreement
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 58: Which of the following best describes the ex-dividend date?

The date the board declares the dividend
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 dividend is paid to shareholders

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 59: Delta in options pricing measures:

The implied volatility of the underlying stock
The rate of change in option price relative to time decay
The sensitivity of the option to interest rate changes
The rate of change in option price per $1 change in the underlying asset (Correct answer)

Correct answer: The rate of change in option price per $1 change in the underlying asset

Delta measures how much an option's price changes for every $1 move in the underlying security's price.

Question 60: An investment company that raises a fixed amount of capital through a one-time IPO and whose shares then trade on an exchange is a:

Closed-end fund (Correct answer)
Variable annuity
Exchange-traded fund
Open-end mutual fund

Correct answer: Closed-end fund

Closed-end funds issue a fixed number of shares through an IPO, after which the shares trade on secondary markets like stocks.

Question 61: SIPC (Securities Investor Protection Corporation) protects investors against:

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

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 62: Which of the following is considered a money market instrument?

Commercial paper (Correct answer)
30-year Treasury bond
Municipal revenue bond
Convertible preferred stock

Correct answer: Commercial paper

Commercial paper is a short-term unsecured debt instrument issued by corporations, making it a money market instrument.

Question 63: What are American Depositary Receipts (ADRs)?

US government bonds traded abroad
Foreign company shares traded on US exchanges in US dollars (Correct answer)
Municipal bond certificates
Receipts for domestic warehouse inventory

Correct answer: Foreign company shares traded on US exchanges in US dollars

ADRs represent shares of foreign companies and are traded on US exchanges denominated in US dollars.

Question 64: Under Regulation T, the Federal Reserve Board sets the initial margin requirement for purchasing equity securities at:

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

Correct answer: 50%

Regulation T requires investors to deposit at least 50% of the purchase price of marginable securities at the time of purchase.

Question 65: Under Regulation T, the Federal Reserve sets the initial margin requirement for equity purchases at:

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

Correct answer: 50%

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

Question 66: What is the 'time value' component of an option premium?

The option's intrinsic value
The strike price minus current stock price
The portion of premium beyond intrinsic value reflecting time until expiration (Correct answer)
The dividend expected before expiration

Correct answer: The portion of premium beyond intrinsic value reflecting time until expiration

Time value is the premium above intrinsic value, reflecting the probability the option will gain more value before expiration.

Question 67: What does Gross Domestic Product (GDP) measure?

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

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.

Question 68: Which type of bond is backed by the full faith and credit of the US government?

Agency bonds
US Treasury securities (Correct answer)
Municipal bonds
Corporate bonds

Correct answer: US Treasury securities

US Treasury securities are backed by the full faith and credit of the federal government, making them the safest bonds.

Question 69: Filling out Form U4 is necessary for those who want to register with FINRA; FINRA reviews and approves the forms. Candidates who have specific issues on their record—referred to as follows in FINRA rules—will not be authorized.

Retraction
Statutory disqualification (Correct answer)
Refusal to register
Misdemeanor

Correct answer: Statutory disqualification

Candidates who have specific issues on their record, such as certain felony convictions, financial misconduct, or regulatory violations, are subject to what FINRA rules refer to as 'statutory disqualification.' This means they are automatically barred from becoming or remaining registered with FINRA, as these issues indicate a potential risk to investors or the integrity of the securities industry. FINRA reviews Form U4 submissions to identify such disqualifying events.

Question 70: Which type of investment risk cannot be eliminated through diversification because it affects the entire market?

Systematic risk (Correct answer)
Credit risk
Liquidity risk
Business risk

Correct answer: Systematic risk

Systematic (market) risk affects all securities in the market and cannot be diversified away because it stems from broad economic factors that impact all investments.

Question 71: Which of the following is NOT a characteristic of common stock?

Voting rights
Residual claim on assets
Guaranteed dividend payments (Correct answer)
Limited liability

Correct answer: Guaranteed dividend payments

Common stockholders are not guaranteed dividends; dividends are paid at the discretion of the board of directors.

Question 72: Rule 144 governs the sale of:

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

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 73: What is a 'fund of funds'?

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

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 74: What is a 12b-1 fee?

A redemption fee charged when selling fund shares
A transaction fee for buying ETF shares
A penalty for early withdrawal from an annuity
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 75: Dark pools are best described as:

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

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 76: A broker-dealer that only transmits customer orders to a carrying firm for execution and clearing is called a(n):

Specialist firm
Introducing broker (Correct answer)
Prime broker
Market maker

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

$500
$1,000 (Correct answer)
$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 78: Which of these situations requires the filing of a Form U5?

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

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

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

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 80: What is the purpose of a prospectus?

To report quarterly earnings to shareholders
To disclose material information about a securities offering to potential investors (Correct answer)
To confirm a completed securities transaction
To register a company with FINRA

Correct answer: To disclose material information about a securities offering to potential investors

A prospectus is a legal disclosure document providing investors with essential information about a securities offering before they invest.

Question 81: Under FINRA's Best Execution rule, broker-dealers must:

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

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

Customer's name, address, tax ID, investment objectives, financial situation, and risk tolerance (Correct answer)
References from two existing brokerage clients
Only the customer's name and tax ID
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 83: 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 owners must hold equal shares
TIC accounts are only for retirement assets
TIC accounts cannot be held by more than two people

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 84: Purchasing power risk (inflation risk) in investing refers to:

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

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 85: A churning violation occurs when a broker:

Excessively trades a customer's account primarily to generate commissions (Correct answer)
Delays execution of customer orders
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.

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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