Securities Industry Essentials (SIE) Exam flashcards

The Municipal Securities Rulemaking Board (MSRB) is a self-regulatory organization (SRO) that creates rules for municipal securities firms, banks, and professionals, but it does not enforce these rules.

• MSRB is an SRO for municipal market.
• Develops rules, but does not enforce them.
• Focuses on investor protection and fair practices in municipal market.

Memory trick: MSRB makes the 'Muni-Rules', but others enforce them.

For severe violations of rules and ethical conduct, such as market manipulation or fraud, FINRA can impose substantial penalties, including significant fines, suspensions, or permanently barring individuals from association with any FINRA member firm.

• Penalties are designed to protect investors and maintain market integrity.
• Severity of action matches the severity of the violation.
• Barring means permanent removal from the securities industry.

Memory trick: Minor errors get a warning, major fraud gets a barring.

FINRA creates and enforces rules governing how broker-dealers and their registered representatives communicate with the public, including through social media.

• FINRA is the primary SRO for broker-dealers.
• Ensures fair and ethical practices in member communications.
• Covers all forms of communication, including electronic and social media.

Memory trick: FINRA's Rules Guide Firms' Communications.

Individuals whose duties are solely clerical or ministerial, such as processing paperwork or handling routine correspondence, are generally exempt from FINRA registration requirements.

• No solicitation of business
• No opening of new accounts
• No investment advice
• Purely administrative tasks

Memory trick: Registration 'R'equires 'R'esponsibility, not just 'R'outine.

Investment banking involves a range of financial services primarily for corporations and governments, including underwriting, M&A advisory, and capital raising.

• Primary market activities (new issues).
• Advisory services for corporate finance.
• Distinct from retail brokerage or asset management.

Memory trick: Investment Banking: 'Initiating' and 'Innovating' corporate finance.

Interest rate risk is the risk that changes in market interest rates will affect the value of a bond.

• Inverse relationship: rates up, prices down; rates down, prices up.
• Longer maturities (duration) mean higher interest rate risk.
• Lower coupon rates (duration) mean higher interest rate risk.

Memory trick: Interest Rate Risk: 'Inverse' to prices, 'Long' duration, 'Low' coupon.

The Municipal Securities Rulemaking Board (MSRB) creates rules for municipal securities firms and professionals, but it does not have its own enforcement powers; instead, its rules are enforced by other regulatory bodies like FINRA and the SEC.

• Creates rules for municipal securities.
• Does NOT enforce its own rules.
• Enforcement is handled by FINRA, SEC, and bank regulators.

Memory trick: MSRB writes the municipal rulebook, but FINRA wears the enforcement badge.

Mandatory ongoing training for registered representatives to ensure they remain knowledgeable about securities products, regulations, ethical standards, and industry changes.

• Consists of a Regulatory Element and a Firm Element.
• Regulatory Element required periodically (e.g., every 3 years).
• Firm Element addresses specific needs of the firm and its RRs.

Memory trick: CE keeps RRs sharp, rules in their heart.

Outside Business Activities (OBA) refer to any business activity engaged in by a registered person outside the scope of their relationship with their employing broker-dealer. FINRA Rule 3270 requires prior written notice to the firm.

• Requires prior written notice to the employing broker-dealer.
• Applies to all business activities, compensated or not.
• Allows the firm to assess conflicts of interest and supervisory needs.

Memory trick: Outside business? Write a note to your firm, not just a thought.

The DTCC provides clearing, settlement, and information services for equities, corporate and municipal debt, money market instruments, and OTC derivatives.

• Reduces risk and enhances efficiency in financial markets.
• Acts as a central counterparty for transactions.
• Its subsidiaries include NSCC (clearing) and DTC (depositories).

Memory trick: DTCC: 'Done, Traded, Clean, Clear'.

The buying and selling of government securities in the open market by the Federal Reserve to expand or contract the amount of money in the banking system.

• Most frequently used monetary policy tool.
• Buying securities increases money supply (stimulates economy).
• Selling securities decreases money supply (slows economy).

Memory trick: Remember 'Buy' for 'Boost', 'Sell' for 'Slow'.

A mutual fund, or open-end fund, is an investment company that pools money from many investors to invest in a diversified portfolio of securities. Shares are continuously offered and redeemed, and priced at Net Asset Value (NAV) once daily.

• Continuously issues and redeems shares.
• Priced at NAV once daily (end of day).
• Typically actively managed.
• Offers diversification and professional management.

Memory trick: Mutual Fund: 'Many' shares, 'Managed' daily NAV.

Employees of broker-dealers performing only clerical or ministerial duties, without soliciting business, advising clients, or receiving transaction-based compensation, are generally exempt from FINRA registration.

• Exemption applies to administrative tasks.
• No solicitation or investment advice allowed.
• No transaction-based compensation.

Memory trick: No Sales, No Advice, No Commission = No Reg.

A stock swap is a type of merger or acquisition where the acquiring company pays for the target company by issuing its own shares to the target's shareholders.

• No cash changes hands between companies for the acquisition.
• Target shareholders become shareholders of the acquiring company.
• Can be tax-efficient for target shareholders in some cases.

Memory trick: Stock Swap: 'Shares' are 'Swapped' for 'Shares'.

A Unit Investment Trust (UIT) is an investment company that offers a fixed portfolio of securities, typically bonds, for a specified period.

• Fixed portfolio, not actively managed.
• Units are redeemable with the trust.
• Typically terminates on a specified date.

Memory trick: UITs are 'United' and 'Immutable' portfolios.

Interest income from municipal bonds is generally exempt from federal income tax. It may also be exempt from state and local income taxes if the bondholder resides in the issuing state.

• Federal tax exemption is standard.
• State/local exemption is for 'in-state' residents.
• This 'triple tax exemption' makes munis attractive to high-income earners.

Memory trick: Munis are 'Mighty' for 'Minimizing' taxes, especially 'My' state's.

Bond prices move inversely to interest rates. When rates rise, existing bond prices fall to offer a competitive yield; when rates fall, prices rise.

• Inverse relationship between bond prices and interest rates.
• When market rates > coupon rate, bond trades at a discount.
• When market rates < coupon rate, bond trades at a premium.

Memory trick: Rates Rise, Prices Plunge; Rates Recede, Prices Progress.

A contract with an insurance company designed to provide retirement income, where the value and payments fluctuate based on the performance of underlying investment options (separate account).

• Value and payments tied to separate account performance (no guarantees).
• Offers investment choices (subaccounts).
• Subject to market risk.
• Often includes a guaranteed minimum death benefit.

Memory trick: Variable Values Vary, Fixed Funds Firm.

An investment vehicle that pools money from many investors to purchase a diversified portfolio of securities, managed by a professional fund manager.

• Professionally managed.
• Offers diversification.
• Shares are redeemable at NAV at the end of the trading day.
• Open-end funds, continuously issue and redeem shares.

Memory trick: Mutual Funds Make Money Many Monthly.

The portion of an option's premium that is in-the-money. For a call, it's the amount the stock price is above the strike price; for a put, it's the amount the stock price is below the strike price.

• Intrinsic value cannot be negative (minimum is $0).
• Call option intrinsic value = Market Price - Strike Price (if positive, else 0).
• Put option intrinsic value = Strike Price - Market Price (if positive, else 0).
• Option premium = Intrinsic Value + Time Value (Extrinsic Value).

Memory trick: Intrinsic Is In-The-Money; Time is Tomorrow's Tremor.

Different investment products are suited for either generating a steady income stream or achieving capital appreciation (growth), based on their fundamental characteristics.

• Income-focused: Preferred stock, bonds, utility stocks, REITs.
• Growth-focused: Growth stocks, early-stage companies.
• Growth stocks typically reinvest earnings, paying little to no dividends.
• Income investments often have lower growth potential but more predictable returns.

Memory trick: Income Is Immediate, Growth Gains Gradually.

Refers to the exercise style of an option contract, determining when the holder can exercise their right to buy or sell the underlying asset.

• American-style: Can be exercised at any time up to and including the expiration date.
• European-style: Can only be exercised on the expiration date.
• Most equity options are American-style.
• Index options are typically European-style.

Memory trick: America: Anytime; Europe: End.

A financial ratio that indicates how much money a company makes for each outstanding share of its stock.

• Calculated as (Net Income - Preferred Dividends) / Weighted Average Common Shares Outstanding.
• Higher EPS generally indicates better profitability.
• Used to evaluate a company's financial health and profitability.

Memory trick: EPS: Every Penny Shares.

The risk that a bond issuer will be unable to make its promised interest payments or repay the principal amount at maturity.

• Higher for lower-rated bonds (junk bonds).
• Lower for government bonds (e.g., U.S. Treasuries).
• Assessed by credit rating agencies (e.g., S&P, Moody's, Fitch).
• Also known as default risk.

Memory trick: Bonds Bring Bad Bets, Beware.

A debt instrument issued by a corporation to raise capital, promising to pay interest over a specified period and repay the principal at maturity.

• Provides fixed or variable income (coupon payments).
• Has a specific maturity date.
• Market value is inversely sensitive to interest rate changes.

Memory trick: Bonds Bring Back Big Bucks, But Borrowers Beware.

A type of U.S. Treasury bond that provides protection against inflation.

• Principal value adjusts with the Consumer Price Index (CPI).
• Coupon rate is fixed, but interest payments vary as principal adjusts.
• Offers protection against inflation risk.

Memory trick: TIPS Take Inflation's Punch, Protecting Principal.

The total number of common shares that would be outstanding if all convertible securities (e.g., convertible bonds, convertible preferred stock, stock options, warrants) were converted into common stock.

• Used in calculating diluted Earnings Per Share (EPS).
• Includes all potential common shares.
• Represents the maximum possible number of shares.

Memory trick: Dilution Adds All Potential Shares.

An options strategy involving buying a put option on a stock that is already owned. It acts as an insurance policy, setting a floor on the potential loss of the stock position.

• Investor is long stock and long put.
• Limits downside risk on the stock.
• Cost of protection is the put premium.

Memory trick: Protecting Puts Prevents Price Plunges.

An investment company that continuously offers new shares and redeems existing shares at net asset value (NAV), providing daily liquidity.

• Professionally managed diversified portfolio.
• Shares bought/sold directly from/to the fund at NAV.
• Offers daily liquidity.

Memory trick: Mutual Funds Manage Money for Many, providing Market Movement.

Dividends from Real Estate Investment Trusts (REITs) are generally taxed as ordinary income at the investor's marginal tax rate, and are typically not considered qualified dividends.

• Not tax-exempt or tax-deferred.
• Usually taxed as ordinary income.
• May be eligible for a 20% Section 199A QBI deduction.

Memory trick: REIT Receipts are Regularly Taxed.

An investor in a limited partnership whose liability is limited to their capital contribution and who does not participate in management.

• Liability limited to investment amount
• No management authority or responsibility
• Participates in profits and losses
• Less active role compared to a General Partner

Memory trick: LPs: Limited Liability, Passive Player.

The greatest amount of money a buyer of a call option can lose, which is limited to the premium paid for the option.

• Premium is the upfront cost of the option
• Occurs if the option expires out-of-the-money
• Buyers of options have limited risk
• Contrast with sellers (writers) who can have unlimited risk (uncovered)

Memory trick: Call Buyer's Loss: Just the PREmium, that's the PREvention.

Preferred stock, with its fixed dividend, behaves similarly to a bond in its sensitivity to interest rate changes.

• Fixed dividend payments
• Market price is inversely related to interest rates
• When interest rates rise, preferred stock prices fall
• When interest rates fall, preferred stock prices rise

Memory trick: Preferred stock, like a bond, feels the interest rate trend.

The profit realized from the sale of a capital asset (like stock) when the selling price exceeds the purchase price (cost basis).

• Calculated as Selling Price - Purchase Price.
• Can be short-term (<= 1 year) or long-term (> 1 year).
• Subject to taxation.

Memory trick: Capital Gains are the Cash Gains from selling an Asset.

The risk that inflation will erode the value of an investment's returns and principal, reducing its real purchasing power.

• Most impactful on fixed-income investments
• Reduces the real return of an investment
• Especially relevant during periods of high or rising inflation

Memory trick: Inflation's bite makes your cash feel light.

The right of existing common stockholders to purchase new issues of common stock before they are offered to the public.

• Protects against dilution of ownership
• Allows shareholders to maintain their percentage of ownership
• Typically offered through rights offerings

Memory trick: PREemptive rights PREserve your PREcentage.

A municipal bond backed by the full faith and credit and taxing power of the issuing municipality.

• Secured by the issuer's general tax revenues (e.g., property, sales taxes)
• Requires voter approval for issuance
• Considered very safe due to broad tax backing
• Used to finance public projects that do not generate revenue

Memory trick: GO Bonds: General Obligation, General Taxes, General Security.

The risk that future interest rates will be lower than current rates, making it difficult to reinvest income or principal payments at a comparable yield.

• Most significant for long-term bonds, especially zero-coupon bonds.
• Affects investors who rely on consistent income streams.
• Becomes relevant when a bond matures or is called.

Memory trick: Reinvesting is Risky when Rates are Really Low.

A derivative contract that gives the buyer the right, but not the obligation, to purchase a specified amount of an underlying asset at a fixed price (strike price) on or before a specified expiration date.

• Used to profit from an increase in the underlying asset's price.
• Buyer pays a premium to the seller (writer).
• Exercised if the market price is above the strike price.

Memory trick: Calls are for Climbing, Puts are for Plunging.

The risk that the value of the underlying investments (subaccounts) within a variable annuity will decline due to adverse market movements, directly impacting the annuity's value and future income payments.

• borne by the annuitant, not the insurer.
• Tied to the performance of the separate account's investments.
• Can lead to fluctuations in account value and income payments.

Memory trick: Variable Values are Vulnerable to Volatile Markets.

The outright purchase and ownership of physical real estate, such as residential or commercial properties.

• Provides direct control and management
• Potential for capital appreciation and rental income
• Often illiquid, difficult to sell quickly
• Requires significant capital and active management

Memory trick: Direct property: Direct control, Direct income, Direct illiquidity.

An investment fund traded on stock exchanges, holding assets like stocks, bonds, or commodities, and typically tracking an index.

• Trades like a stock throughout the day
• Offers diversification and professional management
• Usually has lower expense ratios than mutual funds
• Priced continuously by the market, not just end-of-day NAV

Memory trick: ETFs: Exchange Traded Flexibility for Funds.

The sum of all income received from an investment (e.g., dividends, interest) plus any capital gains (or minus capital losses).

• Combines income and capital appreciation
• Expressed as a dollar amount or a percentage
• Measures the overall profitability of an investment
• Important metric for comparing investment performance

Memory trick: Total Return: Capital Gain + Income = Your Gain.

A class of stock that typically pays a fixed dividend and has preference over common stock in receiving dividends and in the distribution of assets upon liquidation.

• Fixed dividend payments.
• No voting rights (generally).
• Less volatile than common stock, more like a bond.

Memory trick: Preferred is Priority, Common is Control.

A type of annuity that offers a guaranteed minimum return, principal protection, and potential interest linked to a market index.

• Guaranteed return of principal
• Guaranteed minimum interest rate
• Participation in market index gains
• Tax-deferred growth

Memory trick: EIAs: Equity Index Assurance, Principal Protection, Market Gains.

An option strategy where an investor buys a put option on a stock they already own to protect against a decline in the stock's price.

• Provides downside protection for a long stock position
• Limits potential loss to the strike price of the put minus premium paid
• Allows for unlimited upside potential on the stock
• Cost is the premium paid for the put option

Memory trick: Put Protection: Buy a PUT to protect your stock from a DOWNfall.

The risk that a bond will be redeemed by the issuer before its maturity date, typically when interest rates fall, forcing investors to reinvest at lower rates.

• Most relevant for callable bonds trading at a premium
• Occurs when interest rates decline
• Investor loses future higher interest payments
• Reinvestment risk is a direct consequence

Memory trick: Falling rates make the issuer CALL, and your returns FALL.

A type of mutual fund that invests in a combination of stocks and bonds (and sometimes money market instruments) to achieve a balanced objective of growth, income, and capital preservation.

• Professional management and diversification.
• Aims for moderate risk and return.
• Suitable for investors seeking a mix of income and growth.

Memory trick: Balanced Funds Blend Bonds and Stocks.

The amount of equity in a margin account that exceeds the maintenance margin requirement. This excess equity is available for withdrawal or to support additional marginable securities purchases.

• Equity = Market Value - Debit Balance.
• Maintenance Requirement = Market Value x Maintenance Margin Rate.
• Excess Equity = Equity - Maintenance Requirement.
• Can be withdrawn or used for new purchases.

Memory trick: Margin: Know your equity, your loan, and how much cushion you have.

Automated Customer Account Transfer Service (ACATS) is a system that automates and standardizes the transfer of customer accounts between broker-dealers.

• Facilitated by the National Securities Clearing Corporation (NSCC).
• Initiated by the Customer Account Transfer Form (TIF).
• Designed to make account transfers efficient and reliable.

Memory trick: ACATS: 'All Customers Account Transfer Smoothly'

A prohibited practice where a registered representative shares in the profits or losses of a customer's account. Permitted only under strict conditions: written consent from client and firm, and proportionate investment by the rep.

• Requires written consent from client and firm.
• Representative's share must be proportionate to their investment.
• Applies to profits and losses.

Memory trick: Don't 'share' the accounts or 'churn' the trades.

The process by which broker-dealers receive, document, investigate, and resolve customer complaints in accordance with regulatory requirements.

• All complaints (written or verbal) must be documented.
• Must be forwarded to a principal/supervisor immediately.
• Firms must maintain records of all complaints and their resolution.

Memory trick: Complaints: 'Document, Escalate, Resolve.'

The annual income (coupon payment) from a bond divided by its current market price.

• Measures the return an investor would receive if they purchased the bond today.
• Different from coupon rate if the bond trades at a premium or discount.
• Formula: Annual Interest Payment / Current Market Price.

Memory trick: Yields: What you get for what you pay.

A sell stop-limit order has two prices: a stop price and a limit price. Once the stock trades at or below the stop price, the order becomes a limit order to sell at the limit price or better (higher).

• Stop price triggers the order.
• Limit price sets the minimum acceptable selling price.
• Execution occurs at the limit price or higher once triggered.

Memory trick: Stop-Limit: Trigger and then set a price floor.

Information that broker-dealers are legally required to provide to customers when opening a new brokerage account.

• Includes arbitration agreements, privacy policies, and SIPC information.
• Aims to inform customers of their rights, responsibilities, and firm practices.
• Does not typically include detailed financial statements of the broker-dealer itself.

Memory trick: Disclosures: 'Know Before You Go' (into an account).

A type of settlement instruction where securities are delivered to the client's agent (e.g., a bank) against payment. This ensures that the client's agent receives the securities at the same time the payment is made.

• Also known as Cash on Delivery (COD).
• Protects both buyer and seller.
• Payment and delivery occur simultaneously through intermediaries.
• Common for institutional accounts.

Memory trick: DVP: 'D'eliver 'V'ersus 'P'ayment – they meet at the bank.

Broker-dealers must send customer mail to the most current address provided by the customer. While a P.O. Box can be used, it requires strict oversight, including principal approval and periodic review, in addition to having the residential address on file.

• Residential address must be on file.
• P.O. Box requires principal approval.
• P.O. Box usage must be reviewed periodically (e.g., every 6 months).
• Aids in fraud prevention and compliance.

Memory trick: Mail: Get the real address, P.O. Box needs boss's nod and regular checks.

A corporate action where a company reduces the number of its outstanding shares by consolidating them, thereby increasing the price per share proportionally.

• Increases the price per share.
• Decreases the number of shares outstanding.
• Total market value of the investor's holding remains the same.

Memory trick: Reverse Split: 'Fewer shares, higher price, same value.'

A program required by the USA PATRIOT Act for financial institutions to verify the identity of customers opening new accounts. It aims to prevent money laundering and terrorist financing.

• Mandatory for all new accounts.
• Requires collection of name, date of birth, address, and SSN/TIN.
• Identity must be verified through reliable sources.

Memory trick: CIP: Can't Invest without Proof.

An order initiated by the customer without any recommendation or prompting from the registered representative. While suitability rules apply to recommendations, unsolicited orders from a client must generally be executed unless they are illegal or fraudulent.

• Initiated by the client, not the representative.
• Must be executed if not illegal or fraudulent.
• Representative should document that the order was unsolicited.
• Suitability still considered, but client's decision prevails.

Memory trick: Unsolicited: 'U'nderstand, 'N'ote, 'S'ubmit.