SIE Questions and Answers

Step by Step Explanation:

Dividend Reinvestment Plans (DRIPs): These allow investors to automatically reinvest income distributed by the mutual fund to purchase additional shares.

Dollar Cost Averaging: Refers to systematic investments over time, not directly tied to income distributions.

Capital Gains Reinvestment: Involves reinvesting profits from the sale of fund holdings, which is distinct from dividend reinvestment.

References:

FINRA Mutual Fund Features: FINRA Mutual Funds.

The annual interest on a bond is calculated based on thecoupon rateand the bond’s par value.

Coupon rate = 4.0%.

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

A is correctbecause the coupon rate determines the annual interest.

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

CMOs are divided into tranches, which are portions of the pool of mortgage-backed securities. Each tranche has its own characteristics, including coupon rate, maturity date, and credit rating, tailored to meet the needs of different investors.

C is correctbecause tranches represent slices of the investment with specific terms.

Ais incorrect because the yield depends on prepayment rates and interest rate changes.

Bis incorrect as average life is an estimate, not a defining characteristic of a tranche.

Dis incorrect because underwriting is unrelated to the definition of a tranche.

FINRA Rule 3220 prohibits member firms from giving gifts exceeding $100 per individual per year to ensure that gifts do not influence business conduct. The rule applies to gifts given in connection with the firm’s business.

C is correctbecause it adheres to FINRA’s $100 annual limit.

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

Bis incorrect as there is no $200 limit.

Dis incorrect as gifts are allowed within the $100 limit.

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

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

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

CandDare incorrect because the penalty is capped at three times, not six or ten times.

Step by Step Explanation:

Settlement of the Transaction: Refers to the finalization of a trade, where the buyer pays for the securities, and the seller delivers them. For most securities, regular-way settlement occurs T+2 (trade date plus two business days).

Incorrect Options:

Clearing the Trade: Refers to matching trade details to prepare for settlement.

DVP Transactions: A specific type of settlement involving simultaneous payment and delivery, often used for institutional clients.

Corporate Action: Refers to events like stock splits or dividend declarations.

References:

FINRA and SEC Guidelines on Settlement: SEC Settlement Process.

Step by Step Explanation:

Outside Business Activity Definition: Per FINRA Rule 3270, an OBA involves compensated business activities outside the scope of the RR’s role at their firm. Passive investments are excluded because they do not require active involvement.

Incorrect Options:

A, B, and C: Selling real estate, selling insurance, and refereeing are considered OBAs as they involve active participation and compensation.

References:

FINRA Rule 3270 (Outside Business Activities): FINRA Rule 3270.

Step by Step Explanation:

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

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

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

References:

SEC and FINRA Guidance on Sectors: Investopedia Sector Overview.

In a UTMA account, the minor is the legal owner of the account. The custodian (in this case, the attorney) manages the account until the minor reaches the age of majority specified by state law.

C is correctbecause the grandson (the minor) is the account’s legal owner.

Ais incorrect because the attorney is the custodian, not the owner.

Bis incorrect because the grandfather established the account but does not own it.

Dis incorrect because the parent does not have ownership unless explicitly named as the custodian.

Step by Step Explanation:

Tenants in Common: In this arrangement, each tenant owns a fractional interest in the account's assets, which can be unequal depending on the agreement.

Income Distribution: Income is distributed based on ownership percentage, not necessarily equally.

Redemption Requests: Only the owner of the fractional interest has authority to request redemption for their portion.

Estate Taxation: Upon the death of a tenant, only their fractional interest is taxable in their estate.

References:

FINRA Guidelines on Joint Accounts: FINRA Joint Accounts.

Under FINRA Rule 2150, registered representatives may share in profits and losses in a customer’s account if:

The customer provides written consent.

The arrangement is approved by the RR’s firm.

The sharing is proportional to the RR's financial contribution.

C is correctbecause it aligns with FINRA requirements.

A,B, andDare incorrect because they do not meet the necessary conditions for sharing.

Variable annuity subaccounts are held in separate accounts, distinct from the insurance company’s general account. This separation protects subaccount assets from claims by creditors in case the insurance company becomes insolvent.

C is correctbecause the separate account ensures creditor protection.

Ais incorrect as management fees for variable annuities are often higher.

Bis incorrect because the subaccounts are not held at broker-dealers.

Dis incorrect as subaccounts do not represent subordinated debt.

Step by Step Explanation:

Securitization: The process of pooling financial assets, such as mortgage loans, and creating asset-backed securities that investors can buy.

Incorrect Options:

B: Hypothecation refers to pledging assets as collateral.

C & D: Loan and claim processing are administrative terms, not related to the creation of securities.

References:

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

A private securities transaction involves the sale of securities outside the scope of a registered representative’s employment with their member firm. Such transactions must be disclosed to and approved by the firm under FINRA Rule 3280.

B is correctbecause raising money for a startup involves the sale of securities and must be reported as a private securities transaction.

Ais incorrect because soliciting charitable donations does not involve securities.

Cis incorrect because selling term life insurance policies is not a securities transaction.

Dis incorrect because investing personal money does not involve soliciting or selling securities to others.

Step by Step Explanation:

Balance Sheet Definition: Shows a company’s financial position at a specific point in time, listing assets, liabilities, and shareholders' equity (net worth).

Other Financial Statements:

Profit and Loss Statement: Summarizes revenues and expenses over a period.

Cash Flow Statement: Tracks cash inflows and outflows.

References:

SEC Guide to Financial Statements: SEC Financials.

Step by Step Explanation:

Expense Ratio: Class A shares typically have lower ongoing expense ratios but higher front-end sales charges. Class C shares often have higher ongoing expense ratios but no front-end charges.

Incorrect Options:

B: NAV is determined daily and does not vary by share class.

C: All share classes invest in the same underlying portfolio.

D: Purchase timing is the same for all share classes.

References:

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

Step by Step Explanation:

Common Stock: Holders of common stock typically have voting rights, which allow them to participate in decisions like electing the board of directors or approving major corporate actions.

Other Securities:

Preferred Stock: Usually does not carry voting rights.

Corporate and Convertible Bonds: Debt instruments, so they do not confer voting rights.

References:

SEC Guide on Stock Voting Rights: SEC Voting Rights.

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

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

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

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

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

Step by Step Explanation:

Turnover Ratio: Indicates how frequently the fund manager buys and sells securities. A high turnover ratio may result in higher capital gains distributions, impacting tax efficiency.

Incorrect Options:

B: Sales charges affect cost but not tax efficiency.

C: Commission details are unrelated to the fund’s tax efficiency.

D: Projections of distributions are speculative and not disclosed under regulations.

References:

SEC Mutual Fund Guide: SEC Mutual Funds.

An unrealized gain occurs when the value of an asset increases but has not yet been sold. If the customer sells the stock, the unrealized gain becomes a realized gain.

B is correctbecause the increase in value without selling the stock is an unrealized gain.

Ais incorrect because interest income refers to earnings from fixed-income securities.

Cis incorrect because operating profit relates to a company’s earnings, not an investor’s portfolio.

Dis incorrect because "out of the money" is a term used for options, not stocks.

Step by Step Explanation:

FINRA Rule 1122: Requires that registered representatives update their residential address with FINRA for two years post-termination.

Purpose: This ensures accurate records for potential regulatory inquiries during the statutory two-year period when a terminated individual remains subject to FINRA’s jurisdiction.

References:

FINRA Rule 1122 (Filing False or Misleading Information): FINRA Rule 1122.

Step by Step Explanation:

Summary Prospectus Content: Must include key information such as the fund’s investment objectives, risks, fees, and past performance. This helps investors make informed decisions.

Incorrect Options:

A: Projected returns are speculative and not included in the prospectus.

C & D: Detailed portfolio holdings and control persons are included in the full prospectus, not the summary.

References:

SEC Rule 498 (Summary Prospectuses): SEC Prospectus Requirements.

Step by Step Explanation:

Tender Offer Definition: A tender offer is an offer to purchase a certain number of shares from shareholders, typically at a price above the current market value. This is often part of mergers, acquisitions, or corporate takeovers.

Stock Split: A stock split increases the number of shares but decreases the price per share without affecting the total value of an investor's holdings.

Redemption: Redemption refers to the repayment of a bond or preferred stock at maturity or at a predetermined date.

Class Action: A class action is a lawsuit filed by a group of people with similar grievances.

References:

SEC Rule 14e on tender offers: SEC Tender Offers.

Step by Step Explanation:

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

Incorrect Options:

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

References:

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

Open-end mutual funds do not trade on secondary markets. Instead, shares are continuously issued or redeemed by the fund at the net asset value (NAV), calculated at the market close.

D is correctbecause investors purchase and redeem shares directly through the fund or authorized brokers.

Ais incorrect because mutual funds do not have a predetermined dissolution date.

Bis incorrect because mutual fund shares are priced at the NAV calculated once daily after the market closes.

Cis incorrect because secondary market trading applies to closed-end funds and ETFs, not open-end mutual funds.

Step by Step Explanation:

FINRA Rule 3150: Permits firms to hold customer mail only with written instructions specifying the duration, which cannot exceed three months unless there are exceptionalcircumstances.

Incorrect Options:

A: Holding mail is not prohibited if done in compliance with FINRA rules.

C & D: Oral instructions or RR discretion are not sufficient; written authorization is mandatory.

References:

FINRA Rule 3150 (Holding of Customer Mail): FINRA Rule 3150.

During the "quiet period" after filing the registration statement, issuers are restricted in what they can communicate to the public to avoid influencing the market.

C is correctbecause promotional statements, such as those supporting the company’s valuation, are prohibited during this time.

A,B, andDare factual, non-promotional statements and are permitted.

Technology stocks are considered high-risk investments due to their volatility and sensitivity to economic cycles, regulatory changes, and technological advancements. While they may offer significant growth potential, they carry greater risk than blue chip stocks, corporate bonds, or government bonds.

C is correctbecause technology stocks are subject to high volatility and risk.

Ais incorrect because blue chip stocks are generally stable and lower-risk.

Bis incorrect because corporate bonds carry moderate risk, depending on the issuer’s creditworthiness.

Dis incorrect because government bonds are considered low-risk due to the backing of the issuing government.

FINRA’s Continuing Education (CE) requirements include the Regulatory Element, which must be completed:

Within 120 days of the second anniversary of a registered representative’s initialregistration.

Every three years thereafter (changed to every two years as of 2023).

C is correctbecause registered persons must complete the CE Regulatory Element after their initial requirement and then every two years.

AandBare incorrect because CE is not required annually or semiannually.

Dis incorrect because CE is not tied to customer complaints.

Step by Step Explanation:

Low Liquidity: Hedge funds often impose lock-up periods and restrict redemptions, leading to low liquidity for investors.

Incorrect Options:

B: Hedge funds typically have high minimum investment requirements, often $1 million or more.

C: Hedge funds employ diverse strategies, not just fixed income.

D: Hedge funds are generally opaque about their strategies and holdings to protect their competitive advantage.

References:

SEC Investor Bulletin on Hedge Funds: SEC Hedge Funds.

Purchasing a put option allows the customer to sell the stock at a predetermined price (the strike price) if the share price declines. This strategy protects against downside risk while maintaining upside potential.

C is correctbecause a put acts as insurance, locking in a minimum sale price.

Ais incorrect because selling a put exposes the investor to additional risk if the stock declines.

Bis incorrect because selling a call generates income but does not protect against downside risk.

Dis incorrect because purchasing a call is a bullish strategy unrelated to protecting existing positions.

Step by Step Explanation:

Warrants: Are often issued alongside fixed-income securities, such as bonds, to enhance their appeal to investors. Warrants give the holder the right to purchase company stock at a specific price in the future.

Incorrect Options:

Options: Not typically bundled with fixed-income securities.

Common and Preferred Stock: Usually issued separately, not as part of a package with bonds.

References:

SEC Guide on Warrants: SEC Warrants Information.

Step by Step Explanation:

Blue-Chip Stock Mutual Funds: Invest in large, established companies that typically provide stable dividend income and potential for capital appreciation.

Incorrect Options:

A: Growth stocks prioritize capital appreciation, not income.

B: Money market accounts focus on safety and liquidity, not capital gains.

D: STRIPS provide fixed income without capital gains potential.

References:

FINRA Investment Product Education: FINRA Investment Guidance.

Regulation S-P mandates that broker-dealers disclose how they collect, protect, and share customers’ nonpublic personal information. The privacy notice must include:

The categories of information collected.

The firm’s policies for safeguarding data.

Opt-out rights for sharing information with unaffiliated third parties.

D is correctbecause privacy notices must describe policies for protecting customer information.

A,B, andCare incorrect because they do not relate to the required elements of Regulation S-P privacy notices.

Step by Step Explanation:

529 Savings Plans: These plans allow tax-advantaged savings for education expenses. They can be used for both undergraduate and graduate studies, as well as certain K-12 expenses.

Contribution Limits: Contributions are subject to gift tax limits but have no specific statutory maximum under federal law.

Tax Treatment: Earnings grow tax-deferred and are tax-free if used for qualified education expenses.

References:

IRS Section 529 Guidance: IRS 529 Plans.

Step by Step Explanation:

European-Style Options: Can only be exercised on their expiration date, unlike American-style options, which can be exercised any time before expiration.

Incorrect Options:

A: Not accurate; the exercise must occur specifically on the expiration date.

C: Options cannot be exercised after expiration.

D: The expiration date depends on the option contract, not a specific weekday.

References:

Options Clearing Corporation (OCC) Guidelines:OCC European Options.

Step by Step Explanation:

Penny Stocks: These are low-priced, highly speculative stocks often issued by small or distressed companies. They generally have low liquidity, meaning they can be difficult to buy or sell without significantly impacting the price.

Incorrect Options:

Dividends: Penny stocks rarely pay dividends, unlike blue-chip stocks.

Price Stability: Penny stocks are highly volatile compared to blue-chip stocks.

Capitalization: Blue-chip companies are far better capitalized.

References:

SEC Bulletin on Penny Stocks: SEC Penny Stocks.

Currency devaluation reduces the value of a country’s currency relative to others, making its exports cheaper and more competitive internationally. This stimulates demand for the country’s goods and services.

D is correctbecause devaluation reduces export costs, encouraging foreign buyers.

Ais incorrect because devaluation can increase inflation by raising the cost of imported goods.

Bis incorrect because GDP often rises due to increased export demand.

Cis incorrect because imports become more expensive after devaluation, reducing demand.

High-income bond mutual funds typically invest in lower-rated (junk) bonds that offer higher yields. These bonds are exposed to significant credit risk, as issuers may default on their payments.

A is correctbecause credit risk is the primary concern with high-yield bonds.

Bis incorrect as political risk is more relevant for international investments.

Cis incorrect because taxability risk is not specific to bond mutual funds.

Dis incorrect because purchasing power risk is more relevant for fixed-income investments during inflationary periods but is not the primary risk here.

Step by Step Explanation:

Telemarketing Rules (FINRA Rule 3230): Require firms to check the National Do Not Call Registry before contacting individuals, even if those individuals provide their contact information voluntarily.

Incorrect Options:

A: Approval isn’t required for individual follow-ups; compliance with the registry is.

B: While calls must be limited to appropriate hours, the registry check is still mandatory.

C: Written consent does not override the registry requirement.

References:

FINRA Rule 3230 (Telemarketing): FINRA Rule 3230.

Equity securities represent ownership in a company, and preferred stock is a type of equity security that pays dividends and has priority over common stock in liquidation.

A is correctbecause preferred stock is an equity security.

Bis incorrect because commercial paper is a short-term debt security.

Cis incorrect because certificates of deposit (CDs) are fixed-income banking products.

Dis incorrect because exchange-traded notes (ETNs) are unsecured debt securities.

The Securities Investor Protection Corporation (SIPC) protects customers if a broker-dealer fails due to insolvency. Coverage applies to cash and securities in customer accounts, up to $500,000total, including $250,000 for cash.

A is correctbecause SIPC’s purpose is to protect against losses arising from a broker-dealer’s insolvency.

Bis incorrect because SIPC does not guarantee investment performance.

Cis incorrect because SIPC does not cover market losses.

Dis incorrect because futures contracts are not covered under SIPC.

Step by Step Explanation:

Debentures: Corporate bonds not backed by physical assets or collateral. They rely on the issuer’s creditworthiness.

Incorrect Options:

B: Trust certificates are a legacy term for bonds backed by a trust.

C: Collateral trust bonds are secured by financial assets.

D: GO bonds are issued by municipalities, not corporations.

References:

SEC Guide on Corporate Bonds:SEC Corporate Bonds.

Step by Step Explanation:

Negotiated Offering: Occurs when the issuer directly selects an underwriter and negotiates terms. Common in municipal bond issuances.

Incorrect Options:

A: Follow-on offerings apply to subsequent issuances of equity securities.

C: Competitive offerings involve multiple underwriters submitting bids.

D: Best-efforts offerings do not guarantee the sale of all securities.

References:

MSRB Overview of Municipal Offerings:MSRB Offerings.