FINRA SIE - Securities Industry Essentials Exam (SIE)

FINRA Rule 2360 requires that customers receive theOptions Disclosure Document (ODD), published by the Options Clearing Corporation (OCC), before they are approved to trade options. The ODD explains the risks and characteristics of options trading.

D is correctbecause the ODD is mandatory for options account approval.

Ais incorrect because a prospectus is not specific to options trading.

Bis incorrect because the MSRB Investor Brochure applies to municipal securities.

Cis incorrect because a margin disclosure statement is required only for margin accounts.

A pass-through entity does not pay corporate income taxes; instead, income is passed to owners, who report it on their individual tax returns.

A is correctbecause C corporations are not pass-through entities; they pay corporate taxes.

B,C, andDare all pass-through entities for tax purposes.

FINRA’s Continuing Education (CE) requirements include the Regulatory Element, which must be completed:

Within 120 days of the second anniversary of a registered representative’s initialregistration.

Every three years thereafter (changed to every two years as of 2023).

C is correctbecause registered persons must complete the CE Regulatory Element after their initial requirement and then every two years.

AandBare incorrect because CE is not required annually or semiannually.

Dis incorrect because CE is not tied to customer complaints.

Step by Step Explanation:

Margin Accounts: Allow investors to borrow funds to purchase securities, with the securities serving as collateral for the loan.

Cash Accounts: Require full payment for securities purchased.

IRAs: Do not permit borrowing due to their tax-advantaged status.

DVP/RVP: Settlement mechanisms, not account types for borrowing.

References:

FINRA Rule 4210 (Margin Requirements): FINRA Rule 4210.

Step by Step Explanation:

Expense Ratio: Class A shares typically have lower ongoing expense ratios but higher front-end sales charges. Class C shares often have higher ongoing expense ratios but no front-end charges.

Incorrect Options:

B: NAV is determined daily and does not vary by share class.

C: All share classes invest in the same underlying portfolio.

D: Purchase timing is the same for all share classes.

References:

SEC Guidance on Mutual Fund Share Classes:SEC Fund Classes.

Step by Step Explanation:

Front Running Definition: Occurs when a broker executes a personal trade ahead of a customer’s order to profit from the anticipated market movement.

Thinly Traded Security: Front running is particularly impactful in low-liquidity securities.

Other Options:

Selling Away: Involves unapproved securities transactions outside the employing firm.

Insider Trading: Involves trading on material non-public information.

Market Manipulation: Encompasses activities like wash trading or spoofing, not specific to this scenario.

References:

FINRA Rule 5270 (Front Running of Block Transactions): FINRA Rule 5270.

The sales load is calculated as a percentage of the POP, using the formula:Sales load = (POP − NAV) ÷ POP × 100

POP = $15.50, NAV = $14.35.

Sales load = ($15.50 − $14.35) ÷ $15.50 × 100 =8.50%.

C is correctbecause the calculation results in an 8.50% load.

A,B, andDare incorrect due to incorrect calculations.

Open-end mutual funds are redeemable securities, meaning investors can sell their shares back to the fund at the NAV.

D is correctbecause mutual funds allow redemption at NAV.

A,B, andCare not redeemable securities.

A covered call involves selling a call option on a stock the investor already owns. The strategy generates income in the form of the premium collected for selling the call, providing additional returns on the stock position.

D is correctbecause the primary goal of a covered call is to generate income.

Ais incorrect because covered calls do not hedge against large declines in the stock price.

Bis incorrect because speculation involves taking higher risks, not a covered call’s conservative strategy.

Cis incorrect because no strategy guarantees a profit.

Restricted stock refers to securities acquired through private placements, such as those offered under Regulation D. These securities are not registered with the SEC and are subject to holding period restrictions before resale.

A is correctbecause Regulation D offerings involve private placements, resulting in restricted stock.

Bis incorrect because IPOs involve publicly traded shares, not restricted stock.

CandDare incorrect because restricted stock is not obtained through warrants or exchange-traded options.