SIE Tips, Tricks, and Memory Aids

Foundational Test-Taking Strategies and Psychometrics

• The Primary Goal of Study: Learning the substantive information is the best method for success, but test-taking tricks and memory aids serves as a secondary "quiver" or "buffet" of options when direct knowledge fails.

• Psychometrics of Guessing: Statistical analysis of test writers (psychometrics) suggests that writers often shy away from using choice "C" as the correct answer because it was historically the most common advice given in cram courses. Consequently, choice "B" has statistically become a more frequent correct answer for those who are completely clueless on a question.

• Operational Mindset: Approaching the exam from a position of "abundance" means scoring well on practice exams so that guessing on a few difficult questions will not determine a pass or fail result.

Principal Logical Frameworks for Answering Questions

• RTFQ and RTFA (Read the Full Question and Full Answer): Many errors occur by answering the question one expects to see rather than the one actually written.

  • Example (RTFQ): A question describes a stock that is junior to bondholders and pays dividends if declared by the Board of Directors. A test-taker might immediately select "common stock" until reading the final sentence: "The stock issued will have no voting rights." This detail identifies the security as preferred stock rather than common stock.
  • Example (RTFA): Regarding the tax treatment of municipal bonds, an answer might state they are exempt from state and local taxes. However, without knowing the residency of the investor or the specific bond, that cannot be certain. The best answer across a full set might be that they are exempt at the federal level.
  • The Importance of Specific Keywords: Missing a single word like "managed" in a prompt about an active equity portfolio traded intraday can lead a student to select an ETF (typically passive) instead of a closed-end fund (which can be actively managed and traded intraday).

• Reading the Last Sentence First: For paragraph-long questions, starting with the final sentence helps identify the actual query before wading through distractor information.

  • Metaphorical scenario: A long story about business cycles might conclude with simply asking which stock is resilient to economic downturns. Identifying the core question first reveals it is asking for a definition of a "defensive stock."

• Projecting the Correct Answer: Before looking at the choices, one should mentally formulate the answer. If the expected answer is not present, look for the most closely approximated version.

  • Example: If looking for the classical balance sheet equation $Assets - Liabilities = Net Worth$ and it is not offered, check for the algebraic equivalent: $Assets = Liabilities + Net Worth$.

• Process of Elimination: Eliminating known incorrect distractors increases the probability of a correct choice, even if a total reduction to one answer is not possible. Moving from a $1$ in $4$ chance to a $50/50$ chance significantly improves odds.

  • Example (Outside Business Activities): Rule-based questions often include familiar but irrelevant numbers. In a question about making written notification for outside activities, "gambling winnings over $10,000$ dollars" is a distractor referencing Currency Transaction Reports, which has no bearing on outside employment like driving for a transportation network company.

• Reduction to the Ridiculous: Testing an answer by taking its logic to the extreme.

  • Example (UTMA/UGMA): A distractor might suggest that if a minor dies, the assets go to the custodian. Applying "reduction to the ridiculous" suggests a world where custodians are incentivized to harm minors for financial gain, which cannot be the intended legal structure.

• Principal of Mutual Exclusion: If two answer choices are diametrically opposed, they cannot both be true in the same universe. Often, the correct answer is one of the two.

  • Example: If choice A says convertible debt has a higher coupon and choice B says it has a lower coupon, focus brain cells on these two. Since a conversion feature is an advantage to the issuer, it allows them to pay a lower coupon.

• The "Sesame Street" Trick: "One of these things is not like the other." If three choices follow a pattern (e.g., taxes, taxes, taxes) and the fourth is different (e.g., fees), the outlier is often the answer.

• Too Long to be Wrong: Test writers frequently write the correct answer first, ensuring it is technically perfect and exhaustive, which often makes it the longest choice. They then reverse-engineer shorter, less detailed distractors.

Memory Aids for Investor and Entity Classification

• Accredited Investors (1-2-3 Rule):

  • 1: Individuals with a net worth of at least $1,000,000$, excluding their primary residence.
  • 2: Individuals with an annual income of at least $200,000$ for the last two years with an expectation of the same this year.
  • 3: Married couples filing jointly with an annual income of at least $300,000$.

• Qualified Institutional Buyer (QIB): An institutional investor managing at least $100,000,000$ in assets under management (AUM). QIBs are permitted to purchase unregistered foreign and domestic securities.

• ABC of Broker-Dealers:

  • A: Agent
  • B: Broker
  • C: Commission
  • Context: When acting in an agency capacity, the firm acts as a broker and charges a commission.
  • Contrast: When acting in a principal capacity, the firm acts as a dealer and charges a markup or markdown.

• ABC of Investment Advisors:

  • A: Advice (giving investment advice).
  • B: Business (being in the business of giving advice).
  • C: Compensation (receiving a fee for that advice).

Memory Aids for Market Mechanics and Regulation

• The Three A's of Discretion: For an order to be acceptable without discretionary authority, the client must specify the Action (buy/sell), Asset (specific security), and Amount (quantity). If any of these are missing, the representative needs written discretionary power. Decisions regarding price and time do not require discretion.

• Stock Splits:

  • Forward Split: Results in "More Shares at a Lower Price."
  • Reverse Split: Results in "Less Shares at a Higher Price."

• Governments are Goofy: Treasury Notes and Treasury Bonds follow unique rules:

  • Settle at $T+1$.
  • Trade in increments of $1/32$nds.
  • Use an actual calendar ($365$ days) for accrued interest, whereas corporates and municipals use a standardized $30$-day month/$360$-day year.

• Securities Acts of 1933 and 1934:

  • 1933: The "Paper" Act (prospectuses, cooling-off periods, registration of new issues).
  • 1934: The "People and Places" Act (registration of the SEC, exchanges, and Market Centers like NASDAQ/NYSE).

• Primary vs. Secondary Markets: Distinguish based on who receives the proceeds.

  • Primary: The issuer receives the proceeds.
  • Secondary: The previous owner receives the proceeds.

• Rule 144 (1-4-4):

  • Allows for the sale of control or restricted stock.
  • Volume limits: $1\%$ of outstanding shares OR the average of the last $4$ weeks' trading volume, whichever is greater.
  • Frequency: Filing occurs up to $4$ times a year (every $90$ days).

Transactional and Administrative Sequences

• DATO 15 (Options Account Sequence):

  • D: Disclosure (providing the Characteristics and Risks of Options document).
  • A: Approval (account approved by a Registered Options Principal or ROP).
  • T: Trade (the first transaction can occur).
  • O 15: Options Agreement must be signed and returned within $15$ days. If not, the client is restricted to closing transactions only.

• OPMC (Order Flow in a Clearing Firm):

  • O: Order Department (transmits order to the exchange).
  • P: Purchase and Sales Department (generates confirmations and matches trades).
  • M: Margin Department (determines if money or securities are due).
  • C: Cashiering Department (cages/collects the actual funds and securities).

• DERP (Dividend Chronology):

  • D: Declaration Date (Board declared the dividend).
  • E: Ex-Date (Function of the Uniform Practice Code; one business day prior to record date).
  • R: Record Date (Date the company checks the shareholder list).
  • P: Payment Date (Date checks are distributed).

• DIE 90 (Pass-through Requirements):

  • For Mutual Funds and REITs to avoid double taxation on distributed income.
  • D: Dividends received.
  • I: Interest received.
  • E: Expenses subtracted.
  • Result: Must pass through at least $90\%$ of net investment income to shareholders.

Order Placement and Options Mnemonics

• The Teeter-Totter (Bond Yields): Bonds have an inverse relationship between interest rates and prices. When rates go up, prices go down.

  • Premium Bond: Nominal Yield > Current Yield > Yield to Maturity > Yield to Call.
  • Discount Bond: Yield to Call > Yield to Maturity > Current Yield > Nominal Yield.

• SLOBS over BLISS: Where orders are placed relative to the current market price.

  • Above the Market: Sell Limits and Buy Stops (SL/BS).
  • Below the Market: Buy Limits and Sell Stops (BL/SS).

• Call UP, Put DOWN:

  • Call UP: A call option has intrinsic value (is "in the money") if the market price is up from the strike price. Break-even is Strike Price + Premium.
  • Put DOWN: A put option has intrinsic value if the market price is down from the strike price. Break-even is Strike Price - Premium.

• Options Matrix (Short Put Example): A short put position can be defined even without deep options knowledge through the matrix:

  • Break-even: Strike Price - Premium.
  • Sentiment: Bullish.
  • Outcome: Receives premium; obligation to buy stock at the strike price.
  • Max Gain: Premium received.
  • Max Loss: Break-even price down to zero.