Securities Industry Essentials (SIE) Exam flashcards

Fair dealing and integrity are ethical principles requiring financial professionals to treat all clients fairly, honestly, and without preferential treatment, ensuring equal access to information and opportunities.

• Treat all clients equitably.
• Avoid preferential treatment in information dissemination.
• Maintain honesty and transparency.
• Uphold market fairness.

Memory trick: Ethics: 'Fairness First, No Secrets, Always Honest'.

FINRA's regulatory authority, including its power to conduct examinations and demand records from member firms, is delegated to it by the Securities and Exchange Commission (SEC) under the provisions of the Securities Exchange Act of 1934.

• FINRA is an SRO.
• Authority comes from SEC delegation.
• SEC oversees FINRA's activities.
• Ensures compliance with federal laws and FINRA rules.

Memory trick: SROs are the 'SEC's Right Hand' for industry rules and checks.

The Third Market is an over-the-counter (OTC) market for securities that are listed on an exchange.

• Institutional investors often use it for large block trades.
• Facilitated by non-member broker-dealers or market makers.
• Allows trading outside of exchange hours or with potentially better pricing.

Memory trick: Third Market: 'Traded' 'Through' 'The' OTC for listed.

A 12b-1 fee is an annual marketing and distribution fee charged by a mutual fund, deducted directly from the fund's assets. It covers expenses like advertising, promotional literature, and compensation for brokers.

• Annual fee deducted from fund assets.
• Covers marketing and distribution expenses.
• Named after SEC Rule 12b-1.
• Can impact overall fund returns.

Memory trick: 12b-1: '1' fee for '2' kinds of 'b'usiness (brokers and buyers).

Non-governmental organizations that set and enforce rules for their member firms, aiming to protect investors and ensure market integrity, under the oversight of the SEC.

• FINRA and MSRB are examples of SROs.
• They create rules for broker-dealers and municipal securities dealers.
• Their rules must be approved by the SEC.

Memory trick: SEC oversees SROs, who regulate the industry.

FINRA's primary role regarding new product offerings by member firms is to establish and enforce rules governing the firm's conduct, due diligence, suitability, supervision, and communication, rather than approving the product itself.

• Regulates member firm conduct, not product approval
• Ensures due diligence on new products
• Sets suitability standards for recommendations
• Oversees supervision and communication related to products

Memory trick: FINRA 'F'ramework 'I'nstructs 'N'ew 'R'ules 'A'nd actions.

FINRA, as a Self-Regulatory Organization (SRO), has the authority to write and enforce rules of conduct for its member broker-dealers and associated persons, and to impose disciplinary actions for violations.

• Creates and enforces its own rules.
• Disciplines member firms and individuals.
• Operates under SEC oversight.

Memory trick: FINRA Rules, Enforces, Disciplines.

Certificates issued by a U.S. bank representing shares of a foreign stock, allowing that stock to be traded on U.S. exchanges.

• Facilitate U.S. investment in foreign companies.
• Trade in U.S. dollars and clear through U.S. systems.
• Sponsored ADRs are registered with the SEC and trade on exchanges.

Memory trick: ADRs are 'America's Doorway' to foreign stocks.

The OCC charters, regulates, and supervises all national banks and federal savings associations.

• Independent bureau of the U.S. Department of the Treasury.
• Ensures national banks and federal savings associations operate safely and soundly.
• Promotes fair access to financial services and compliance with laws.

Memory trick: OCC: 'Our Custodians Control' national banks.

Federal law designed to protect investors by requiring full and fair disclosure of information regarding new securities offerings in the primary market.

• Often called the 'Paper Act' or 'Truth in Securities Act'.
• Requires registration of new securities with the SEC.
• Mandates prospectuses for informed investment decisions.

Memory trick: Primary disclosure for new issues, the truth must be told.

The Securities Exchange Act of 1934 primarily governs the secondary market and mandates ongoing requirements for broker-dealers, including registration, adequate capital, and operational procedures to ensure fair and orderly markets.

• Regulates secondary market (trading of existing securities).
• Requires broker-dealer registration with the SEC.
• Mandates financial responsibility and operational standards for broker-dealers.
• Created the SEC.

Memory trick: The '34 Act: SEC, Exchanges, BDs, and ongoing trading rules.

Under FINRA rules, individuals performing purely clerical or ministerial functions for a broker-dealer, without engaging in activities such as soliciting business, effecting transactions, or providing investment advice, are generally not required to be registered.

• No customer contact for sales/advice.
• Activities are purely administrative.
• Does not require FINRA registration.

Memory trick: No sales, no advice, no FINRA registration for purely clerical staff.

Compliance programs in financial firms are designed to ensure adherence to all applicable laws, rules, and regulations, primarily to protect investors and maintain market integrity.

• Mandated by regulatory bodies like the SEC and FINRA.
• Aims to prevent violations and detect misconduct.
• Crucial for investor protection and market integrity.

Memory trick: Compliance programs guard against legal woes and investor woes.

FINRA Rule 3220 generally prohibits registered persons from accepting gifts or compensation from clients that exceed $100 per person per year.

• Limit is $100 per person per year
• Applies to gifts and gratuities
• Requires firm permission for exceptions
• Designed to prevent conflicts of interest

Memory trick: One-hundred dollar 'FINRA' gifts from 'any-ONE' client.

The Municipal Securities Rulemaking Board (MSRB) is an SRO that writes rules for broker-dealers and banks that engage in municipal securities business.

• Creates rules for municipal securities market participants.
• Does NOT enforce its own rules; enforcement is by FINRA, SEC, and bank regulators.
• Protects investors and municipal entities.

Memory trick: Every SRO has its specialized zone.

A rule enacted by the SEC requiring financial institutions to protect the privacy of consumer financial information and to provide customers with privacy notices describing their policies.

• Focuses on safeguarding non-public personal information.
• Requires firms to provide initial and annual privacy notices.
• Allows customers to 'opt-out' of information sharing with non-affiliates.

Memory trick: Reg S-P protects secrets, keeping client data discreet.

The Securities and Exchange Commission (SEC) is the primary federal regulator responsible for overseeing the registration of securities offerings to protect investors.

• Enforces federal securities laws.
• Requires registration of most securities offerings.
• Protects investors from fraud and manipulation.

Memory trick: SEC ensures security offers are seen and clear.

Before a new account can be opened and trades executed, a registered principal must review and approve the account, ensuring completeness, accuracy, and suitability, and that all necessary disclosures have been provided.

• Principal must sign the new account form.
• Suitability is paramount.
• Specific documents (e.g., tax returns) are not universally required.

Memory trick: Principal checks all, but tax returns not always call.

Statutory disqualification refers to certain events (e.g., felony convictions, securities-related misdemeanors, SRO revocations) that bar an individual from associating with a FINRA member firm in any capacity, including clerical, unless FINRA grants a waiver or exception.

• Bars association with FINRA firm in ANY capacity.
• Triggered by specific events (felonies, securities-related misdemeanors, SRO revocations).
• Requires FINRA approval for any association.
• Firm must report such events.

Memory trick: Statutory Disqualification is FINRA's 'No-Entry' sign for bad actors.

The suitability rule requires financial professionals to have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for a customer, based on the customer's investment profile.

• Applies to recommendations made by RRs.
• Considers investment profile (age, risk tolerance, goals).
• Protects investors from inappropriate investments.

Memory trick: RRs must recommend what's right, not just what's requested.

A group of investment banks or broker-dealers that collaborate to underwrite and distribute a new issue of securities. They share the risk and responsibilities.

• Formed for both competitive and negotiated offerings.
• Spreads risk among multiple firms.
• Responsible for selling securities to the public.

Memory trick: Syndicates 'Sync' up to sell the whole 'Stack' of securities.

An underwriting agreement where the investment bank commits to buying all shares from the issuer, assuming the risk of unsold shares.

• Underwriter acts as a principal.
• Issuer is guaranteed to receive the capital.
• Highest risk for the underwriter.

Memory trick: Firm Commitment: 'Fixed' and 'Final' purchase.

FINRA establishes and enforces rules for its member broker-dealers regarding all communications with the public, including advertisements, sales literature, and social media, to ensure they are fair, balanced, and not misleading.

• Applies to all public communications
• Ensures fairness and balance
• Prohibits misleading statements
• Includes social media, websites, ads

Memory trick: FINRA 'FINE'-tunes what firms 'SAY'.

A broker-dealer that stands ready to buy and sell a particular stock on a regular and continuous basis at a publicly quoted price, providing liquidity to the market.

• Quotes both bid (buy) and ask (sell) prices.
• Earns profit from the spread between bid and ask.
• Essential for orderly trading in the secondary market.

Memory trick: Market Makers 'Make' the market 'Move' smoothly.

Anti-Money Laundering (AML) programs, mandated by the Bank Secrecy Act and FINRA, require broker-dealers to establish policies and procedures to detect and prevent money laundering, including designating an AML compliance officer.

• Mandated by Bank Secrecy Act and FINRA.
• Must have a designated AML Compliance Officer.
• Requires ongoing employee training.
• Requires independent testing of the program.

Memory trick: AML needs a 'C.O.T.S.' - Compliance Officer, Training, Testing, SARs.

A 'Chinese Wall' is an organizational barrier within a financial firm designed to prevent the flow of material non-public information between departments that could create conflicts of interest, such as investment banking and sales/trading/research.

• Prevents insider trading and front-running.
• Mandated by regulations to manage conflicts of interest.
• Maintains market fairness and investor trust.

Memory trick: Chinese Wall: Information stays in its stall.

The ex-dividend date is the first date on which a stock trades without the right to the next dividend payment.

• Typically one business day before the record date.
• If you buy on or after this date, you do not receive the dividend.
• The stock price usually drops by the dividend amount on this date.

Memory trick: Ex-Dividend: 'Exclude' yourself if you buy on this day.

With very few exceptions, all broker-dealers engaged in the securities business with the public in the United States are required to be members of FINRA.

• Applies to nearly all broker-dealers.
• Ensures uniform industry standards and oversight.
• Exceptions are very limited (e.g., direct issuer sales, some bank activities).

Memory trick: All Public Dealers Must Join FINRA.

In the context of securities laws, civil enforcement (e.g., fines, suspensions) is handled by regulators like the SEC and SROs, while criminal enforcement (e.g., imprisonment) is handled by the Department of Justice.

• SEC and SROs (FINRA, MSRB) handle civil actions.
• DOJ handles criminal prosecutions.
• Criminal charges require a higher burden of proof.

Memory trick: Regulators fine, Justice confines.

The Securities Exchange Act of 1934 governs the secondary market, requiring ongoing disclosures from public companies and prohibiting fraudulent activities like misrepresentation in financial statements to protect investors.

• Regulates secondary market.
• Requires periodic reporting from public companies.
• Prohibits fraud and manipulation.
• Empowers SEC to enforce these rules.

Memory trick: The '33 Act is new, the '34 Act is old; the '40 Acts are funds and advice told.

When a broker-dealer acts as a principal, it buys or sells securities for its own account, taking ownership of the securities. It profits from the spread between the purchase and sale price.

• Acts for its own account.
• Takes ownership of the securities.
• Involves inventory risk.
• Profits from the bid-ask spread.

Memory trick: Principal = 'P'ossession, 'P'rofit from inventory.

Bond prices move inversely to interest rates (yields). When market yields rise, bond prices fall, and vice versa. If coupon < market yield, bond trades at discount; if coupon > market yield, bond trades at premium.

• Coupon Rate < Market Yield = Discount.
• Coupon Rate > Market Yield = Premium.
• Coupon Rate = Market Yield = Par.

Memory trick: If your coupon is 'Low', your price will 'Go' low (discount).

A SAR is a report filed by financial institutions with the Financial Crimes Enforcement Network (FinCEN) when they suspect a transaction or series of transactions of $5,000 or more (or any amount if suspicion exists) may be involved in illegal activities like money laundering or terrorist financing.

• Filed with FinCEN
• Triggered by suspicious activity (e.g., money laundering)
• Threshold is generally $5,000 (or any amount if suspicious)
• Confidential filing, client must not be informed

Memory trick: suspicious activity, 'SAR' is what you 'ARE' required to file.

The illegal practice of trading on the stock exchange to one's own advantage, using confidential information about a company that is not yet public. It is primarily prohibited by the Securities Exchange Act of 1934.

• Violates Section 10(b) and Rule 10b-5 of the 1934 Act.
• Applies to anyone with material non-public information.
• Penalties include fines and imprisonment.

Memory trick: The '34 Act stops insider lies.

A broker acts as an agent, executing trades on behalf of clients and earning commissions. A dealer acts as a principal, trading from its own inventory and earning a markup/markdown or spread.

• Broker = Agent = Commission.
• Dealer = Principal = Markup/Markdown or Spread.
• Some firms act as both (broker-dealers).

Memory trick: Agent is 'A'lways 'A'ssisting the client, not owning.

The Securities Exchange Act of 1934 prohibits insider trading and mandates periodic reporting from publicly traded companies to the SEC, ensuring fair and transparent markets and preventing the misuse of material non-public information.

• Prohibits insider trading
• Requires periodic reports (10-K, 10-Q)
• Applies to secondary market trading
• Empowers SEC to enforce against fraud

Memory trick: The 'Exchange' Act 'Ex'poses 'Ex'ternal and 'Ex'isting information abuse.

The Regulatory Element is a component of FINRA's Continuing Education program designed to ensure registered representatives remain current on industry rules, regulations, and ethical standards.

• Mandatory for all registered persons.
• Completed periodically (e.g., every three years).
• Focuses on regulatory, compliance, and ethical issues.

Memory trick: Regulatory Element: Stay Current, Stay Compliant.

For bonds trading at a premium (price > par), the yields rank from highest to lowest as: Nominal Yield > Current Yield > Yield to Maturity > Yield to Call.

• Nominal Yield (Coupon Rate) is fixed.
• Current Yield considers market price.
• YTM considers capital loss at maturity.
• YTC considers capital loss at an earlier call date.

Memory trick: Premium Bond: 'NCY-TM-TC' (Nicely Timed Call).

An order to buy a security at a specified price or lower. It guarantees the price but not the execution.

• Placed below the current market price.
• Executes only if the market price drops to or below the limit price.
• Used to get a better price than the current market.

Memory trick: Limit means you set the 'Limit' you're 'Willing' to pay.

FINRA (Financial Industry Regulatory Authority) is the largest independent regulator for all securities firms doing business in the United States. Its primary role involves investor protection and market integrity through the registration, qualification, and regulation of broker-dealers and their associated persons.

• Largest independent securities regulator.
• Registers and qualifies securities professionals.
• Regulates member firms' conduct.
• Protects investors and ensures market integrity.

Memory trick: FINRA is the 'Gatekeeper and Coach' for securities professionals.

A non-profit, non-government corporation that protects securities customers of its members up to $500,000 (including $250,000 in cash) in the event a broker-dealer fails.

• Protects against broker-dealer insolvency, not market losses.
• Coverage limit: $500,000 total, with maximum $250,000 for cash.
• Mandatory membership for most broker-dealers.

Memory trick: SIPC 'Saves' your 'Securities' if your broker 'Stops'.

The MSRB writes rules for municipal securities, but does not enforce them. FINRA enforces MSRB rules for broker-dealers and municipal securities dealers, while the SEC enforces them for municipal advisors.

• MSRB is a rule-making body, not an enforcement body
• FINRA enforces MSRB rules for broker-dealers
• SEC enforces MSRB rules for municipal advisors
• Ensures fair practices in municipal market

Memory trick: MSRB 'WRITES' the rules, FINRA/SEC 'FIGHTS' the violations.

FINRA, as a self-regulatory organization (SRO), is primarily funded by fees and assessments collected from its member firms and registered individuals, rather than government funds or fines.

• Supported by the industry it regulates.
• Fees include membership, assessment, and qualification exam fees.
• Fines contribute but are not the main source of operating revenue.

Memory trick: FINRA's funds flow from its firm's fees.

Front-running is an unethical and illegal practice where a broker or analyst executes trades on their own account or for favored clients, based on prior knowledge of a pending customer order or a firm's research report that will likely move the market.

• Involves using non-public information.
• Creates an unfair advantage for the professional.
• Violates fiduciary duties and market integrity.

Memory trick: Unfair trades break the market's trust.

Excessive trading in a client's account by a registered representative solely to generate commissions, without a legitimate investment purpose, violating the duty to act in the client's best interest.

• Prohibited practice under FINRA rules.
• Focuses on commissions over client benefit.
• A breach of the ethical duty of fair dealing.

Memory trick: Always act right, for the client's light.

The Securities Act of 1933 requires the registration of new securities offerings with the SEC and mandates the delivery of a prospectus to potential investors, ensuring full disclosure.

• Regulates new issues (primary market).
• Requires registration statements and prospectuses.
• Aims to ensure investors receive adequate information.

Memory trick: 33 means new issues must be seen with a prospectus.

A share repurchase, or buyback, is when a company buys back its own stock from the open market, reducing the number of outstanding shares.

• Reduces outstanding shares.
• Can increase EPS and ROE.
• Often seen as a way to return value to shareholders.

Memory trick: Buyback: 'Boosts' 'Earnings' by 'Reducing' shares.

Unregistered individuals at a broker-dealer are limited to performing purely clerical or ministerial tasks and cannot engage in activities that require registration, such as soliciting business, taking orders, or providing investment-related information to clients.

• Cannot solicit or accept orders.
• Cannot provide investment advice or recommendations.
• Cannot handle customer funds or securities.
• Cannot discuss account specifics with clients beyond basic administrative functions.

Memory trick: Unregistered means no talking to clients about their money.

The Fourth Market is a market where institutional investors trade securities directly with each other, often via Electronic Communication Networks (ECNs), bypassing broker-dealers and exchanges.

• Direct trading between institutions.
• Bypasses traditional exchanges and broker-dealers.
• Primarily uses ECNs for execution.
• Aims to reduce transaction costs and market impact.

Memory trick: Fourth means 'for us' (institutions) directly.

An increase in the number of outstanding shares of a company's stock, with a corresponding decrease in the share price, maintaining the total market value of the shares.

• Common splits are 2-for-1, 3-for-1, etc.
• Increases liquidity and makes shares more accessible.
• Total value of an investor's holding remains unchanged.

Memory trick: Split means more pieces, same pie. Shares Up, Price Down.

A market order is an order to buy or sell a security immediately at the best available current price.

• Guarantees execution.
• Does not guarantee a specific price.
• Prioritizes speed of execution.

Memory trick: Market Order: 'Make' it 'Move' 'Now'.

An offering of new shares to existing shareholders, giving them the 'right' to buy additional shares, usually at a discount, before they are offered to the public.

• Preserves existing shareholders' proportionate ownership.
• Shares are typically offered below market price.
• Rights are short-lived and can be traded in the secondary market.

Memory trick: Rights are the 'Right' way for existing owners to get more.

FINRA rules mandate that all written customer complaints must be reported to the firm and escalated to supervisory personnel, with many requiring reporting to FINRA itself, to ensure proper handling and oversight.

• Written complaints must always be reported to the firm.
• Attempting private settlement is a serious violation.
• Ensures regulatory oversight and investor protection.

Memory trick: Complaints are firm business, not personal business.

A public offer to all shareholders to purchase their shares directly, typically at a premium to the current market price, often made by another company seeking control or by the issuer buying back its own shares.

• Subject to SEC Rules 14D and 14E.
• Must be open for at least 20 business days.
• All shareholders must be treated equally (best price rule).

Memory trick: Tender offers need 'Twenty Business Days' to be fair.

Broker-dealers engaged in general securities business are legally required to become members of the Financial Industry Regulatory Authority (FINRA), which acts as their primary Self-Regulatory Organization (SRO).

• FINRA is the primary SRO for general securities firms.
• Membership is mandatory for most broker-dealers.
• FINRA oversees sales practices, exams, and compliance.
• Other SROs are specialized (e.g., MSRB for munis, exchanges for listed securities).

Memory trick: To be a BD, you need SEC's nod and FINRA's 'Firm-ID'.

Federal legislation that primarily regulates the secondary market (trading of existing securities), establishes the SEC, and governs broker-dealers and exchanges.

• Regulates secondary market
• Established the SEC
• Governs broker-dealers and exchanges
• Addresses insider trading and market manipulation

Memory trick: Each Act has its own 'Exchange' of focus.

Individuals performing solely clerical or administrative tasks that do not involve direct customer contact related to securities business, solicitation, or handling of funds/securities are generally not required to be registered with FINRA.

• Registration depends on the function performed, not just employment by a broker-dealer.
• Clerical duties like mail handling or file organization are typically exempt.
• Any activity involving securities sales, advice, or direct customer account responsibilities requires registration.

Memory trick: No customer talk, no trading walk, no license shock.

The Securities Exchange Act of 1934 is the primary federal law prohibiting insider trading and other fraudulent activities in the secondary securities markets.

• Regulates secondary market (trading on exchanges).
• Prohibits fraud and market manipulation.
• Establishes the SEC and empowers it to enforce rules against insider trading.

Memory trick: The '34 Act Prevents Insider Scams.

Current yield measures the annual income (coupon payment) from a bond relative to its current market price. It is calculated as Annual Interest Payment / Current Market Price.

• Measures income return on current price.
• Calculated as Annual Interest / Current Price.
• Differs from coupon rate when bond trades at premium or discount.
• Does not factor in capital gains/losses to maturity.

Memory trick: Current Yield: Income 'now' on 'today's' price.

An IPO is the first sale of stock by a private company to the public, marking its transition from private to public ownership.

• Occurs in the primary market.
• Facilitated by investment banks (underwriters).
• Company raises capital for the first time from the public.

Memory trick: IPO: 'Introduce' to the 'Public' 'Original' shares.