Exam Identity and Use
This independent Quick Reference supports preparation for the FINRA SIE — Securities Industry Essentials Exam (SIE). Use it as a compact review of high-yield products, market structure, orders, account rules, risks, regulations, and prohibited practices. It is not affiliated with FINRA.
Fast Exam Map
| Area | What to recognize quickly | Typical exam task |
|---|
| Securities products | Equity, debt, funds, options, annuities, retirement products | Match product features, risks, tax treatment, and investor objectives |
| Markets and trading | Primary/secondary markets, exchanges, OTC, orders, settlement | Choose order type, identify market participant roles, read basic trade scenarios |
| Customer accounts | Account types, documentation, margin basics, retirement accounts | Identify required authorization, ownership effect, fiduciary duty, or account limitation |
| Regulations and conduct | Securities Acts, SROs, AML, communications, prohibited activities | Spot violations, required disclosures, and proper firm/representative behavior |
| Economics and risk | Interest rates, inflation, Fed actions, yield curve, risk types | Predict bond price movement, rank product risk, identify macroeconomic impact |
Regulatory and Market Structure Reference
| Entity or rule set | Core role | SIE cues and traps |
|---|
| SEC | Federal securities regulator; oversees securities markets, issuers, exchanges, broker-dealers, investment companies, and advisers | Created under the Securities Exchange Act of 1934; broad antifraud authority |
| FINRA | Self-regulatory organization for broker-dealers and associated persons | Administers qualification exams and enforces broker-dealer conduct rules |
| MSRB | Writes rules for municipal securities dealers and municipal advisors | MSRB writes rules; enforcement is handled by other regulators such as FINRA, SEC, or bank regulators |
| Federal Reserve Board | Monetary policy and margin rules | Reg T initial margin is a common exam cue |
| SIPC | Protects customers if a broker-dealer fails financially | Does not protect against market losses or bad investment choices |
| FDIC | Protects bank deposits at insured banks | Does not insure stocks, bonds, mutual funds, ETFs, or variable annuities |
| OCC | Issues, standardizes, and clears listed options | Buyer has rights; writer has obligations |
| IRS | Tax rules for income, gains, retirement accounts, and education savings | Know general tax character; avoid assuming all tax-advantaged products are tax-free |
Key Securities Laws
| Law or regulation | Main focus | Exam-ready distinction |
|---|
| Securities Act of 1933 | New issue registration and prospectus delivery | “Paper Act”; primary market disclosure |
| Securities Exchange Act of 1934 | Secondary trading, exchanges, broker-dealers, SEC creation, antifraud rules | “People and markets Act”; includes Rule 10b-5 antifraud concepts |
| Trust Indenture Act of 1939 | Corporate bond indentures | Protects bondholders through written promises and trustee structure |
| Investment Company Act of 1940 | Mutual funds, closed-end funds, UITs | Product regulation for investment companies |
| Investment Advisers Act of 1940 | Investment adviser registration and conduct | Advisers are paid for securities advice |
| Securities Investor Protection Act of 1970 | SIPC and customer protection in broker-dealer liquidation | Brokerage failure protection, not investment protection |
| USA PATRIOT Act / AML rules | Customer identification and anti-money laundering programs | Know CIP, suspicious activity red flags, OFAC screening, and escalation |
Market Participants and Roles
| Term | Meaning | Trap |
|---|
| Issuer | Entity that creates and sells securities | Issuer receives proceeds in primary market sales |
| Underwriter | Broker-dealer that helps distribute new issues | Buys from issuer or uses best efforts to sell |
| Broker | Acts as agent for a customer and charges commission | Agent capacity means customer trade, not firm inventory |
| Dealer | Acts as principal from firm inventory and charges markup/markdown | Principal capacity means firm is on the other side |
| Market maker | Dealer quoting firm bid and ask prices | Provides liquidity but may profit from spread |
| Designated market maker / specialist | Exchange participant maintaining fair and orderly markets | Exchange-based role, not the same as an OTC dealer |
| Institutional investor | Bank, insurance company, registered investment company, investment adviser, or other large institutional account | Communication classification differs from retail communications |
| Retail investor | Any person other than an institutional investor | Triggers retail communication rules when audience threshold is met |
Primary vs Secondary Markets
| Market | What happens | Proceeds go to | Common terms |
|---|
| Primary market | New securities sold for the first time | Issuer | IPO, APO, underwriting, prospectus |
| Secondary market | Existing securities trade among investors | Selling investor | Exchange, OTC, market maker, bid/ask |
| Third market | Exchange-listed securities traded OTC | Selling investor | Institutional block trades, broker-dealer market making |
| Fourth market | Direct institution-to-institution trading | Selling investor | No exchange or broker-dealer intermediation in the trade |
New Issue Process and Underwriting
| Concept | Meaning | Exam point |
|---|
| Registration statement | Filed with SEC for registered offerings | Contains issuer and offering information |
| Cooling-off period | Period after filing and before effectiveness | No sales; indications of interest may be accepted but are not binding |
| Preliminary prospectus / red herring | Disclosure document before effective date | Does not include final price; used to gauge interest |
| Final prospectus | Required disclosure after effectiveness | Contains final offering details |
| Tombstone ad | Limited announcement of offering | Not a full sales piece |
| Firm commitment underwriting | Underwriter buys securities from issuer and resells | Underwriter assumes unsold inventory risk |
| Best efforts underwriting | Underwriter acts as agent to sell as much as possible | Issuer bears risk securities may not sell |
| All-or-none | Offering canceled unless all shares are sold | Investor funds returned if condition not met |
| Mini-max | Minimum must sell, then up to maximum may sell | Offering proceeds only released after minimum met |
| Syndicate | Group of underwriters | Shares distribution responsibility and risk |
| Selling group | Assists syndicate in sales | Does not assume underwriting risk in the same way |
| Stabilization | Underwriter activity to support market price | Permitted only under strict rules; not ordinary manipulation |
| Restricted persons | Certain industry insiders restricted from buying hot IPOs | Free-riding and withholding are prohibited |
Exempt Securities vs Exempt Transactions
| Category | Examples | What is exempt? | Trap |
|---|
| Exempt securities | U.S. government securities, municipal securities, bank securities, certain commercial paper | Usually exempt from SEC registration under the 1933 Act | Antifraud rules still apply |
| Exempt transactions | Private placements, intrastate offerings, certain small offerings | Transaction exemption, not necessarily security exemption | Resale may be restricted |
| Private placement | Securities sold to limited eligible investors | No public offering registration | Often restricted securities; not freely resold immediately |
| Regulation A offering | Exempt public offering framework for smaller issuers | Simplified offering process | Still subject to disclosure and antifraud principles |
| Regulation D offering | Private placement safe harbor | Often involves accredited investors | Not the same as registered IPO |
| Rule 144 | Resale of restricted/control securities | Provides conditions for public resale | Affiliate/control status matters |
Equity Securities
| Product | Main features | Investor profile | Key risks and traps |
|---|
| Common stock | Ownership, voting rights, residual claim on assets, dividends if declared | Growth, capital appreciation, voting participation | Lowest claim in liquidation; dividends not guaranteed |
| Preferred stock | Fixed dividend preference, priority over common, usually limited voting | Income investor wanting equity-like security with fixed income features | Interest-rate sensitive; less upside than common |
| Cumulative preferred | Missed dividends accumulate and must be paid before common dividends | Income-focused investor | Only preferred dividends accumulate if cumulative |
| Convertible preferred | May convert into common stock | Income plus upside potential | Lower stated dividend than comparable nonconvertible preferred |
| Callable preferred | Issuer may redeem | Issuer flexibility | Call risk when rates fall |
| Participating preferred | May receive extra dividends under conditions | Income plus potential additional payout | Less common; read scenario carefully |
| Rights | Short-term privilege to buy new shares, often below market | Existing shareholder maintaining ownership percentage | Short life; rights are issued to existing shareholders |
| Warrants | Long-term right to buy shares at set price | Speculative upside | Often issued with bonds or preferred stock; no voting/dividends |
| ADR | U.S.-traded receipt representing foreign shares | Foreign exposure through U.S. markets | Currency, political, and foreign market risk |
Common Stockholder Rights
| Right | Meaning | Trap |
|---|
| Voting right | Vote for directors and major corporate actions | Preferred stock usually has limited or no voting rights |
| Dividend right | Receive dividends if declared by board | No guaranteed dividend |
| Preemptive right | Maintain proportional ownership when new shares are issued, if granted | Not automatic in every corporation |
| Residual claim | Claim assets after creditors and preferred shareholders | Common shareholders are last in liquidation |
| Inspection right | Review certain corporate records | Does not mean access to all internal records |
Dividend Dates
| Date | Meaning | Exam cue |
|---|
| Declaration date | Board declares dividend | Creates dividend obligation |
| Ex-dividend date | First day buyer is not entitled to the declared dividend | Buy before ex-date to receive dividend |
| Record date | Company checks records to determine owners entitled to dividend | Ownership record date, not trade date alone |
| Payable date | Dividend is paid | Cash or stock distribution occurs |
Debt Securities
Bond Terminology
| Term | Meaning | Exam cue |
|---|
| Par / face value | Amount repaid at maturity, commonly quoted as 100 or $1,000 | Bond price 95 means $950 per $1,000 par |
| Coupon / nominal yield | Stated interest rate on par value | Does not change after issuance for fixed-rate bonds |
| Current yield | Annual interest divided by current market price | Changes as market price changes |
| Yield to maturity | Total return if held to maturity, accounting for price discount/premium | Best comprehensive yield for noncallable bonds |
| Yield to call | Return if bond is called at call date | Important for premium callable bonds |
| Accrued interest | Interest earned since last coupon payment | Buyer pays seller accrued interest |
| Indenture | Contract between issuer and bondholders | Contains covenants, collateral, maturity, call provisions |
| Trustee | Acts for bondholders | Required under corporate bond indenture rules |
| Call feature | Issuer can redeem early | Bad for investor when rates fall |
| Put feature | Investor can force issuer to redeem early | Good for investor when rates rise |
| Sinking fund | Issuer sets aside funds to retire debt | Reduces credit risk but may create call-like risk |
| Convertible bond | Bond can convert into common stock | Lower coupon in exchange for conversion privilege |
Bond Price and Yield Relationship
| Bond status | Relationship | Exam shortcut |
|---|
| At par | Coupon rate = current yield = yield to maturity | Price equals face value |
| Discount bond | Coupon rate < current yield < yield to maturity | Price below par; yield rises |
| Premium bond | Coupon rate > current yield > yield to maturity | Price above par; yield falls |
| Rates rise | Existing bond prices fall | Long maturity and low coupon fall more |
| Rates fall | Existing bond prices rise | Callable bonds may be called |
Debt Product Matrix
| Product | Backing / structure | Income tax cue | Major risks |
|---|
| Treasury bills | U.S. government short-term discount obligations | Federal taxable; generally exempt from state/local tax | Purchasing power risk, reinvestment risk |
| Treasury notes | U.S. government intermediate-term coupon debt | Federal taxable; generally exempt from state/local tax | Interest-rate risk |
| Treasury bonds | U.S. government long-term coupon debt | Federal taxable; generally exempt from state/local tax | Higher interest-rate risk due to long maturity |
| TIPS | Treasury principal adjusts with inflation | Federal taxable; inflation adjustment may be taxable | Lower deflation protection than misunderstood; market price still fluctuates |
| STRIPS | Zero-coupon Treasury components | Taxable accretion may occur without cash payment | High interest-rate risk, phantom income |
| GNMA securities | Mortgage-backed securities with U.S. government backing | Federal taxable | Prepayment and extension risk |
| Agency / GSE securities | Issued or guaranteed by agencies or government-sponsored enterprises | Tax treatment varies | Credit, interest-rate, prepayment risk |
| Corporate mortgage bond | Secured by real property | Fully taxable interest | Credit and interest-rate risk |
| Equipment trust certificate | Secured by equipment | Fully taxable interest | Industry and collateral risk |
| Debenture | Unsecured corporate debt | Fully taxable interest | Credit risk higher than secured debt |
| Subordinated debenture | Lower-priority unsecured debt | Fully taxable interest | Higher credit risk due to lower claim |
| Income bond | Interest paid only if issuer has sufficient earnings | Fully taxable interest when paid | High credit risk |
| Municipal GO bond | Backed by issuer’s taxing power | Generally federally tax-exempt | Political/tax base risk |
| Municipal revenue bond | Backed by project or facility revenues | Generally federally tax-exempt | Revenue/project risk |
| Private activity municipal bond | Supports private-use projects | May have AMT implications | Credit and tax complexity |
| Money market instrument | Short-term debt such as T-bills, commercial paper, CDs, repos | Varies by issuer | Lower interest-rate risk, but not risk-free |
Municipal Bond Distinctions
| Municipal type | Backed by | Approval / analysis focus | Trap |
|---|
| General obligation bond | Full faith, credit, and taxing power of issuer | Tax base, debt levels, voter or legislative approval where applicable | Not backed by a specific project revenue stream |
| Revenue bond | User fees or project revenues | Feasibility study, debt service coverage, covenants | Not backed by general taxing power |
| Double-barreled bond | Revenue source plus government backing | Both revenue and taxing support | Stronger than single revenue pledge |
| Special tax bond | Specific tax, such as gasoline or sales tax | Stability of dedicated tax revenue | Not the same as ad valorem property tax GO support |
| Special assessment bond | Taxes on properties benefiting from project | Local property benefit | Narrow backing source |
| TAN / RAN / BAN | Short-term municipal notes | Timing of taxes, revenues, or bond issuance | Notes are short-term financing tools |
Use formulas as recognition tools. The SIE is not a heavy quantitative exam, but these relationships appear often.
\[
\text{Current yield} = \frac{\text{annual interest}}{\text{current market price}}
\]\[
\text{Dividend yield} = \frac{\text{annual dividend}}{\text{current market price}}
\]\[
\text{Taxable-equivalent yield} = \frac{\text{tax-free yield}}{1 - \text{marginal tax rate}}
\]\[
\text{Conversion ratio} = \frac{\text{par value}}{\text{conversion price}}
\]\[
\text{Long margin equity} = \text{market value} - \text{debit balance}
\]\[
\text{Short margin equity} = \text{credit balance} - \text{short market value}
\]
| Calculation | Plain-English shortcut | Example cue |
|---|
| Current yield | Annual bond interest divided by current price | 5% bond at 900: $50 / $900 |
| Dividend yield | Annual dividend divided by current stock price | $2 dividend on $40 stock = 5% |
| Taxable-equivalent yield | Tax-free yield divided by after-tax percentage kept | Higher tax bracket makes muni yield more attractive |
| Conversion ratio | Par divided by conversion price | $1,000 par / $25 conversion price = 40 shares |
| Option premium total | Quoted premium times 100 shares for standard equity option | Premium 3 = $300 |
| Gain or loss on stock | Sale proceeds minus cost basis | Include commissions/fees conceptually if tested |
| Bond discount/premium | Compare price to 100 / $1,000 par | 92 = discount; 105 = premium |
Options Basics
Option Rights and Obligations
| Position | Market view | Right or obligation | Maximum gain | Maximum loss | Breakeven |
|---|
| Long call | Bullish | Right to buy | Unlimited | Premium paid | Strike + premium |
| Short call | Bearish/neutral | Obligation to sell | Premium received | Unlimited if uncovered | Strike + premium |
| Long put | Bearish | Right to sell | Strike minus premium, if stock falls to zero | Premium paid | Strike - premium |
| Short put | Bullish/neutral | Obligation to buy | Premium received | Strike minus premium, if stock falls to zero | Strike - premium |
Moneyness
| Option | In the money | At the money | Out of the money |
|---|
| Call | Market price above strike | Market price equals strike | Market price below strike |
| Put | Market price below strike | Market price equals strike | Market price above strike |
Options Vocabulary
| Term | Meaning | Exam trap |
|---|
| Premium | Price paid by buyer and received by writer | Standard listed equity option premium is usually multiplied by 100 |
| Intrinsic value | Amount option is in the money | Out-of-the-money options have no intrinsic value |
| Time value | Premium minus intrinsic value | Declines as expiration approaches |
| Exercise | Buyer uses the option right | Call buyer buys; put buyer sells |
| Assignment | Writer is required to fulfill obligation | Call writer sells; put writer buys |
| Opening purchase | Establishes long option position | Buyer pays premium |
| Opening sale | Establishes short option position | Writer receives premium |
| Closing purchase | Closes short option position | Writer buys back option |
| Closing sale | Closes long option position | Buyer sells option |
| Covered call | Long stock plus short call | Income strategy; upside capped |
| Protective put | Long stock plus long put | Downside protection; premium is insurance cost |
| Straddle | Call and put on same stock, strike, and expiration | Long straddle expects volatility; short straddle expects stability |
Investment Companies and Packaged Products
| Product | Structure | Pricing / trading | Best-fit objective | Key traps |
|---|
| Open-end mutual fund | Continuously issues and redeems shares | Bought/redeemed at NAV, possibly plus sales charge | Diversification, professional management | No intraday trading; no secondary market trading |
| Closed-end fund | Fixed shares after IPO | Trades on exchange at premium or discount to NAV | Exchange-traded diversified exposure | Price may differ from NAV |
| ETF | Exchange-traded portfolio | Intraday exchange trading; often tracks index | Low-cost, tax-efficient, tradable diversification | Can trade at small premium/discount; brokerage commissions may apply |
| UIT | Fixed unmanaged portfolio with termination date | Redeemable units; portfolio generally not actively managed | Defined portfolio exposure | Not actively managed like a mutual fund |
| Money market fund | Short-term high-quality debt portfolio | Seeks stable NAV but not guaranteed | Liquidity and current income | Not FDIC insured unless held as bank deposit product, which funds are not |
| REIT | Owns or finances real estate | Trades like stock if publicly traded | Real estate income and diversification | Real estate, interest-rate, and liquidity risk |
| DPP / limited partnership | Pass-through business structure | Often illiquid | Income, tax attributes, specialized exposure | Limited liquidity, suitability concerns, passive loss complexity |
| Variable annuity | Insurance contract with separate account investments | Value fluctuates with subaccount performance | Tax-deferred retirement accumulation | Surrender charges, expenses, market risk; not suitable for short-term liquidity |
| Fixed annuity | Insurance contract with fixed credited rate | General account of insurer | Principal stability and guaranteed income features | Inflation and insurer credit risk |
| Index annuity | Credited based partly on index formula | Insurance product, not direct index ownership | Downside protection with limited upside | Caps, participation rates, surrender charges |
Mutual Fund Share Classes and Sales Charges
| Class | Typical charge structure | Investor fit | Trap |
|---|
| Class A | Front-end sales charge; lower ongoing expenses | Larger or long-term investments, especially with breakpoints | Breakpoint sales are prohibited |
| Class B | Contingent deferred sales charge; higher ongoing expenses; may convert | Smaller investment with medium holding period | Back-end charge declines over time |
| Class C | Level load / higher ongoing expenses | Shorter holding period | Long holding period can become expensive |
| No-load | No front-end or back-end sales charge | Cost-sensitive investors | Still may have operating expenses |
Mutual Fund Sales Charge Terms
| Term | Meaning | Exam cue |
|---|
| NAV | Assets minus liabilities divided by shares outstanding | Redemption price for open-end fund |
| POP | Public offering price | NAV plus sales charge for front-end load fund |
| Breakpoint | Reduced sales charge at investment thresholds | Must disclose available breakpoint |
| Letter of intent | Investor states intent to invest enough over time for breakpoint | Allows breakpoint now; escrow may apply |
| Rights of accumulation | Prior eligible purchases count toward breakpoint | Helps reduce future sales charges |
| 12b-1 fee | Distribution/service fee from fund assets | Included in expense ratio |
| Expense ratio | Ongoing fund operating expenses | Lower expenses improve net return, all else equal |
| Prospectus | Required disclosure document | Must be provided according to offering rules |
Product Selection Matrix
| Investor need | Usually consider | Usually avoid or question |
|---|
| Capital preservation and liquidity | T-bills, money market instruments, insured bank deposits | Long-term bonds, common stock, illiquid DPPs |
| Current taxable income | Corporate bonds, preferred stock, bond funds | Growth stocks with no dividends |
| Federal tax-exempt income | Municipal bonds or municipal bond funds | Corporate bonds if after-tax yield is lower |
| Growth | Common stock, growth funds, ETFs | Products with capped upside if growth is primary goal |
| Inflation protection | TIPS, equities, real assets/REITs | Long fixed-rate bonds |
| Speculation | Options, low-priced stocks, sector ETFs | Products sold as “safe” or guaranteed |
| Diversification | Mutual funds, ETFs, balanced funds | Concentrated single security positions |
| Retirement tax deferral | IRAs, employer plans, annuities where appropriate | Tax-deferred annuity inside tax-deferred account unless justified by features |
| Short-term emergency liquidity | Cash equivalents, money market instruments | Variable annuities, limited partnerships, long-term bonds |
| Real estate exposure | REITs, real estate funds | Directly treating REITs as guaranteed income products |
Trading Markets, Quotes, and Settlement
| Concept | Meaning | Exam cue |
|---|
| Bid | Price dealer is willing to pay | Customer sells at bid |
| Ask / offer | Price dealer is willing to sell at | Customer buys at ask |
| Spread | Ask minus bid | Dealer compensation and liquidity indicator |
| Round lot | Standard trading unit, commonly 100 shares | Odd lots are less than round lots |
| Long sale | Seller owns or is deemed to own security | Mark order long |
| Short sale | Sale of borrowed security | Requires locate and has unlimited loss potential |
| Regular-way settlement | Standard settlement cycle for most securities transactions | Know trade date vs settlement date distinction |
| Cash settlement | Same-day settlement | Used when parties agree or product rules require |
| When-issued trading | Trading before security is issued | Settlement occurs after issuance |
| Ex-dividend | Buyer no longer gets declared dividend | First day stock trades without dividend entitlement |
Order Types
| Order | Use when investor wants | Execution certainty | Price certainty | Trap |
|---|
| Market order | Immediate execution | High | Low | Execution price can move rapidly |
| Buy limit | Buy at or below limit price | Lower | High | May not execute |
| Sell limit | Sell at or above limit price | Lower | High | May not execute |
| Sell stop | Protect long position or enter short after decline | Becomes market once triggered | Low after trigger | Stop price is not guaranteed execution price |
| Buy stop | Protect short position or buy after breakout | Becomes market once triggered | Low after trigger | Placed above current market |
| Stop-limit | Trigger creates limit order | Lower | High | May trigger but not execute |
| Day order | Valid only for trading day | Depends on order terms | Depends on order terms | Expires if not executed |
| GTC order | Remains open until canceled or firm expiration | Depends on order terms | Depends on order terms | Must be monitored |
| IOC | Execute immediately all or part; cancel rest | Medium | Depends on limit/market | Partial execution allowed |
| FOK | Execute immediately in full or cancel | Lower | Depends on limit/market | No partial execution |
| AON | Execute only full quantity | Lower | Depends on limit/market | Not necessarily immediate |
| Not held | Broker has time and price discretion | Depends on broker judgment | Depends on broker judgment | Does not permit discretion over security, side, or quantity |
Order Placement Shortcuts
| Scenario | Likely order |
|---|
| “Buy now regardless of small price movement” | Market buy |
| “Buy only if price falls to 40 or lower” | Buy limit 40 |
| “Sell only if price rises to 60 or higher” | Sell limit 60 |
| “Protect long stock if it falls below 45” | Sell stop 45 |
| “Protect short stock if it rises above 55” | Buy stop 55 |
| “Trigger at 45 but do not sell below 44” | Sell stop-limit 45 stop / 44 limit |
| “Give broker discretion over timing and price today” | Not held order |
| “Guarantee price but not execution” | Limit or stop-limit |
| “Maximize execution likelihood, not price certainty” | Market order |
Margin Accounts
| Concept | Meaning | Exam cue |
|---|
| Margin account | Customer borrows from broker-dealer secured by securities | Magnifies gains and losses |
| Reg T initial margin | Federal Reserve initial equity requirement for margin stock purchases | Commonly tested as 50% for eligible stock purchases |
| Debit balance | Amount customer owes broker in long margin account | Interest charged on debit |
| Credit balance | Proceeds and deposits in short margin account | Used in short equity calculation |
| Hypothecation | Customer pledges securities as collateral | Authorized in margin agreement |
| Rehypothecation | Broker-dealer re-pledges customer securities within permitted limits | Requires margin agreement authority |
| Maintenance margin | Minimum equity after purchase | If equity falls below requirement, customer receives margin call |
| Margin call | Demand for additional equity | Failure may lead to liquidation |
| Short margin | Borrow and sell security, later buy back | Loss potential is unlimited |
| Retirement account | Generally not a borrowing margin account | Avoid recommending borrowing in retirement accounts |
Customer Accounts
| Account type | Ownership / authority | Key exam point |
|---|
| Individual | One owner | Owner controls trading and receives tax reporting |
| Joint tenants with rights of survivorship | Equal undivided ownership; survivor receives deceased owner’s interest | Common for spouses; avoids probate for account assets |
| Tenants in common | Each owner has stated percentage; deceased owner’s share goes to estate | No automatic survivor ownership |
| Transfer on death | Beneficiary receives assets after death | Beneficiary has no trading authority during owner’s life |
| Custodial UGMA/UTMA | Custodian manages irrevocable gift for minor | One custodian and one minor; minor owns assets |
| Trust | Trustee acts for beneficiaries under trust document | Need trust powers; fiduciary duty applies |
| Estate | Executor/administrator acts for estate | Requires court documentation |
| Corporate | Authorized officer trades under corporate resolution | Need entity authority documentation |
| Partnership | Authorized partner trades under partnership agreement | Confirm authority and limitations |
| Discretionary account | Representative may decide action, asset, or amount | Requires written customer authorization, firm acceptance, and supervision |
| Fiduciary account | Person acts for another’s benefit | Must follow governing document and prudent standards |
| Numbered account | Account uses number/name code for privacy | Firm must still know beneficial owner |
| Cash account | Customer pays in full | No borrowing against securities |
| Margin account | Customer may borrow | Requires margin agreement |
| Item | Why it matters | Trap |
|---|
| Customer identity | CIP and account opening | Must make reasonable identity verification |
| Date of birth / legal age | Capacity to contract | Minors need custodial structure |
| Tax ID / Social Security number | Tax reporting and backup withholding | Missing or incorrect TIN creates issues |
| Address and contact information | Records, statements, notices | P.O. box alone may be insufficient for identity purposes |
| Employment / affiliation | Conflicts and insider issues | Industry employees may require employer notification/approval |
| Investment objective | Product and strategy alignment | “Speculation” is not the same as “income” |
| Risk tolerance | Volatility and loss capacity | Conservative investor and speculative options mismatch |
| Financial status | Suitability context | Liquidity needs matter |
| Trusted contact | Helps address suspected exploitation or diminished capacity | Trusted contact is not authorized to trade |
| Beneficial owner | AML and control | Numbered or entity account does not eliminate disclosure need |
Retirement and Education Accounts
| Account / plan | Main tax concept | Best-fit use | Trap |
|---|
| Traditional IRA | Possible deductible contribution; tax-deferred growth; taxable distributions | Retirement savings with current tax benefit potential | Early distributions may trigger tax and penalty |
| Roth IRA | After-tax contribution; qualified distributions tax-free | Retirement savings with future tax-free potential | Contribution eligibility depends on tax rules |
| Rollover IRA | Receives eligible retirement plan assets | Preserve tax deferral | Direct rollover avoids common withholding problems |
| 401(k) | Employer-sponsored salary deferral plan | Workplace retirement savings | Plan rules govern investments and distributions |
| 403(b) | Retirement plan for certain nonprofit/public education employees | Tax-deferred workplace savings | Often uses mutual funds or annuities |
| 457 plan | Deferred compensation for certain governmental/nonprofit employees | Supplemental retirement savings | Distribution rules differ from 401(k)/403(b) |
| SEP IRA | Employer-funded plan often for small businesses/self-employed | Simplified employer retirement contributions | Employer contribution rules apply |
| SIMPLE IRA | Small employer salary deferral plan | Small business retirement plan | Employer contribution obligation applies |
| 529 plan | Tax-advantaged education savings | Qualified education expenses | State plan, donor control, beneficiary changes |
| Coverdell ESA | Education savings account | Qualified education expenses | Contribution limits and eligibility rules are restrictive |
Tax Reference
| Item | General treatment | Exam cue |
|---|
| Corporate bond interest | Taxable as ordinary income | Fully taxable income |
| Treasury interest | Taxable federally; generally exempt from state/local tax | Good state tax distinction |
| Municipal bond interest | Generally federally tax-exempt | In-state bonds may receive state/local tax benefit |
| Private activity bond interest | May be subject to AMT | Not all muni income has identical tax treatment |
| Qualified dividends | May receive favorable tax rate | Not guaranteed for every dividend |
| Short-term capital gain | Typically taxed at ordinary income rates | Holding period matters |
| Long-term capital gain | Typically receives preferential tax rate | Requires longer holding period |
| Capital loss | Can offset capital gains, subject to tax rules | Wash sale can disallow loss |
| Wash sale | Loss disallowed if substantially identical security is bought within 30 days before or after sale | Basis is adjusted; rule discourages tax-loss selling without economic change |
| Mutual fund distributions | Taxable if held in taxable account, even if reinvested | Reinvestment does not avoid tax |
| Zero-coupon bond accretion | Taxable income may accrue without cash payments | “Phantom income” |
| Annuity growth | Tax-deferred | Withdrawals may be taxable and penalized if early |
| Retirement distributions | Tax depends on account type and qualification | Traditional and Roth treatment differ |
Risks
| Risk | Meaning | Highest-yield product cues |
|---|
| Market risk | Overall market decline | Common stocks, equity funds, ETFs |
| Business risk | Issuer’s business performs poorly | Common stock, corporate debt |
| Credit/default risk | Issuer cannot pay interest or principal | Corporate bonds, revenue bonds, lower-rated debt |
| Interest-rate risk | Bond prices fall when rates rise | Long-term bonds, low-coupon bonds, preferred stock |
| Reinvestment risk | Income must be reinvested at lower rates | Callable bonds, mortgage-backed securities |
| Call risk | Issuer redeems bond early when rates fall | Callable corporate/municipal bonds, callable preferred |
| Prepayment risk | Borrowers repay mortgages early | Mortgage-backed securities when rates fall |
| Extension risk | Prepayments slow, extending maturity | Mortgage-backed securities when rates rise |
| Inflation / purchasing power risk | Return fails to keep up with inflation | Long-term fixed income, cash |
| Liquidity risk | Cannot sell quickly at fair price | DPPs, thinly traded bonds, limited partnerships |
| Currency risk | Foreign exchange movement hurts return | ADRs, foreign funds, international bonds |
| Political/regulatory risk | Law or policy change hurts investment | Foreign securities, regulated industries, municipal projects |
| Systematic risk | Nondiversifiable market-wide risk | Cannot be eliminated by diversification |
| Unsystematic risk | Company- or industry-specific risk | Can be reduced by diversification |
| Opportunity cost | Choosing one investment prevents another | Low-yield conservative choices during rising markets |
Economics and Interest Rates
| Concept | Meaning | Securities impact |
|---|
| Expansion | GDP and business activity rising | Equities may benefit; inflation pressure may rise |
| Contraction | Business activity declining | Defensive assets may outperform; credit risk may rise |
| Recession | Significant economic decline | Earnings and lower-quality credit may weaken |
| Inflation | General price level rising | Hurts purchasing power and long fixed-income securities |
| Deflation | General price level falling | Can signal weak demand; debt burden rises in real terms |
| Fed easing | Policy designed to lower rates/increase money supply | Bond prices tend to rise; borrowing easier |
| Fed tightening | Policy designed to raise rates/reduce inflation | Bond prices tend to fall; borrowing cost rises |
| Normal yield curve | Short rates lower than long rates | Typical expansionary environment |
| Inverted yield curve | Short rates higher than long rates | Often viewed as recession warning |
| Flat yield curve | Short and long rates similar | Transition or uncertainty |
| CPI | Consumer inflation measure | Purchasing power and COLA cue |
| PPI | Producer inflation measure | Can signal future consumer inflation |
| GDP | Broad economic output | Growth/contraction indicator |
| Unemployment rate | Labor market condition | Often lagging indicator |
| Money supply | Amount of money available in economy | Fed policy and inflation cue |
Communications with the Public
| Communication type | Audience | Core rule idea |
|---|
| Correspondence | 25 or fewer retail investors within a 30-calendar-day period | Subject to supervision and review procedures |
| Retail communication | More than 25 retail investors within a 30-calendar-day period | Generally requires principal approval before use, unless exception applies |
| Institutional communication | Institutional investors only | Requires written procedures and supervision |
| Public appearance | Seminar, webinar, TV, radio, unscripted forum | Must be fair, balanced, and not misleading |
| Research report | Analysis of securities or issuers | Conflicts and independence rules matter |
| Social media static content | Profile, background, prepared posts | Treated like advertising/retail communication if retail audience |
| Social media interactive content | Real-time interactive posts | Supervision rules still apply |
Communication Standards
| Requirement | Meaning | Violation cue |
|---|
| Fair and balanced | Discuss benefits and risks | “High return with no risk” |
| No exaggerated claims | Avoid promissory or misleading language | “Guaranteed profit” in securities product |
| Basis for recommendations | Claims need reasonable support | Unsupported performance projections |
| Disclose material facts | Include risks, costs, limits, conflicts | Omitting surrender charges or liquidity restrictions |
| No misleading comparisons | Compare similar products fairly | Comparing taxable yield to tax-free yield without tax adjustment |
| Testimonials/endorsements | Must follow disclosure and supervision rules | Cherry-picked praise without context |
| Past performance | Not guarantee of future results | “This fund returned 12%, so it will again” |
Prohibited and Unethical Practices
| Practice | Meaning | Exam clue |
|---|
| Insider trading | Trading on material nonpublic information | Tip, tippee, merger rumor from confidential source |
| Front-running | Trading ahead of customer/block order | Representative buys before entering customer buy order |
| Churning | Excessive trading to generate commissions | High turnover inconsistent with objective |
| Unauthorized trading | Trade without customer authorization | Discretion must be written and approved |
| Selling away | Securities business outside firm without approval | Private deal not recorded through broker-dealer |
| Outside business activity violation | Outside compensation activity without required notice | Paid side business undisclosed to firm |
| Private securities transaction violation | Securities transaction away from firm without required notice/approval | “I’ll sell you shares in my friend’s startup” |
| Market manipulation | Artificially affecting price or volume | Pump and dump, matched orders, wash trades |
| Marking the close | Trades intended to influence closing price | End-of-day price manipulation |
| Painting the tape | Creating false appearance of activity | Trades with no real change in beneficial ownership |
| Spoofing/layering | Placing orders to mislead market participants | Orders entered with intent to cancel |
| Breakpoint sale | Selling mutual fund amount just below breakpoint | Customer misses lower sales charge |
| Guaranteeing against loss | Promising customer cannot lose | Securities returns generally cannot be guaranteed by rep |
| Sharing in customer account | Sharing profits/losses without permitted conditions | Requires firm approval and proportionate contribution if allowed |
| Borrowing from/lending to customer | Personal loan arrangement with customer | Only allowed under firm rules and permitted relationships |
| Commingling | Mixing customer and firm assets improperly | Customer asset protection violation |
| Conversion | Misusing customer funds/securities | Theft or unauthorized use |
| Falsifying records | Altering documents or signatures | Never sign for customer |
| Rumor spreading | Circulating unverified market-moving information | Especially dangerous with thinly traded securities |
| Using discretion improperly | Choosing security/amount/action without authorization | Time and price discretion alone is different |
AML, CIP, and Red Flags
| Topic | What to know | Red flags |
|---|
| CIP | Firm must verify customer identity at account opening | Reluctance to provide ID, inconsistent information |
| Beneficial ownership | Identify people who own/control legal entity customers | Shell entities with unclear control |
| OFAC screening | Check for prohibited persons/entities | Potential sanctions match |
| Suspicious activity | Escalate and report through firm procedures | Structuring, unexplained wires, rapid in/out transfers |
| Money laundering stages | Placement, layering, integration | Cash-like funds enter, move through transactions, reappear as legitimate |
| Third-party transactions | Require scrutiny | Wires to unrelated parties or high-risk jurisdictions |
| Senior exploitation | Financial abuse of vulnerable adult | Sudden new contact, unusual withdrawals, confusion, coercion |
| Account takeover | Unauthorized access/control | Changed contact info plus urgent transfer request |
Customer Protection and Insurance
| Protection | Covers | Does not cover | Exam trap |
|---|
| SIPC | Missing customer cash/securities if broker-dealer fails, up to coverage limits | Market losses, unsuitable recommendations, issuer bankruptcy | SIPC is not FDIC |
| FDIC | Insured bank deposits at insured banks | Securities, mutual funds, ETFs, annuities | Bank-sold securities are not FDIC insured |
| Excess SIPC | Additional private insurance some firms buy | Still generally does not cover market loss | Firm-specific, not automatic |
| Fidelity bond | Protects firm against employee dishonesty | Not an investor performance guarantee | Firm protection, not product guarantee |
| Clearing firm custody | Holds and clears customer assets for introducing broker | Does not eliminate market risk | Introducing and clearing firms have different roles |
Account Transfers, Statements, and Confirmations
| Document / process | Purpose | Exam point |
|---|
| Trade confirmation | Details transaction after execution | Capacity, price, commission/markup, settlement, security details |
| Account statement | Periodic holdings, activity, balances | Customer should review for errors/unauthorized activity |
| Customer complaint record | Written customer grievance | Must be handled under firm procedures |
| ACATS transfer | Automated customer account transfer between firms | Helps move assets from one broker-dealer to another |
| DRS | Direct registration system | Security registered directly on issuer books |
| Proxy statement | Shareholder voting information | Common stockholders vote; proxy solicits voting authority |
| Annual report / 10-K | Audited annual issuer information | More comprehensive than quarterly report |
| 10-Q | Quarterly issuer report | Unaudited quarterly update |
| 8-K | Current report of material events | Timely disclosure of significant events |
Suitability-Style Decision Points
Although the SIE is not a full representative-level suitability exam, it frequently tests whether a product logically fits a stated objective.
| If the customer says… | Watch for… | Better answer direction |
|---|
| “I cannot lose principal.” | Market risk, credit risk, liquidity risk | Insured deposits or very conservative short-term instruments, not common stock |
| “I need tax-free income.” | Tax bracket and state residency | Municipal bonds/funds; compare taxable-equivalent yield |
| “I need money next month.” | Liquidity and market risk | Cash equivalents, not annuities or DPPs |
| “I want aggressive growth.” | Risk tolerance and time horizon | Common stock/growth funds, not fixed annuity |
| “I want income and can accept rate risk.” | Credit quality and duration | Bonds, bond funds, preferred stock |
| “I fear inflation.” | Fixed income purchasing power risk | TIPS, equities, real assets, inflation-aware allocation |
| “I want to trade during the day.” | Mutual fund pricing | ETFs or listed stocks, not open-end mutual funds |
| “I want foreign exposure in U.S. markets.” | Currency and political risk | ADRs or international funds |
| “I want tax deferral.” | Costs, surrender charges, retirement account context | Retirement accounts or annuities if features justify |
| “I want options income.” | Approval level and risk | Covered call is lower risk than uncovered call, but not risk-free |
High-Yield Distinctions
| Distinction | Choose this answer when… |
|---|
| Broker vs dealer | Broker is agent and earns commission; dealer is principal and earns markup/markdown |
| Primary vs secondary | Issuer receives proceeds only in primary market |
| Common vs preferred | Common has voting and growth; preferred has fixed dividend priority |
| Right vs warrant | Rights are short-term and for existing shareholders; warrants are longer-term and often attached to other securities |
| GO vs revenue municipal bond | GO uses taxing power; revenue uses project revenue |
| Treasury vs municipal tax | Treasury interest is federal taxable/state exempt; muni interest is generally federal exempt |
| Open-end vs closed-end fund | Open-end redeems at NAV; closed-end trades in market at premium/discount |
| ETF vs mutual fund | ETF trades intraday; mutual fund prices once at NAV after market close |
| Variable annuity vs mutual fund | Variable annuity is insurance contract with tax deferral and expenses; mutual fund is investment company security |
| Call vs put | Call is right to buy; put is right to sell |
| Buyer vs writer | Buyer has right and pays premium; writer has obligation and receives premium |
| Limit vs stop | Limit sets acceptable price; stop triggers a market order |
| Stop vs stop-limit | Stop improves execution chance after trigger; stop-limit improves price control but may not execute |
| Discretion vs time/price | Choosing security/action/amount requires written discretionary authority; time/price discretion for the day is different |
| SIPC vs FDIC | SIPC covers brokerage failure; FDIC covers bank deposits |
| Exempt security vs exempt transaction | Security exemption follows the instrument; transaction exemption follows how it is sold |
| Systematic vs unsystematic risk | Systematic cannot be diversified away; unsystematic can be reduced through diversification |
Common Trap Checklist
- Do not treat tax-exempt as risk-free.
- Do not treat SIPC as protection from market loss.
- Do not assume preferred stock has the same upside or voting rights as common stock.
- Do not confuse yield to maturity with current yield.
- For bonds, remember: rates up, prices down.
- For premium bonds: coupon > current yield > YTM.
- For discount bonds: coupon < current yield < YTM.
- A market order seeks execution, not price protection.
- A limit order protects price, not execution.
- A stop order becomes a market order after trigger.
- A stop-limit may never execute after trigger.
- A call buyer is bullish; a put buyer is bearish.
- An uncovered short call has unlimited loss potential.
- Open-end mutual funds do not trade intraday.
- Closed-end funds and ETFs may trade at premium or discount to NAV.
- A variable annuity is not a mutual fund, even though subaccounts may resemble funds.
- Retirement account tax treatment depends on account type and distribution qualification.
- A trusted contact is not automatically an authorized trader.
- Written customer complaints must be escalated under firm procedures.
- Private securities transactions and outside business activities require firm notice and possible approval.
- Antifraud rules still apply to exempt securities and exempt transactions.
Final Review Sequence
- Memorize the broker/dealer, primary/secondary, common/preferred, GO/revenue, open-end/closed-end, and call/put distinctions.
- Drill the bond yield-price relationships until automatic.
- Practice order-type scenarios using trigger, execution certainty, and price certainty.
- Review prohibited practices as scenario recognition, not definitions only.
- Rework missed questions by product type, rule type, and customer objective.
Next step: use this Quick Reference as a checklist, then complete timed SIE practice sets and review every missed question against the matching table above.