Securities Industry Essentials (SIE) Exam — Questions and Answers

Question 1: Which type of order guarantees execution but not price?

Stop order
Limit order
Stop-limit order
Market order (Correct answer)

Correct answer: Market order

A market order guarantees execution at the best available current price but does not guarantee a specific price.

Question 2: Credit risk in the context of fixed income investing is best described as:

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
The risk that inflation will reduce the purchasing power of bond payments

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 3: Which US Treasury security has a maturity of more than 10 years?

Treasury note
Treasury bond (Correct answer)
Treasury bill
Treasury STRIP

Correct answer: Treasury bond

Treasury bonds have maturities of 20 to 30 years, making them the longest-duration US government securities.

Question 4: A joint tenancy with right of survivorship (JTWROS) account means:

Owners can designate different beneficiaries for their share
Each owner can only access their proportional share
The account is subject to probate upon any owner's death
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 5: An investor who believes a stock's price will decline would most likely take which position?

Long put
Covered call
Short position (Correct answer)
Long position

Correct answer: Short position

A short position involves selling borrowed shares with the expectation of buying them back at a lower price.

Question 6: SIPC (Securities Investor Protection Corporation) protects investors against:

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

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

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

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

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

Correct answer: Building permits issued

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

Question 9: Reg BI (Regulation Best Interest) requires broker-dealers to:

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

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 10: A letter of intent (LOI) in mutual fund investing allows a shareholder to:

Qualify for a breakpoint discount over a 13-month investment period (Correct answer)
Defer capital gains taxes on fund distributions
Switch between fund families without sales loads
Redeem shares before the surrender period

Correct answer: Qualify for a breakpoint discount over a 13-month investment period

An LOI allows investors to commit to reaching a breakpoint investment level over 13 months to receive the reduced sales load upfront.

Question 11: 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)
Is prohibited from profiting on the transaction
Must disclose the trade to a stock exchange

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 12: Which document must be provided to customers before or during the opening of an options account?

Annual report
Options Disclosure Document (ODD) (Correct answer)
Prospectus
Proxy statement

Correct answer: Options Disclosure Document (ODD)

The Options Disclosure Document (ODD), titled 'Characteristics and Risks of Standardized Options,' must be delivered to options account customers.

Question 13: What is the 'suitability' obligation under FINRA rules?

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

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

Coupon payments are tax-free
Principal adjusts with changes in the Consumer Price Index (Correct answer)
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 15: A futures contract obligates the buyer to:

Pay a premium for the right to sell
Purchase the underlying asset at a specified price on a future date (Correct answer)
Sell the underlying asset immediately at market price
Have the option to buy at a fixed price

Correct answer: Purchase the underlying asset at a specified price on a future date

Unlike options, futures contracts create a binding obligation to buy the underlying asset at the agreed price on the delivery date.

Question 16: 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 17: The Securities Act of 1933 primarily regulates:

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

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 18: To combat rising inflation, the Federal Reserve would most likely:

Lower the discount rate charged to member banks
Lower the reserve requirement for member banks
Sell government securities on the open market (Correct answer)
Purchase government securities on the open market

Correct answer: Sell government securities on the open market

Selling government securities withdraws money from the banking system, reducing the money supply and raising interest rates, which slows inflation.

Question 19: The Investment Advisers Act of 1940 requires investment advisers to act in their clients' best interests under the:

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

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 20: Dark pools are best described as:

Derivatives trading platforms
Private trading venues that do not display quotes publicly (Correct answer)
After-hours trading systems
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 21: A firm commitment underwriting arrangement means the underwriter:

Purchases all unsold shares from the issuer (Correct answer)
Sells shares only on a best-efforts basis
Guarantees the sale price to retail investors
Shares profits equally with the issuer

Correct answer: Purchases all unsold shares from the issuer

In a firm commitment underwriting, the underwriter buys all securities from the issuer and assumes the risk of selling them to the public.

Question 22: Under Regulation T, the initial margin requirement for purchasing equity securities is:

25%
100%
75%
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 23: 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 tax evasion on investment gains
To ensure customers meet accredited investor standards
To prevent market manipulation

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

Class A shares (Correct answer)
Class I shares
Class C shares
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 25: What is accrued interest in bond trading?

The premium paid above par value
The penalty for calling a bond early
Interest earned since the last coupon payment, owed to the seller (Correct answer)
The discount below par value

Correct answer: Interest earned since the last coupon payment, owed to the seller

Accrued interest is the interest earned by the bond seller from the last coupon date to the settlement date, paid by the buyer.

Question 26: Under Regulation S-P, broker-dealers must provide customers with a privacy notice:

Annually and at account opening (Correct answer)
Every five years
Only upon request
Only when information is shared with third parties

Correct answer: Annually and at account opening

Regulation S-P requires financial institutions to deliver privacy notices at account opening and annually thereafter.

Question 27: What information is required on a new account form under FINRA rules?

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

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 28: Which of the following describes the primary market?

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

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 29: What is a 12b-1 fee?

A transaction fee for buying ETF shares
A penalty for early withdrawal from an annuity
A redemption fee charged when selling fund 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 30: When interest rates rise, what happens to the price of existing bonds?

Bond prices remain unchanged
Bond prices become volatile but trend upward
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 bonds with lower rates become less attractive, so their prices fall.

Question 31: Delta in options pricing measures:

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

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

The Treasury Department
The SEC
The Federal Reserve Board
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 33: A put option gives the holder the right to:

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

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

The order is not filled within one trading day
The security's price reaches or passes the stop price (Correct answer)
The security's price reaches the limit price
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 35: A mutual fund that trades on an exchange throughout the day like a stock is called a(n):

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

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 36: What does the term 'market capitalization' refer to?

The total value of a company's debt
The book value of a company's assets
The total value of a company's outstanding shares (Correct answer)
The company's annual revenue

Correct answer: The total value of a company's outstanding shares

Market capitalization equals the current share price multiplied by the total number of outstanding shares.

Question 37: When interest rates rise, what happens to existing bond prices?

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

Correct answer: Bond prices fall

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

Question 38: What is a Uniform Gifts to Minors Act (UGMA) account?

A retirement account for minors
A custodial account holding assets for a minor, managed by an adult custodian (Correct answer)
A trust account requiring court oversight
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 39: What is the accumulation phase of an annuity?

The period after the annuitant's death when beneficiaries receive payments
The period during which premiums are paid and the account value grows (Correct answer)
The period during which surrender charges apply only
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 40: At what price are open-end mutual fund shares bought and sold?

At a fixed price set at fund launch
At a price set by the broker
At the current market trading price
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 41: What is the role of a market maker?

To provide liquidity by continuously quoting bid and ask prices (Correct answer)
To set the official closing price of securities
To regulate trading activity on exchanges
To execute trades only for institutional investors

Correct answer: To provide liquidity by continuously quoting bid and ask prices

Market makers provide liquidity by posting continuous bid (buy) and ask (sell) prices, profiting from the bid-ask spread.

Question 42: Under the Bank Secrecy Act, currency transaction reports (CTRs) must be filed for cash transactions exceeding:

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

Correct answer: $10,000

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

Question 43: Items valued at no more than the following are the maximum gifts or gratuities that registered representatives may provide to consumers in a given year:

$1,000
$250
$500
$100 (Correct answer)

Correct answer: $100

FINRA Rule 3220, regarding Gifts and Gratuities, limits the value of gifts or gratuities that registered representatives may give to customers or other associated persons to $100 per person per year. This rule is in place to prevent undue influence, maintain ethical standards, and ensure that business decisions are not swayed by excessive gifts.

Question 44: Which of the above scenarios demonstrates an unsystematic risk?

Oil businesses are impacted by the war in Ukraine, which lowers the value of their shares.
Stock values fall after a hurricane significantly affects the majority of the east coast.
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.

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

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

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

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

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 47: What is a unit investment trust (UIT)?

A hedge fund open to retail investors
An investment company with a fixed, unmanaged portfolio that terminates on a set date (Correct answer)
A fund actively managed by a portfolio manager
A government-sponsored bond fund

Correct answer: An investment company with a fixed, unmanaged portfolio that terminates on a set date

A UIT holds a fixed portfolio of securities and has a set termination date, unlike mutual funds that are actively managed.

Question 48: A broker-dealer that holds customer securities and cash is considered a:

Introducing firm
Discount broker
Carrying firm (Correct answer)
Market maker

Correct answer: Carrying firm

A carrying firm (also called a clearing firm) maintains custody of customer assets and handles settlement of trades.

Question 49: According to FINRA regulations, a private securities transaction is one in which:

An agent transacts on their own behalf.
Outside of their regular work hours, an agent transacts in securities on behalf of their member firm. (Correct answer)
A private placement investment is made by any employee of the company, as specified by Regulation D of the Securities Act of 1933.
For the account of a customer, an agent trades.

Correct answer: Outside of their regular work hours, an agent transacts in securities on behalf of their member firm.

A private securities transaction, often referred to as 'selling away,' occurs when an associated person engages in a securities transaction outside the regular course or scope of their employment with their member firm. This activity requires the firm's written permission and supervision, especially if the associated person receives compensation. While the phrasing 'on behalf of their member firm' in option B is slightly contradictory to the 'private' nature, the core element of transacting 'outside of their regular work hours' points to activity not under the firm's direct oversight, which is the defining characteristic of such a transaction.

Question 50: Under the Investment Company Act of 1940, a mutual fund must redeem shares at:

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

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

OCC (Office of the Comptroller of the Currency)
FDIC
Federal Reserve
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 52: A bond that pays no periodic interest but is issued at a discount to face value is called a:

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

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 53: What is the maximum gain for a seller (writer) of a put option?

The full value of the underlying stock
Unlimited
The strike price minus the premium
The put premium received (Correct answer)

Correct answer: The put premium received

The maximum profit for a put writer is the premium collected upfront, achieved when the put expires worthless.

Question 54: 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:

Regulatory-element CE (Correct answer)
Lawful-element CE
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 55: Which of the following transactions would be exempt from SEC registration under Regulation D?

A rights offering to existing shareholders
An IPO on the NYSE
A secondary offering on NASDAQ
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 56: What risk do bond investors face when interest rates fall and they must reinvest coupon payments at lower rates?

Inflation risk
Credit risk
Liquidity risk
Reinvestment risk (Correct answer)

Correct answer: Reinvestment risk

Reinvestment risk is the risk that future coupon payments will be reinvested at lower interest rates than originally expected.

Question 57: What is the maximum loss for a buyer of a call option?

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

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 58: The Municipal Securities Rulemaking Board (MSRB) has rulemaking authority over:

Corporate bond underwriters only
Municipal securities dealers and advisors (Correct answer)
Federal government bond dealers
All fixed-income securities markets

Correct answer: Municipal securities dealers and advisors

The MSRB creates rules for broker-dealers and municipal advisors who deal in municipal securities, though it relies on FINRA and the SEC for enforcement.

Question 59: 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 trade must be approved by FINRA in advance
The customer must be an accredited investor
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 60: Municipal bonds are issued by:

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

Correct answer: State and local governments

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

Question 61: Which of these describes an Exchange-traded fund's (ETF) drawback?

Has to release holdings every day
exchanged via the public market
better tax efficiency compared to alternative investments, such as mutual funds
Expenses of trading versus stocks (Correct answer)

Correct answer: Expenses of trading versus stocks

While Exchange-Traded Funds (ETFs) offer many advantages like diversification and often lower expense ratios than mutual funds, they do have a drawback related to trading costs. Unlike mutual funds, which are typically bought and sold once a day at their net asset value, ETFs are traded on exchanges throughout the day like individual stocks. This means that each purchase or sale of an ETF incurs trading expenses, such as commissions or bid-ask spreads, which can add up for frequent traders.

Question 62: A margin call is issued when:

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

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 63: Convertible preferred stock can be exchanged for:

Cash at redemption value
Government securities
A fixed number of common shares (Correct answer)
Corporate bonds at par

Correct answer: A fixed number of common shares

Convertible preferred stock can be exchanged for a predetermined number of common shares at the holder's option.

Question 64: Open market operations conducted by the Federal Reserve refer to:

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

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 65: A churning violation occurs when a broker:

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

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 66: Which of the following factors largely affects an option contract's price?

The linked stock's share price (Correct answer)
The price at which strikes
If it's a put or a call
The date of the strike

Correct answer: The linked stock's share price

The price of an option contract is primarily determined by the price of its underlying asset, which is typically a stock. As the underlying stock's price moves, the intrinsic value of the option changes, directly impacting its premium. Other factors like time to expiration, volatility, and interest rates also play a role, but the linked stock's share price is the most fundamental determinant.

Question 67: Which regulatory body has jurisdiction over variable annuities and variable life insurance products?

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

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

Seek the most favorable terms reasonably available for customer orders (Correct answer)
Match any competitor's price
Execute all trades on the NYSE
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 69: Which type of investment risk cannot be eliminated through diversification because it affects the entire market?

Credit risk
Liquidity risk
Systematic risk (Correct answer)
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 70: What is a power of attorney (POA) in a brokerage account context?

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

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

5
4 (Correct answer)
3
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 72: 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 73: An Initial Public Offering (IPO) occurs when a company:

Lists its shares on a stock exchange for the first time (Correct answer)
Buys back shares from the public
Issues bonds to the public for the first time
Declares its first dividend

Correct answer: Lists its shares on a stock exchange for the first time

An IPO is when a private company first offers its shares to the public on a stock exchange.

Question 74: What is the primary market?

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

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

Total assets divided by total shares outstanding
Market price minus book value per share
(Total assets minus total liabilities) divided by shares outstanding (Correct answer)
Total liabilities divided by 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 76: A protective put strategy involves:

Buying a put option to hedge against a decline in owned shares (Correct answer)
Writing a covered put against a short stock position
Buying puts on an index to hedge a bond portfolio
Selling a put to generate income on a long stock position

Correct answer: Buying a put option to hedge against a decline in owned shares

A protective put combines long stock with a long put option, limiting downside risk while maintaining upside potential.

Question 77: What is the key difference between open-end and closed-end mutual funds?

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

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 78: Callable preferred stock allows the issuer to:

Redeem the shares at a specified price (Correct answer)
Force conversion into common stock at any time
Convert shares into bonds
Suspend dividends indefinitely

Correct answer: Redeem the shares at a specified price

Callable preferred stock can be redeemed (bought back) by the issuer at a predetermined call price.

Question 79: Which document must be completed before a new brokerage account is opened?

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

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 80: 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 owners must hold equal shares
TIC accounts are only for retirement assets

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

The issuing government's taxing power (Correct answer)
Federal government guarantees
Revenue from a specific project
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 82: 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 83: Insider trading refers to buying or selling securities based on:

Tips from financial news channels
Material nonpublic information in breach of a duty (Correct answer)
Technical analysis of price patterns
Information from publicly available analyst reports

Correct answer: Material nonpublic information in breach of a duty

Insider trading is illegal trading based on material, nonpublic information that gives an unfair advantage over other investors.

Question 84: A discretionary account allows a broker to:

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

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

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
The interest rate that the Federal Reserve charges member banks

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.

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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