FINRA SIE Exam: Capital Markets, Regulation and Securities

Securities Industry Essentials (SIE) Exam

FINRA introductory exam; 75 scored multiple-choice questions + 5 unscored pretest questions (80 total); 1 hour 45 minutes; passing score 70 (equated scale); valid 4 years.

Knowledge of Capital Markets section weight

16% (≈12 questions)

Understanding Products and Their Risks section weight

44% (≈33 questions)

Understanding Trading, Customer Accounts and Prohibited Activities section weight

31% (≈23 questions)

Overview of the Regulatory Framework section weight

9% (≈7 questions)

SEC (Securities and Exchange Commission)

Primary federal securities regulator; enforces Securities Act of 1933 and Securities Exchange Act of 1934; oversees SROs, exchanges, broker-dealers, investment companies, and advisers.

FINRA

Self-regulatory organization (SRO) that regulates broker-dealers and associated persons; writes and enforces conduct rules; administers qualification exams including the SIE.

MSRB (Municipal Securities Rulemaking Board)

SRO that writes rules for municipal securities dealers and municipal advisors; does not enforce its own rules (enforcement by FINRA or bank regulators).

SIPC (Securities Investor Protection Corporation)

Protects customers of failed broker-dealers up to $500,000 (including $250,000 cash); does not protect against market losses or fraud by the issuer.

FDIC

Insures bank deposits up to $250,000; does not protect securities accounts.

Federal Reserve Board (FRB)

Sets monetary policy; implements Regulation T (margin requirements).

NASAA

Organization of state securities regulators; enforces state "blue sky" laws.

Primary market

Market where new securities are issued and sold by the issuer (e.g., IPO, follow-on offering).

Secondary market

Market where previously issued securities trade between investors (exchanges and OTC).

Third market

Exchange-listed securities traded over-the-counter.

Fourth market

Institution-to-institution trading that bypasses brokers/exchanges (often via ECNs).

Broker-dealer

Firm that can act as broker (agent, commissions) or dealer (principal, mark-ups/mark-downs).

Introducing broker-dealer

Opens accounts and accepts orders but does not hold customer assets or clear trades.

Clearing broker-dealer

Holds customer assets, clears and settles trades, and handles back-office functions.

Investment adviser

Provides advice for compensation; regulated under the Investment Advisers Act of 1940 (SEC or state registration).

Market maker

Firm that continuously stands ready to buy and sell a security at publicly quoted bid/ask prices.

Transfer agent

Maintains records of ownership, issues/cancels certificates, handles distributions.

DTCC

Primary clearing and settlement entity for most U.S. securities trades.

OCC (Options Clearing Corporation)

Clears and guarantees performance of listed options contracts.

Monetary policy vs. fiscal policy

Monetary = Federal Reserve (interest rates, open market operations); Fiscal = Congress/Treasury (taxing and spending).

Federal funds rate

Interest rate banks charge each other for overnight loans of reserves; primary tool of Fed monetary policy.

Discount rate

Rate the Federal Reserve charges banks for loans from the discount window.

Business cycle stages

Expansion → Peak → Contraction (recession) → Trough.

Leading economic indicators

Predict future economic activity (e.g., stock prices, building permits, average weekly hours).

Coincident indicators

Move with the economy (e.g., GDP, industrial production, personal income).

Lagging indicators

Confirm trends after the fact (e.g., unemployment rate, corporate profits).

Keynesian economics

Emphasizes government spending and fiscal policy to manage the economy.

Monetarist economics

Emphasizes control of the money supply by the central bank.

Normal yield curve

Upward sloping (longer-term rates higher than short-term); typical in healthy economy.

Inverted yield curve

Downward sloping; often precedes recession.

Firm commitment underwriting

Underwriter buys the entire issue from the issuer and assumes the risk of unsold shares.

Best efforts underwriting

Underwriter acts as agent and does not guarantee sale of the entire issue.

Shelf registration

Allows an issuer to register securities once and sell them over a two-year period (or three years for well-known seasoned issuers).

Regulation D

Exemption from full registration for private placements; Rule 506 is the most commonly used.

Rule 144

Sets conditions for the public resale of restricted and control securities.

Rule 144A

Allows qualified institutional buyers (QIBs) to trade restricted securities among themselves.

Accredited investor (Reg D)

Includes individuals with net worth > $1 million (excluding primary residence) or income > $200k ($300k joint) in each of the last two years, plus certain institutions and knowledgeable employees.

Prospectus

Disclosure document required for registered public offerings under the Securities Act of 1933.

Official statement

Disclosure document for municipal bond offerings.

Common stock

Equity ownership; residual claim on assets and earnings; voting rights; unlimited upside; limited liability.

Preferred stock

Equity with priority over common for dividends and liquidation; usually fixed dividend; typically no (or limited) voting rights.

Cumulative preferred

Missed dividends accumulate and must be paid before common dividends.

Convertible preferred / convertible bond

Can be exchanged for a fixed number of common shares.

Rights (preemptive rights)

Short-term privilege allowing existing shareholders to buy new shares at a discount to maintain proportional ownership.

Warrants

Long-term options to buy stock at a fixed price; often attached to bonds or preferred stock as a sweetener.

American Depositary Receipts (ADRs)

U.S.-traded receipts representing shares of a foreign company; facilitate U.S. investor ownership of foreign stocks.

Order of liquidation

1. Secured creditors 2. Unsecured creditors / general creditors 3. Subordinated debt 4. Preferred stockholders 5. Common stockholders.

Treasury bills (T-bills)

Short-term discount instruments; mature in 1 year or less; no periodic interest.

Treasury notes

2-10 year maturity; pay semi-annual interest.

Treasury bonds

>10 year maturity; pay semi-annual interest.

TIPS (Treasury Inflation-Protected Securities)

Principal adjusts with CPI; protects against inflation risk.

General obligation (GO) municipal bonds

Backed by the full faith, credit, and taxing power of the issuer.

Revenue municipal bonds

Backed by the revenue from a specific project or facility.

Municipal bond tax treatment

Interest is generally exempt from federal income tax (and often state/local tax for in-state residents).

Corporate bond

Debt issued by corporations; interest is taxable; subject to credit risk.

Callable bond

Issuer can redeem before maturity (usually when rates fall); investor faces reinvestment risk.

Current yield

Annual interest / current market price.

Yield to maturity (YTM)

Total return if bond is held to maturity (accounts for price, coupon, and time).

Yield to call (YTC)

Total return if bond is called at the first call date.

Inverse relationship (bonds)

When interest rates rise, bond prices fall (and vice versa).

Money market instruments

Short-term, high-quality debt (T-bills, commercial paper, bankers' acceptances, CDs, repos).

Call option

Right to buy the underlying at the strike price; bullish.

Put option

Right to sell the underlying at the strike price; bearish.

In-the-money (call)

Stock price > strike price.

In-the-money (put)

Stock price < strike price.

Covered call

Long stock + short call; generates income; limited upside.

Uncovered (naked) call

Short call without owning the stock; unlimited risk.

American-style option

Can be exercised any time up to expiration.

European-style option

Can be exercised only at expiration.

Options Disclosure Document (ODD)

Must be delivered to customers at or before options account approval.

Options Clearing Corporation (OCC)

Issues and guarantees listed options; handles exercise and assignment.

Open-end investment company (mutual fund)

Continuously issues and redeems shares at NAV; priced once per day after market close.

Closed-end fund

Fixed number of shares that trade on an exchange at market price (can be premium or discount to NAV).

Unit Investment Trust (UIT)

Fixed portfolio; redeemable units; no active management.

ETF (Exchange-Traded Fund)

Trades intraday on exchange like a stock; usually tracks an index; generally low expense ratios.

ETN (Exchange-Traded Note)

Unsecured debt obligation of the issuer that tracks an index; credit risk of the issuer.

Variable annuity

Insurance product with investment options (separate account); tax-deferred growth; surrender charges common; investment risk borne by the owner.

Breakpoint

Discounted sales charge on mutual fund purchases at specified dollar levels.

Letter of Intent (LOI)

Allows investor to receive breakpoint sales charge immediately by committing to invest a certain amount over 13 months.

Right of Accumulation (ROA)

Allows previous purchases (and sometimes related accounts) to count toward breakpoints.

NAV (Net Asset Value)

(Assets - Liabilities) / Shares outstanding; the price at which mutual fund shares are redeemed.

12b-1 fee

Annual marketing/distribution fee charged by some mutual funds.

529 plan

Tax-advantaged education savings plan; earnings grow tax-free if used for qualified education expenses; can be prepaid tuition or savings plan.

ABLE account

Tax-advantaged savings account for individuals with disabilities (onset before age 26).

Direct Participation Program (DPP)

Usually limited partnerships; pass-through taxation; generally illiquid; high risk.

REIT (Real Estate Investment Trust)

Company that owns or finances real estate; must distribute at least 90% of taxable income; avoids corporate-level tax if requirements met.

Hedge fund

Pooled investment vehicle for accredited/institutional investors; limited regulation; often illiquid; high minimums; partnership structure.

Market / systematic risk

Risk of overall market decline; cannot be diversified away.

Non-systematic / business risk

Risk specific to a company or industry; can be reduced by diversification.

Credit / default risk

Risk that the issuer will not make interest or principal payments.

Interest rate risk

Risk that rising rates will cause bond prices to fall.

Reinvestment risk

Risk that coupons or principal will be reinvested at lower rates.

Inflation / purchasing power risk

Risk that returns will not keep pace with inflation.

Liquidity risk

Risk of not being able to sell quickly at a fair price.

Currency / exchange-rate risk

Risk of adverse currency movements for foreign investments.