SIE Class Summary: Please Review Them Multiple Times Before Your Actual Test. They Are Not Intended

SIE Class Summary
This summary highlights important and heavily tested concepts on the SIE exam.
Please review them multiple times before your actual test. They are not intended
as a substitute for the textbook, class attendance, or practice examinations but
instead will help you focus your study efforts as the exam approaches.
Contents
Chapter 1 – Equity Securities ................................................................................................................ 2
Chapter 2 – Debt Securities .................................................................................................................. 5
Chapter 3 – Types of Bonds .................................................................................................................. 7
Chapter 4 – Investment Company Securities ................................................................................ 10
Chapter 5 – Other Managed Products ........................................................................................... 13
Chapter 6 – Options .............................................................................................................................. 15
Chapter 7 – Suitability and Investment Risks .................................................................................. 17
Chapter 8 – Issuing Securities ............................................................................................................. 18
Chapter 9 – The Secondary Market and Equity Trading ............................................................ 20
Chapter 10 – Economics and Monetary Policy ............................................................................ 22
Chapter 11 – Customer Accounts .................................................................................................... 24
Chapter 12 – Tax-Advantaged Accounts and Products ........................................................... 29
Chapter 13 – FINRA Registration ........................................................................................................ 33
Chapter 14 – Business Conduct Rules .............................................................................................. 35
Version: 2021 V9 Confidential—For Knopman Marks Students Only Page 1 of 39

SIE Class Summary
Chapter 1 – Equity Securities
1. Treasury Stock: Treasury stock is authorized stock that was previously sold to
the public but was repurchased by the issuer. Because it is no longer
outstanding, the company’s share count will fall, and the shares no longer
receive dividends or have voting rights. Treasury shares may be held by the
company, reissued to the public, or cancelled.
2. Company Repurchases: A company that believes its stock is undervalued
may repurchase shares in the open market (creating treasury stock).
3. Voting Rights: Holders of common stock have voting rights, which allow
them to exercise control by electing the board of directors and voting on
corporate policy. This contrasts with holders of preferred stock, who
typically do not have voting rights.
4. Statutory Versus Cumulative Voting: Voting by common stockholders can
be carried out by one of two methods.
• Statutory voting allows a shareholder to vote one time per share for
each seat on the board of directors. For example, if an investor
owns 100 shares of common stock and there are three board seats
to be filled, they can cast up to 100 votes for each of the three
seats.
• Cumulative voting allows the shareholder to pool their votes
together and allocate them as desired. For example, the
shareholder above can aggregate all of their votes – 300 total (100
votes x 3 seats) and allocate them however they choose (e.g. they
could cast all 300 votes for one candidate or cast 200 for one
candidate and the remaining 100 votes for another).
5. Form 10-K: Public companies must file annual financial reports (which
includes financial statements) called 10-ks with the SEC within 90 days of
year-end.
6. Pre-Emptive Rights: Pre-emptive rights allow a current shareholder to
maintain their proportionate ownership interest and avoid dilution when a
company issues additional shares.
7. Warrants: Warrants are typically issued by a company in conjunction with
another security to make that other security more attractive to investors.
For example, a company might use a warrant as a sweetener for investors
as part of a debt deal. Unlike pre-emptive rights, warrants do not prevent
dilution.
8. Warrants As Equity Securities: Warrants are considered equity securities
(not debt securities) because if the warrant is exercised, the investor will

SIE Class Summary
receive shares in the underlying company. Importantly, warrants do not

make interest payments to investors.
9. Value of Warrants: A warrant provides an investor the ability to purchase a
company’s stock at a specified exercise price for a set time period. For
example, the investor is given the right to purchase the stock at $100 per
share. The investor would want to exercise this right if the price increases
above the exercise price (e.g. an investor wants to pay $100 for stock
worth $150 not for stock only worth $50) and therefore the market value of
a warrant is tied to the value of the underlying stock.
10. Issuance Price of Warrants: Warrants are generally not issued with intrinsic
value, meaning they are issued with an exercise price above the current
market value of the stock. For example, if the current stock price is $50,
the exercise price given to the warrants might be $80. For the warrants to
be exercised by an investor, the price would have to increase above the
exercise price.
11. Define Penny Stock: Penny stocks are defined as OTC equity securities
(i.e. unlisted) worth less than $5.00 per share.
12. Blue Chip Versus Penny Stocks: Stocks of well-established, stable
companies with a long history of steady earnings and dividends are
known as blue chip stocks. Blue chip stocks typically trade on the major
exchanges such as the NYSE or Nasdaq. Penny stocks are riskier, more
volatile, and less liquid than blue chip stocks.
13. Wilshire 5000: The Wilshire 5000 is an index which measures the value of
U.S. companies with actively traded stock.
14. Business Risk: Non-systematic risk is business risk, which is the risk that a
specific company may not be profitable.
15. Risk of ADRs: American depositary receipts (ADRs) help to facilitate the
trading of a foreign corporation’s stock in the US. Investors in ADRs face
political risk, which is the risk that political instability and uncertainty in that
foreign country might negatively impact their investment. Importantly,
because ADRs are common stock and not debt securities, they do not
have call risk or interest rate risk.
16. Withholding Taxes: When a foreign corporation pays a dividend, a bank
will take the foreign dividend payment (e.g. Euro or Japanese Yen) and
convert it into US dollars for the ADR holder. It is possible that the ADR
holder might receive a lower dividend than was actually declared
because the foreign government might withhold a percentage of the
dividend for taxes.
17. Cumulative Preferred Stock: Cumulative preferred stock allows investors to
receive dividends in arrears. This means that if a dividend is skipped for

SIE Class Summary
cumulative preferred shareholders, they must receive both current and

skipped dividend payments before any dividend payment can be made
to common shareholders. This is a benefit for the investor as it entitles them
to receive missed dividend payments.
18. Transfer Agent Versus Custodian: A transfer agent of an issuer is
responsible for issuing and cancelling certificates and processing investor
mailings (e.g. proxies). A custodian, on the other hand, is responsible for
holding investor assets or securities for protections. A custodian may also
maintain certain investor records.
19. Cash Dividend Taxation: Cash dividends on stock received by an investor
are taxable as ordinary income and do not increase the investor’s cost
basis.
20. Ex-Dividend Date: The ex-date is the first day purchasers of the stock will
not receive a dividend. This is because the trade will not settle on or
before the record date. For a regular way trade, which settles T + 2 (two
business days after the trade date), the ex-date is the business day before
the record date.
21. Order of Dividend Process: Make sure to know the order of dates in the
dividend payment process. 1) Declaration Date, 2) Ex-Dividend Date, 3)
Record Date, 4) Payment Date.
22. Stock Splits: A stock split is an artificial adjustment in the issuer’s
outstanding share count and stock price. Importantly, because the
number of shares and price change in proportion with one another, the
overall value of the company as well as the investor’s ownership position
in the company remain unchanged. For example, if an investor owned
$1,000 of stock before a stock split, they will still own $1,000 of stock after.
23. Forward Stock Split: In a forward stock split, the number of outstanding
shares increases, and the share price is reduced proportionally. For
example, after a 2-for-1 split an investor owning 100 shares of stock at $30
per share will now own 200 shares at $15 per share. Both before and after
the split, the value of the investor’s position remains $3,000.
24. Reverse Stock Split: In a reverse stock split, the number of outstanding
shares is reduced, and the share price is increased proportionally.
Generally, a reverse split is used by a company to inflate their stock price
and avoid falling below the minimum price required for exchange listing.
For example, after a 1-for-10 split an investor owning 100 shares of stock at
$1 per share will now own 10 shares at $10 per share. Both before and
after the split, the value of the investor’s position remains $100.

SIE Class Summary
25. Stock Dividend Taxation: Stock dividends are not taxed when received by
a shareholder. However, the basis of the investor’s position is adjusted
downward to reflect the new number of shares.
• Example: Assume an investor holds 100 shares of stock valued at $50
per share and receives a 10% stock dividend. The $5,000 value ($50
x 100 shares) of the total position does not change, so the investor
now has 110 shares with an adjusted basis of $45.45 (calculated as
$5,000 total value/110 shares).
26. Short Sale: Selling short is when an investor, believing the price of the
security will decline, sells borrowed shares in the market, hoping to
repurchase and replace the shares at a lower price than what they were
initially sold for. Theoretically, because the price of the shares can rise
indefinitely (rather than fall as the investor wants), short sellers have
unlimited risk potential.
Chapter 2 – Debt Securities
1. Discount Versus Premium Bond: When the market value of a bond is

greater than the par value, the bond is trading at a premium. If the
market value of the bond is below par value, the bond is trading at a
discount.
2. Nominal Yield: Also referred to as the coupon, the nominal yield is the
annual interest rate paid to the investor. Unlike other bond yields, the
nominal yield is fixed and does not change over the life of the bond. For
example, a bond that pays a 5% coupon, pays the same 5% of $1,000
(par value) or $50 of interest per year throughout the life of the bond.
3. Current Yield: The current yield of a bond is calculated as the annual
interest divided by the market price. If the semiannual coupon is
provided, make sure to multiply by two to annualize.
• Example: A bond is trading at $960 and pays a $15 semiannual
coupon. Current yield is calculated as the annual interest of $30
($15 x 2) divided by the market price of $960. Therefore, current
yield is 3.1%.
4. Interest Rate Risk: The risk that if interest rates increase, the price of
outstanding bonds will fall. Long-term, low-coupon bonds (including zero-
coupon bonds) have the greatest interest rate risk, meaning they are most
sensitive to changing rates. Although a Treasury bond has no credit risk, as
they are guaranteed by the full faith and credit of the US government,
they still are very susceptible to interest rate risk given their long-term (e.g.
30 year) maturity.

SIE Class Summary
5. Reinvestment Rate Risk: The risk that as interest rates fall, that the semi-
annual coupon payments that an investor receives will be reinvested
back into the market at a lower rate of return. Note that zero coupon
bonds do not have reinvestment rate risk as there are no cash flows to
reinvest.
6. Duration: Duration is a measure of a bond’s sensitivity to changing interest
rates. Bonds with a longer duration are more sensitive to changing rates.
7. Bond Pricing: The price of a bond is affected most by interest rates.
Factors like credit rating, market demand, and earnings potential of the
company are not as impactful.
8. Serial Bonds: In a serial bond issue, the outstanding bonds mature at
different intervals with a portion of the issue maturing each year.
9. Call Feature: If a bond is callable, the issuer has the right to buy it back
from the investor prior to maturity. Typically, the issuer will redeem a bond
if interest rates decline, allowing the company to issue new bonds at a
lower interest rate. A call feature benefits the issuer, not the investor.
10. Call Protection: Issuers can call callable bonds at any time unless the
bond has a call protection period. If there is call protection, the issuer
must wait until the period expires. Callable bonds with call protection are
safer for investors.
• Example: A 20-year bond with a 10-year call protection period
could be called any time after year 10 through maturity.
11. Call Price: When an issuer calls bonds, it must pay the investor par value +
any call premium (if applicable) + interest accrued to that date. Investors
receive no interest after the bond is called.
12. Default: If an interest payment is missed on an outstanding debt
obligation, the bond will default.
13. Credit Ratings: Bond rating services publish credit ratings to inform
investors of a bond’s credit quality. A bonds credit rating may change
periodically while it is outstanding. Credit ratings are typically a big factor
in the liquidity of bonds (even more so than the coupon or maturity).
14. Adjusting Premium Bonds by Amortization: Bonds purchased at a premium
(> $1,000 par) must be amortized over the life of the bond. Amortization
means that the cost basis will be adjusted downwards each year so that
at maturity an investor’s cost basis is $1,000 par. What will amortization
effect? Amortization effects a bond’s cost basis (downwards) and should
the investor sell the bond prior to maturity, the profit or loss on the
transaction. Amortization does not affect sale proceeds (what a
purchaser is willing to pay).

SIE Class Summary
• Example: When an investor purchases a bond at a premium, the

cost basis will be adjusted downward towards par on a straight-line
basis. This is referred to as amortization. For example, a 10-year
bond bought at 110 would be adjusted by one point per year,
calculated as: 10-point premium / 10 years to maturity = 1 point per
year.
15. Accretion of Discount Bonds: Discount bonds will be accreted, which is
similar to amortization, but the cost basis is adjusted upwards (towards
par) each year.
16. Accrued Interest: Accrued interest is the interest paid by the buyer of the
bond to the seller of the bond when the bond is trading between coupon
dates. A bond the trades with accrued interest is said to trade “and” or
“with” interest. The accrued interest is taxable for the recipient as ordinary
income, though it does not impact the cost basis of the bond. A bond
that trades without accrued interest (e.g. a bond in default, or a zero
coupon instrument) is said to trade flat.
17. Dated Date: The dated date is the date when interest begins to accrue on
fixed income securities. The dated date is only relevant for new issuances
and once regular semi-annual coupon payments begin, it is no longer
relevant.
Chapter 3 – Types of Bonds
1. Unsecured Corporate Debt: Unsecured corporate debt is not backed by

collateral or a specific asset of the corporation. Instead, it is backed by
the good faith and credit quality of the company. It is also referred to as a
debenture bond.
2. Convertible Bonds: Convertible bonds are a type of corporate bond
where the investor has the right to convert the bond into the company’s
underlying common stock. Because of this conversion benefit for the
investor, convertible bonds pay a lower rate of interest compared to
similar non-convertible bonds.
3. Convertible Bond Pricing: The value of a convertible bond is based on the
value of the underlying common stock, since the investor can exchange
the bond for the shares. The parity price is the value at which the investor
is mathematically indifferent between owning the bond or converting into
the underlying shares.

SIE Class Summary
4. Non-Marketable US Government Securities: The US government issues

both marketable and non-marketable debt securities. Marketable
securities can be freely traded by investors and include US Treasury
securities, such as Treasury bills, Treasury notes, and Treasury bonds. Non-
marketable securities, for example US savings bonds, cannot be resold by
investors and therefore have no secondary market.
5. Series I Bond: A Series I bond is a non-marketable US Treasury savings
bond. It pays a combination of fixed and variable interest (linked to the
rate of inflation).
6. Risk of Treasury Securities: Treasury securities do not have credit risk but
are subject to interest rate risk, purchasing power risk and political risk. An
investor purchasing treasury securities would be more concerned with
interest rate risk than political or credit risk.
7. Taxation of Treasury Securities: The interest income from Treasury bonds is
taxed at the federal level, but not at the state or local levels.
8. Treasury Receipts: Treasury receipts are zero-coupon bonds that are
structured by broker-dealers but backed by cash flows from Treasury
securities.
9. STRIPS: STRIPS are zero coupon bonds that are issued and backed by the
US Government. They are issued at a discount and mature to face value.
10. General Obligation Bonds: GO bonds are municipal securities used to
finance non-revenue facilities, such as public parks, public schools, and
public libraries. The interest and principal is backed by the full taxing
power of the issuing municipality.
11. Industrial Development Revenue Bonds: Industrial development revenue
bonds are a type of taxable municipal security that is issued by a
municipality on behalf of a corporation. Specifically, the municipality will
issue to debt to build a facility on behalf of a corporation and then lease
that facility to the corporation. Because the bonds are backed by lease
payments made by the corporation, the debt is the responsibility and
credit quality of the corporation.
12. Official Statement: The official statement is the primary disclosure
document used in connection with a municipal security offering. It
includes all relevant information for investors, such as the risks of the
bonds.
13. Ginnie Mae: Along with Fannie Mae and Freddie Mac, Ginnie Mae is an
issuer of mortgage-backed securities (MBS). However, Ginnie is the only
one of the three that is backed by the full faith and credit of the US
government. Because Fannie and Freddie are government sponsored

SIE Class Summary
enterprises, they only have an implied, but not an explicit backing of the
US government.
14. Agency Securities: Securities issued by Ginnie Mae, Fannie Mae, and
Freddie Mac – sometimes collectively referred to as “Agency Securities” –
are taxable at the federal, state, and local levels.
15. Money Market Instruments: Money market securities are short-term debt
instruments with maturities of one year or less. Because of their short-term
nature, they tend to be relatively liquid and low risk compared to longer-
term bonds. Examples include Treasury bills, commercial paper,
negotiable CDs, and banker’s acceptances. Additionally, once a Treasury
bond has only one year or less remaining until maturity, it can trade in the
money market.
16. Commercial Paper: Commercial paper is an unsecured promissory note,
issued by corporations at a discount. It typically has a maximum maturity
of 270 days.
17. Banker’s Acceptances: A banker’s acceptance is a money market
instrument that is used to finance and facilitate international trade.
18. Eurodollar Deposit: Eurodollars are U.S. Dollars held in a depository (bank)
abroad. E.g. A swiss bank account denominated in U.S. dollars would
hold Eurodollar deposits. These are used by foreign corporations (or
individuals) who have US currency abroad.
19. Eurodollar Bonds: Eurodollar bonds are bonds issued outside the United
States (e.g. Argentina) but denominated in U.S. dollars. Par is $1,000 USD;
coupon payments are made in USD. These are issued and trade outside
the U.S. and are not registered with the SEC. Issuers use Eurodollar bonds
to make their securities more marketable (e.g. the issuer’s home currency
is unstable).
20. Tax-Equivalent Yield: To determine the interest an investor must earn on a

taxable corporate bond to equal the tax-free yield of a municipal bond,
an investor can calculate the tax-equivalent yield, which is the tax-free
yield of the municipal bond divided by (100% - Tax Rate).
• Example: For an investor in the 35% tax bracket who owns a 5% tax-
free municipal bond, the tax-equivalent yield is 7.69%, calculated as
5%/(100% - 35%). This means that a taxable bond yielding 7.69%
produces equal after-tax income to a tax-free municipal bond
yielding 5% for this investor in the 35% tax bracket.

SIE Class Summary
Chapter 4 – Investment Company Securities
1. Summary Prospectus: The SEC allows a mutual fund to deliver a summary

prospectus to shareholders, which is a compilation of highlights from the
longer prospectus. A summary prospectus includes the fund’s investment
objectives, fee structure, and other pertinent information. It must be
provided to investors prior to or at the time of sale.
2. Mutual Fund Shareholder Reports: Mutual funds are required to send
financial reports to shareholders which include financial statements (e.g. a
balance sheet and income statement) and detail the holdings of the
fund’s portfolio. These reports must be sent semiannually.
3. Mutual Fund Custodian: A bank or trust company acts as custodian for
mutual fund sand is responsible for the holding and safekeeping of the
fund’s securities and cash.
4. Net Investment Income: Net investment income is the total profits that an
individual earns from their investments. For mutual fund investments, this
would include any dividends plus interest income plus net capital gains
(capital gains minus capital losses).
5. Forward Pricing: When an investor purchases shares of a mutual fund, the
price they pay is based on the next NAV (net asset value) calculation
after the order is received. The NAV is calculated daily based on the
closing price of the market. This is referred to as forward pricing. For
example, if on Monday a customer places an order to buy shares at
5:00pm, which is after the market close, the price they would pay for the
shares is based on Tuesday’s closing price. The share price is not
calculated based on the prior day’s closing price or the next day’s
opening price.
6. Expense Ratio: Every mutual fund has an expense ratio, which is the
percentage of the fund’s total assets that will be used to cover the
expenses of the fund. It is calculated as (management fees plus operating
expenses) divided by the average annual net assets of the fund. The
fund’s expense ratio would increase if the operating expenses of the fund
were rising faster than the value of the fund’s investments.
7. 12b-1 Fee: 12b-1 fees are annual fees paid by mutual funds shareholders
to cover the marketing and administrative expenses of the fund. 12b-1
fees do not cover management expenses or trading fees.
8. Fund Share Classes: Mutual funds can have different share classes. Class A
shares have an upfront sales charge. Class B shares have a back-end
load (aka contingent deferred sales charges or CDSCs), which investors
pay when they redeem their shares. Class C shares have level loads. All
share classes have 12b-1 fees, but Class B and C 12b-1 fees are usually

SIE Class Summary
higher than Class A shares. Class A shares are the only share class that can
benefit from breakpoints.
9. No-Load Fund: No-load funds are mutual funds that do not charge a sales
charge. They are purchased by investors at the NAV.
10. Mutual Fund Suitability: When deciding on a mutual fund investment, the
investor’s investment objectives are the primary consideration. Fees are of
secondary importance. Note that the size of the fund is typically the least
important factor.
11. Letter of Intent (LOI): A letter of intent allows a mutual fund shareholder to
invest in installments and receive breakpoints, which are discounts off of
the sales charge. A letter of intent can be used for up to 13 months and
can be backdated 90 days.
12. Breakpoint Sale: A breakpoint sale is a violation where a registered rep
suggests that an investor purchases a mutual fund just below the point at
which they would receive a discounted sales charge. For example, if
there is a breakpoint at $250,000, suggesting the customer only invest
$249,000 is a violation.
13. Municipal Bond Funds: A municipal bond fund, also referred to as a tax-
exempt bond fund, is a mutual fund consisting of tax-free municipal
bonds. These funds are most appropriate for high-net-worth investors in
high tax brackets who will most benefit from the tax-free nature of the
interest income. When the fund pays out its net investment income to
investors, the dividends are tax-free because they represent the tax-free
interest income, though any capital gains distributions are taxable.
14. Money Market Fund: Money market funds are mutual funds consisting of
money market securities, which are debt securities with maturities of one
year or less. Because of the nature of the securities they invest in, money
market funds are extremely safe and highly liquid. These funds generally
attempt to maintain a stable NAV of $1.00 per share, though the price
can fluctuate above or below that amount. Investments in a money
market fund are least exposed to currency risk as the investments are held
in US dollars. They would be subject to inflationary risk.
15. Mutual Fund Investment Strategies: Mutual funds can invest in equities,
corporate bonds and other registered securities. An investor who is
seeking a combination of interest income and growth potential can invest
in a diversified mutual fund that offers exposure to both debt and equity.
16. Prohibited Mutual Fund Strategies: Mutual funds cannot sell stock short or
borrow money.

SIE Class Summary
17. Cost Basis: Cost basis is the original value of an asset for tax purposes. If
the asset is later sold for a profit, the difference between the cost basis
and sales proceeds reflects the investor’s taxable capital gain.
Importantly, any dividends reinvested by an investor would increase their
cost basis as the investor will have already paid tax on that income. For
example, if an investor’s original cost basis in a mutual fund is $1,000 and
the investor receives $200 in dividends which they reinvest into the fund,
their cost basis would be adjusted upwards to $1,200.
18. Mutual Fund Dividends: Mutual fund cash dividends are taxable for
investors regardless of whether they are taken in cash or reinvested back
into the fund.
19. Impact of Dividends on NAV: The NAV of a mutual fund share will
decrease by the amount of the dividend on the ex-date. This is because
the fund is paying out cash so the fund’s assets will fall.
20. Index Fund Reconstitution: Index funds are mutual funds that seek to track
the performance of a specific index – i.e. the S&P 500. Because they
simply track an index and are not actively managed they have lower fees
and expenses than other types of mutual funds. Generally, the only time
the portfolio changes is when a company is added or subtracted from the
benchmark index. For example, when Facebook was added to the S&P
500, all of the index funds that tracked the S&P 500 purchased Facebook
stock. The process of updating the portfolio to continue to mirror the
underlying index is referred to as reconstitution.
21. Closed-End Fund Pricing: Similar to mutual funds, closed-end funds have a
net asset value, which is the total assets of the fund minus the total
liabilities. However, because closed-end funds are exchange-traded, they
can trade at a price either above or below their NAV based on the supply
and demand of the shares.
22. Unit Investment Trust (UIT): A UIT is an investment company security that
combines redeemable shares with a fixed portfolio. Specifically, the
portfolio is assembled by a sponsor, who does not actively trade the
portfolio.
23. Exchange-Traded Funds (ETFs): ETFs are investment company securities
that are designed to track a specific index or benchmark. Like closed-end
funds, ETFs are exchange-traded and thus investors pay commissions
when purchasing the shares.
24. ETFs Versus Mutual Funds: Mutual fund shares are redeemable, which
means they can only be bought from and sold back to the mutual fund.
There is no secondary market for mutual funds. In contrast, ETFs are
exchange-traded and can be bought and sold between investors

SIE Class Summary
throughout the day. Because ETFs have a secondary market, they are
considered more liquid than mutual funds.
25. ETF Versus Mutual Fund Expenses: Because mutual funds are actively
managed, they typically have higher fees for investors than ETFs.
Chapter 5 – Other Managed Products
1. REITs: A real estate investment trust (REIT) is a company that owns or

operates income-producing real estate or real estate-related assets. It is
not an investment company or direct participation program (DPP). REITs
are not subject to corporate tax (they pass through gains, though not
losses)) if they meet all three of the following criteria:
I. At least 75% of the assets must be invested in real estate
II. At least 75% of the REIT’s income must be derived from real estate,
and
III. 90% of the gains must be passed through to investors
2. REIT Investment Objective: The primary investment objective for a REIT
investor is current income in the form of dividends. This is because REITs are
required to pay out at least 90% of income to investors.
3. REIT Dividends: Dividends paid by a REIT are always taxed as ordinary
income, regardless of the holding period. This contrasts with dividends
paid by traditional corporations which are taxed at a lower rate as long
as the investor holds the stock for greater than 60 days.
4. Equity REITs: Equity REITs own and operate income-producing real estate.
They are professionally managed to generate income from rent received
as well as sales from the properties they hold.
5. Depletion: Depletion is a tax deduction that compensates a limited
partnership as they use up a natural resource such as oil or gas. Because
real estate is not a natural resource it cannot be depleted.
6. Passive Gains and Losses: Direct participation programs (DPPs) pass
through gains and losses to investors, which means there is no corporate
taxation, instead only the investors in the program pay tax. If there is a
passive loss, it can only be used to offset passive gains.
7. General Versus Limited Partners: In a limited partnership, the general
partner is the active partner in the business, managing the day-to-day,
whereas the limited partner contributes capital and from that point has a
passive involvement in the business. The general partner has unlimited
personal liability, whereas the limited partners have limited liability.

SIE Class Summary
8. Interest in a Limited Partnership: An interest in a limited partnership is an

equity security as it indicates the partner owns a piece of the partnership.
9. S-Corp Versus C-Corp: An S corporation is a type of DPP. Shareholders
receive a pass-through of income and losses, and the S-Corp entity is not
taxed. A C corporation is a taxable entity and shareholders receive
dividends that were taxed at the entity level and will be taxed again at
the shareholder level. Double taxation applies to dividends from C-Corps.
10. Raw Land Limited Partnership: Raw land LPs invest in a piece of land
hoping that it increases in value over time and that it can eventually be
sold for a profit. Because the land is not developed, there is no income or
depreciation from the ownership interest.
11. Dissolution of a Limited Partnership: When a limited partnership is dissolved,
the priority of claims against the partnership is:
I. Secured lenders
II. General creditors
III. Limited partners
IV. General partners
12. Hedge Funds: Hedge funds are typically only suitable investments for
institutional and sophisticated investors. This is because they often pursue
aggressive trading strategies, such as the use of derivatives as well as
purchasing stocks of distressed companies or those of public companies
looking to go private.
13. Hedge Fund Managers: Hedge fund managers receive management and
performance fees which are typically higher than fees charged for other
fund investments.
14. Fund of Hedge Funds: An investment in a “fund of hedge funds” offers the
liquidity of a mutual fund, but with risk more associated with a hedge
fund.
15. Prime Brokerage Accounts: Prime brokerage is a suite of bundled services
offered to hedge funds and other large institutional investors by banks
and wealth management firms.
16. Exchange-Traded Notes (ETNs): ETNs are of unsecured corporate debt
issued by a broker-dealer that combines principal protection with equity
market upside exposure. Because they are unsecured, although their
return is based on an underlying equity, they do not actually own that
security. This contrasts with ETFs, which own the securities in their portfolio.
The credit quality of an ETN is based on that of the issuing broker-dealer.

SIE Class Summary
Chapter 6 – Options
1. Options Clearing Corporation (OCC): The OCC issues and guarantees all
listed options contracts. Therefore, if an investor wants to exercise an
options position, their broker-dealer would notify the OCC who would
then assign their contract to an appropriate counterparty.
2. Listed Options: A listed option is issued by the OCC and not by the
underlying corporation (e.g. Apple or Facebook). Therefore, listed options
have no impact on the capital structure of a corporation as the company
itself is not raising money. A stock or bond issuance by a corporation
would impact its capital structure.
3. American-Style Options: American-style options can be exercised at the
strike price any time up to and including the expiration date. This contrasts
with European-style options which can only be exercised on the expiration
date.
4. LEAPS: A LEAP is a long-term option contract with a maturity of up to three
years. Operating like a conventional short-term option contract, a LEAP
provides an investor with longer exposure to the price movement of the
underlying security.
5. At-the-Money: Options are at-the-money when the market value is equal
to the strike price. When the option is at-the-money, the owner of the
option would let is expire and lose their premium.
6. Liquidate an Option: If an investor owns a call option which is in-the-
money (e.g. they own a 50 call with the stock trading at $60), the investor
will not necessarily exercise the option. Instead, they may opt to liquidate
their position (sell the option contract to another investor).
7. Maximum Gain on Long Call: When an investor buys a call option, they
have the right to buy the underlying stock at the strike price. Because
there is no limit on how high the stock price can rise, the maximum gain is
unlimited.
8. Obligation of Call Writer: If a call writer receives an assignment notice,
they will have an obligation to sell the stock at the strike price. In return for
this obligation, they receive the premium. Options are always written to
generate income in the form of the premium.
9. Risk of Uncovered Call: When an investor sells an uncovered call, they are
writing a call option without owning the underlying stock. This position has
unlimited risk because no matter how high the price of the stock
increases, the writer is obligated to purchase the shares in the market and
then sell the stock at the strike price. Because of this risk profile, uncovered
calls are typically inappropriate for retail investors.

SIE Class Summary
10. Covered Call Breakeven: A covered call is a strategy where an investor

sells a call option on a stock, while also owning that stock. To calculate
the breakeven of a covered call, which is the market value where there is
no profit or loss on the position, subtract the premium received from the
purchase price of the stock.
• Example: Investor owns 100 shares of XYZ stock @50 and sells 1 XYZ
Nov Call @5. The breakeven is $45 ($50 - $5). Put differently, the $5
premium received for writing the option provides investor with $5 of
downside protection on their stock.
11. Long Put Breakeven: The breakeven of a put option is calculated as the
strike price minus the premium. Take note, that purchasing multiple
contracts would not impact the breakeven point.
• Example: Investor buys 3 ABC Nov 60 Puts @5. The breakeven is $55
($60 - $5). The fact that the customer purchased three contracts
does not change breakeven.
12. Protecting a Short Put: If an investor sells (shorts) a put option, they have an
obligation to purchase the stock at the strike price regardless of how far
the price has fallen if they option is exercised against them. If the investor
wants to hedge against some of the downside risk, they can buy a put
option with a lower strike price in order to lock in a sale price for the
shares.
13. Volatility Market Index (VIX): The VIX, often referred to as the “fear index”,
measures the volatility of S&P 500 index options.
14. Index Options: Stock index options allow investors to speculate on the
performance of an index (e.g. S&P 500 or Nasdaq 100) or hedge their
existing stock portfolio. If an investor has a diversified portfolio of stocks
and they are concerned about market risk, they can purchase puts on
that an index to protect their portfolio. Index options are settled in cash;
there is no stock transaction.
15. Option Contract Adjustment: Options contracts are adjusted for stock
dividends. Specifically, the number of shares the contract represents will
increase, while the strike price will decrease proportionately. The total
value of the contract does not change.
• Example: An ABC 60 call is subject to a 6% stock dividend. The total
value of the contract is $60 strike price x 100 shares per contract =
$6,000. After the stock dividend, the investor will now have 106
shares (6% more). To find the new strike price: $6,000 total value
divided by 106 shares equals $56.60.

SIE Class Summary
16. Option Series: Options series are all call or put contracts in the same class
(call or put) with identical strike prices and expiration dates. For example,
a March 80 call and a March 80 put are of the same series
Chapter 7 – Suitability and Investment Risks
1. Institutional Threshold: Under FINRA suitability rules, an individual with

assets of at least $50 million is considered an institutional investor.
2. Preferred Stock Investment Objective: Preferred stock pays a fix quarterly
dividend and is therefore appropriate for an investor seeking current
income. However, because of the fixed dividend, preferred stock does
not have as much potential for appreciation and capital gains. For an
investor seeking growth, common stock would be more suitable.
3. Liquidity Risk: A security that cannot easily be sold is said to have liquidity
risk. Examples of illiquid investments include direct participation programs
and thinly traded stocks, such as penny stocks.
4. Safety and Preservation of Capital: An investment objective in which an
investor seeks no decline in the value of their investments. Suitable
investments for this strategy would include highly rated instruments such as
Treasury and money market securities. Investments where there is a risk of
loss of principal, such as common stock, penny stocks, direct participation
programs, and high-yield bonds, are inappropriate.
5. Fund Investing: If the manager of a fund believes there might be a short-
term drop in the market, they could keep excess cash in cash and cash
equivalents and then buy the dip.
6. Total Return on Equity: The total return on a stock investment is calculated
as (dividends plus capital gains) divided by the initial purchase price of
the shares.
• Example: Jane purchased ABC stock for $100 and sold it one year
later for $110. She also received $5 in dividends. Total return = ($5
dividend + $10 capital gain)/$100 purchase price = 15%
7. Current Yield of Common Stock: Another way to evaluate the return on
common stock is by calculating its current yield, which is the annual
dividend divided by the current market price. Make sure that if a quarterly
dividend is provided that you annualize it by multiplying by four.
• Example: XYZ stock is trading at $15 and pays a quarterly dividend
of $0.30. Current yield = ($0.30 x 4)/$15 = 8%

SIE Class Summary
Chapter 8 – Issuing Securities
1. Preliminary Prospectus: A preliminary prospectus can be used to market

to investors during the cooling-off period. The preliminary prospectus will
generally not include the timely details of the transaction, such as the
offer price or number of shares being registered. Instead, buyers must still
receive a final prospectus no later than the settlement date of the
transaction, which includes this information.
2. SEC Effectiveness: When the SEC declares a new issue effective, it clears
the securities for public sale. At this time a registered rep could say the
issue has been deemed effective, but could not say that it has been
approved by the SEC.
3. Prospectus Delivery: A prospectus or notice of its availability must be
delivered to investors for any sales for the first 25 days following an IPO.
4. Rule 147: Rule 147 allows an in-state business to raise capital in their home
state and avoid SEC registration. Under 147, 100% of the securities must be
sold to state residents who cannot resell outside the state for six months.
5. Regulation D: Regulation D is an exemption from SEC registration for
private placements. In a Reg D transaction, there are two types of
investors – accredited and non-accredited. Accredited investors include
1) officers and directors of the issuer, 2) institutions with at least $5 million in
assets, and 3) individuals with a net worth of at least $1 million, excluding
the value of their primary residence or individuals who earned at least
$200,000 in each of the past two years ($300,000 for married couples).
Anyone who is not defined as accredited is considered a non-accredited
investor. Although different types of private placement transactions exist,
generally there can be an unlimited number of accredited investors and
a maximum of 35 non-accredited participating in the deal.
6. Retired Individuals Accredited Status: An individual who consistently made
at least $200,000 during his or her career but has since retired would not
be accredited because once he or she retires there is not a reasonable
expectation for a similar income to continue.
7. Private Investment in Public Equity (PIPE): A PIPE deal is when a public
company raises capital through a private placement. A company might
do this in order to raise capital quickly and avoid the SEC registration
process.
8. Offering Memorandum: An offering memorandum is provided to investors
for disclosure like a prospectus, except it is used for offerings that are
exempt from SEC registration like private placements. Audited financial
statements are not required in an offering memorandum.

SIE Class Summary
9. Regulation S: Reg S is an exempt transaction which allows an issuer to raise

money outside the U.S. and avoid SEC registration.
10. Qualified Institutional Buyer (QIB): Rule 144A allows QIBs to freely trade
unregistered securities (e.g. private placements) among themselves. A
QIB is defined as an institution that manages at least $100 million of
discretionary assets.
11. Tender Offer Minimum Threshold: A tender offer is an offer by a company
or an outside investor to purchase at least 5% of the company’s shares
directly from the company’s shareholders. The purchaser making the offer
might qualify a tender with a minimum number of acceptable shares. This
means that unless shareholders agree to sell a certain number of shares,
the investor making the offer will not go through with any purchases.
• Example: InvestorCo is looking to purchase up to 10 million shares of
Company ABC at a price of $25 per share. InvestorCo sets a
minimum threshold of 8 million shares. If the shareholders of
Company ABC only agree to tender 6 million shares collectively,
InvestorCo will not go through with any purchases since the
minimum threshold was not met.
12. All Holders Best Price: All shareholders receive the exact same price in a
tender offer. This is sometimes referred to as “all holders best price”.
13. Oversubscribed Tender Offers: If a tender offer is oversubscribed, the
shares are accepted proportionally from those shareholders who
tendered.
• Example: If an investor seeks to purchase 10 million shares in a
tender offer, but shareholders collectively tender 100 million shares,
only 10% of each shareholders’ shares will be accepted. Therefore,
if a shareholder tendered 1,000 shares, only 100 of their shares (10%)
will actually be accepted.
14. Follow-On Offering: A follow-on is a public offering by an existing public
company that has already had its IPO.
15. Secondary Offering: A secondary offering is a new issue (could be an IPO
or follow-on) where shares are being sold by existing investors, not the
company. For example, if a private equity firm liquidates a position in a
company, this is a secondary offering.
16. Shelf Registration: A shelf registration allows an issuer to preregister
securities today and sell them at a later date when market conditions are
favorable. A shelf is good for up to three years and can be used for both
debt and equity follow-on offerings, but never for an IPO.

SIE Class Summary
17. Best Efforts: A best efforts is a type of underwriting where the underwriters
act as agents and have no financial responsibility for any unsold securities.
18. Restricted Persons: FINRA rules prohibit restricted persons from investing in
an IPO of common stock. Restricted persons include broker-dealers,
portfolio managers for their own personal accounts, employees of broker-
dealers, as well as their immediate family members. Under this rule
immediate family members include the spouse, parents, siblings, children,
and in-laws of the employee of a broker-dealer. Note who is not
immediate family and therefore not restricted: grandparents, aunts and
uncles, cousins, nieces and nephews, and ex-spouses.
19. Regulation M: Reg M is an SEC rule that aims to prevent market
manipulation of IPOs and follow-on offerings by broker-dealers.
20. Stabilization: Stabilization allows an underwriter to bid on securities in the
open market to prevent the price from declining following an IPO. The
underwriters are allowed to stabilize at or below the POP (public offering
price). For example, if XYZ stock went public at $30 per share, the
underwriters could stabilize at or below $30.
Chapter 9 – The Secondary Market and Equity Trading
1. Settlement: Settlement is the legal transfer of securities to a buyer’s

account and cash to seller’s account. The standard settlement cycle
varies for different securities:
• T+1  Treasures and listed options contracts
• T+2  Equities, corporate bonds and municipal bonds
Note: Customers have a two-day grace period to pay for their
securities under Regulation T, i.e. payment must be made by T+4.
2. Dealer Capacity: When a firm acts as a principal or dealer they are a
counterparty to the customer, trading from its own inventory. When the
firm sells to the customer they charge them a mark-up and when they buy
from the customer they charge them a mark-down.
3. Backing Away: Backing away is a violation that occurs if a market maker
fails to honor firm quotes.
4. OTC Quotes: Quotes on the OTC Bulletin Board (OTCBB) and OTC Pink
may be one-sided, meaning both a bid and ask are NOT required. Quotes
on national exchanges such as the NYSE, NASDAQ, and BATS are required
to be two-sided.
5. OTCBB Requirements: Companies that want to have their securities
quoted on the OTCBB must file current financial reports with the SEC.

SIE Class Summary
6. Market Orders: Market orders are executed immediately at the best

available price.
7. Market-On-Close: A market-on-close order is a market order that is held
and executed near the end of trading hours as close to the closing price
as possible.
8. Partial Execution of Customer Orders: Limit orders can be partially filled if
the trader cannot get the entirety of the order executed. However,
because stop orders become a market order once the order is activated,
there is no partial execution.
9. Adjustment of Orders: On the morning of the ex-dividend date any orders
that are entered at or below the market are adjusted downwards by the
amount of the dividend. This includes buy limit, sell stop, and sell stop limit
orders. Note that orders entered at or above the market, including sell
limit, buy stop, and buy stop limit orders, are not adjusted.
10. Order Splitting: Breaking a large customer order into smaller parts is
allowed if it will help achieve best execution for a customer. It is not
permitted if the sole purpose is to generate higher commissions.
11. Front-Running: Front-running is a prohibited activity whereby a registered
rep or a firm becomes aware of a large customer order and trade for his
personal account beforehand in the hopes the large order will increase
the stock price.
• Example: A firm receives an order from a customer to purchase
20,000 shares of XYZ stock. If the firm buys XYZ stock for itself before
executing the client’s order, that would be a front-running violation.
12. Trading Ahead of Research Reports: Trading ahead is a violation where a
broker-dealer or registered representative trades a security based on
nonpublic information contained in a research report prior to that report
being released to the public.
13. Arbitrage: Arbitrage occurs when an investor takes advantage of a
temporary price disparity in a security. An example is buying a stock on
one exchange for a low price and then reselling it on another exchange
for a higher price.
14. Spoofing: Spoofing is a form of market manipulation where a trader enters
an order to manipulate prices to be higher or lower, with no intent to
actually execute at the quoted price. In other words, spoofing refers to
entering orders to entice other participants to join on the same side of the
market, and then trading against the other market participants’ orders.
15. Pump and Dump: A pump and dump scheme is a form of securities fraud
where an investor uses false or misleading statements to artificially inflate
the price of an owned stock in order to resell the stock at a higher price.

SIE Class Summary
An example is when an investor is randomly solicited with positive

information over email or social media to purchase shares in a penny
stock or other risky investment.
16. Marking the Open or Close: Marking the open or marking the close is
when a trader attempts to manipulate the opening or closing price of a
security by entering a number of buy or sell orders just prior to the open or
close of trading.
17. Fourth Market: The fourth market refers to a market where securities trade
directly between institutions on a private, OTC computer network rather
than large exchanges such as the NYSE or NASDAQ.
Chapter 10 – Economics and Monetary Policy
1. Elasticity: Elasticity refers to the sensitivity of supply and demand of a

commodity to a change of price. If a commodity is demand elastic, that
means that as prices change, demand will change. For example, if prices
increase, demand will decrease, and vice versa. Alternatively, if a
commodity is demand inelastic, a change in price will have no impact on
demand for that product.
2. Recession: A recession is defined as a decline in gross domestic product
(GDP) for two or more consecutive quarters.
3. Gross Domestic Product (GDP): GDP is the total market value of good and
services produced within a country. It is a coincident indicator.
4. Economic Stabilizer: In a recession, the government would take steps to
increase GDP. This is sometimes referred to as an economic stabilizer.
5. Velocity of Money: The velocity of money is the rate of turnover of money,
or how fast it is being spent. It is usually measured as a ratio comparing
GDP to money supply. When money velocity is low, people are investing
and saving instead of spending.
6. Inverted Yield Curve: The yield curve graphs the relationship between
interest rates and time until maturity. An inverted yield curve occurs when
short-term rates are higher than long-term rates and can be a sign of a
recession.
7. Cyclical Stocks: Cyclical stocks are those that mirror the economy,
strengthening when the economy is growing and declining as the
economy contracts. Examples include auto and tech stocks.
8. Defensive Stocks: Defensive stocks are those that are resistant to
downturns in the economy because they supply consumers with basic
needs. Examples include utility and health care stocks.

SIE Class Summary
9. Impact of Inflation: Inflation describes rising prices for goods and services
over time. Typically, as inflation increases, interest rates will also increase.
Therefore, as inflation increases, bond prices will decrease (because of
the inverse relationship between interest rates and bond prices).
Conversely, in a deflationary environment, interest rates are falling, and
bonds will increase in value. Note that in an inflationary environment
bonds with longer maturities will have a greater price decrease than
those with shorter maturities.
10. Deflationary Environment: In a deflationary environment, outstanding
issues of corporate bonds are more attractive than new issues. This is
because the new issue would have a lower coupon, reflecting the
decline in interest rates that accompanies deflation.
11. Working Capital: Working capital is a metric that helps to measure how
much cash a company needs to finance its current operations. It can be
calculated from a company’s balance sheet as current assets minus
current liabilities.
12. Earnings Per Share (EPS): Earnings per share (EPS) is calculated as a
company’s net income divided by shares outstanding. Research analysts
commonly provide EPS estimates. Stock splits impact EPS, for instance,
when a company initiates a reverse stock split the company’s EPS would
increase due to same amount of earnings divided by a decreased
number of shares outstanding.
13. P/E Ratio: The price-to-earnings (P/E) ratio is calculated as a company’s
stock price divided by earnings per share.
14. PEG Ratio: In addition to the PEG ratio, the current yield (also called
dividend yield) and cash flow yield are methods to evaluate and
compare stocks.
15. Adam Smith: Adam Smith is considered the founder of classical economic
theory, which states that the economy best functions without government
interference.
16. Keynesian Economics: Keynesian economists believe that the economy is
best controlled through taxation and government spending.
17. Federal Reserve: The Federal Reserve is the central banking system of the
US. In its role of implementing monetary policy, the Fed has several tools
including conducting open market operations, setting the discount rate,
as well as reserve and margin requirements. To ensure compliance with
these requirements, the Federal Reserve Board will audit member banks.
18. Federal Reserve Stimulus: When the economy is slowing, the Fed cuts
interest rates to stimulate financial activity. This will lead to a fall in different

SIE Class Summary
interest rates such as the federal funds rate, mortgage rates, and savings
account rates.
19. Curb Inflation: When inflation is increasing, the Fed will tighten the money
supply by increasing interest rates. The Fed can tighten the money supply
by increasing the discount rate, selling government securities, or raising
the reserve requirement.
20. Discount Rate: The discount rate is the rate of interest that the Fed charges
banks for short term loans. To ease the money supply, the Fed would lower
the discount rate as this would allow banks to borrow at a cheaper rate.
To tighten the money supply, the Fed would raise the discount rate as this
would make it more expensive for banks to borrow money.
21. Order of Interest Rates: The order from highest to lowest is 1) prime rate, 2)
broker’s call rate, 3) discount rate, and 4) federal fund rate.
22. Trade Surplus Versus Trade Deficit: A trade surplus (exports are greater
than imports) will cause a company’s currency to appreciate. A trade
deficit will cause the currency to depreciate.
23. Purchasing Power Parity: Purchasing power parity compares the strength
of a country’s currency by determining how much it costs to buy the same
basket of goods. It is used to determine the exchange rate between the
currencies of different countries.
24. Producer Price Index: The Producer Price Index (PPI) measures inflation for
producers of products, such as manufacturers.
Chapter 11 – Customer Accounts
1. Telemarketing: FINRA and the MSRB have telemarketing rules that allow
firms to solicit new business by cold calling potential clients. Prior to
making a cold call, the caller must ensure the individual is not on the
national or firm’s do-not-call list. Cold calls are permitted between 8am
and 9pm in the time zone of the person being called.
2. Do-Not-Call List: Under the telemarketing rule, once an individual is added
to the firm’s internal do-not-call list, they remain there indefinitely.
3. Do-Not-Call List Exceptions: A registered rep can call an individual on the
do-not-call list if the individual is an existing customer of the firm, the
registered rep has a personal relationship with the individual, or if the
individual has provided prior written consent.
4. New Account Form: A new account form must be completed when a
customer opens a new brokerage account with a broker-dealer. Required
information includes the customer’s name, address, social security

SIE Class Summary
number, employment status, investment experience and objectives. The

firm is required to maintain a record of this form.
5. Numbered Account: A numbered account is a brokerage account that is
represented by a symbol or number, allowing the account holder (e.g. a
celebrity) to remain anonymous. The broker-dealer must still receive a
written statement of ownership and proof of identity from the client.
6. Free-Riding: Free-riding is a violation under Regulation T where an investor
sells their securities without ever paying for them. If this occurs, the
customer’s account will be frozen for 90 days and transactions in the
account will be limited to sell orders and purchases where the customer
fully pays upfront prior to trade.
7. Long Margin Account Initial Minimum Equity Requirement: Under FINRA
rules, if a customer wants to purchase less than $2,000 of stock in a margin
account, they must deposit 100% of the purchase price. For example, if a
customer wants to buy $1,000 of stock on margin, they must deposit the
full $1,000. If the customer wants to purchase between $2,000 and $4,000
in a margin account, they must deposit minimum initial equity of at least
$2,000. For example, if a customer wants to buy $3,000 of stock on margin,
they must deposit $2,000. For purchases above $4,000, the customer must
deposit 50% of the purchase price (Regulation T).
8. Short Sales in a Margin Account: All short sales must be executed in a
margin account. Additionally, Reg T requires the customer to deposit 50%
of the sale price. For example, if a customer sells short $100,000 of stock,
they are required deposit $50,000 in equity into the account.
9. Mark-to-Market: The value of a customer’s margin account is marked-to-
market daily to determine equity balances and margin calls.
10. Marginable Securities: The Federal Reserve Board determines whether a
security is eligible to be purchased on margin. Those that can be include
exchange-listed stocks, closed-end funds, ETFs, fixed income securities
(e.g. Treasury bonds), and LEAPS options with more than nine months until
expiration. Securities that cannot be bought on margin include options
contracts with nine months or less until expiration, mutual funds, and
annuities contracts.
11. Hypothecation: In a margin account, the customer borrows 50% of the
purchase price from the broker-dealer to buy securities. In return the
customer agrees to hypothecate, meaning pledge, the securities in their
account as collateral for the loan.
12. Loan Consent Form: The loan consent form is an optional component of
the margin agreement. If signed by the customer, it allows the broker-

SIE Class Summary
dealer to lend stock held in the customer’s account to other investors to

facilitate short sales.
13. Discretionary Account: A discretionary account is a brokerage account
where the customer has given their rep at the firm the written authority to
make investment decisions and trade on their behalf. If a rep does not
have discretionary authority, it would be a violation for them to conduct
trades on behalf of a customer, even if they believe the transactions are
in the best interest of their client, without the customer’s consent.
14. Discretionary Account Approval: Discretionary accounts must be
approved by a principal prior to the first trade and each discretionary
trade must be approved by a principal promptly after execution.
15. Not Held Orders: A not held order is when the customer provides the asset,
amount, and action, but allow the registered rep to choose the price and
time of execution. For example, the customer states “Buy 100 shares of XYZ
stock when the price is right”. Not held orders do not require discretionary
authority.
16. Trading Authority: The owner of an account has trading authority, which is
the ability to trade the assets of the account. A non-account holder can
only trade on behalf of the account if this right is granted in writing by the
account holder.
• Example: An adult child can only make trades for their mother’s
brokerage account if the mother grants this authority in writing.
17. Power of Attorney (POA): An existing power of attorney (POA) would be
cancelled if a court declares the customer legally incompetent. An
exception exists if the customer had a durable power of attorney, which
would remain in effect. Note that all POAs end upon death of the
customer.
18. Fee-Based Accounts: In a fee-based account, the customer pays a flat
fee for as many trades as they would like. This type of account would not
be appropriate for a buy and hold investor.
19. Payments in Joint Accounts: In a joint account checks must be made
payable to all parties.
20. Joint Accounts: The two main types of joint accounts are discussed below.
A. A joint tenants in common (JTIC) account is a divided account
where each account owner specifies their percentage ownership
of the account based on their contributions to the account. At
each owner’s death, their portion of the account is distributed to
their beneficiary, not the surviving account owners. JTIC account
assets are subject to probate (the inheritance process via court)

SIE Class Summary
and are distributed as part of the deceased’s estate. Unrelated

friends or siblings who want to leave their assets to their respective
spouses might open at JTIC account together.
B. A joint tenants with rights of survivorship (JTWROS) account is an
undivided account, meaning all owners own 100% of the assets. If
one of the owners dies, their share of the account passes to the
surviving owners. In a JTWROS, the assets avoid probate and go
straight to the survivor. A husband and wife might open a JTWROS
account together.
21. Transfer on Death (TOD) Account: A TOD account has a named
beneficiary and avoid probate. This means the assets in the account
bypass the estate settlement process and are transferred directly to the
beneficiary at death.
22. Minors Accounts: UGMA and UTMA accounts are securities accounts that
can be established for a minor. Because the minor owns the account, it is
their social security number on the account and the minor is liable for any
taxes. However, the account is managed by a custodian, who trades on
behalf of the minor. The custodian can be the same individual that
donates the assets to the account (e.g. a parent can gift the assets and
be the custodian managing the account). Once the minor reaches the
age of majority, which varies by state, they take control of the assets.
Additionally, any assets that are gifted to the minor’s account are
irrevocable, which means they cannot be taken back.
23. UGMA New Account Registration Form: The new account registration form
for an UGMA account includes the name of the custodian. It would not
include the name of an individual who donates funds to the account
(unless the donor was also the custodian).
24. Guardian: An individual appointed by the court to manage the assets of
a minor is referred to as a guardian.
25. Trust Account: In a trust account, a beneficiary’s assets are managed by a
trustee. The trustee has a fiduciary responsibility, meaning they must act
on behalf of the beneficiary by ensuring that the terms set forth in the trust
agreement are adhered to. One benefit of a trust is that it allows the
creator of the trust, or grantor, to limit or restrict the use of the assets. For
example, a grandparent can set up a trust for a minor that allows the
assets to be used for educational expenses only. Another benefit is that
certain types of trusts can be used by a customer to ensure their assets
avoid probate and instead go straight to the named beneficiary.
26. Trust Invalidation: A trust may be invalidated (aka overturned) due to
undue influence (e.g. the individual signing the trust documents was

SIE Class Summary
coerced) or lack of capacity (e.g. the individual signing the trust

documents was mentally incompetent).
27. Customer Account Statements: Account statements, which are snapshots
of the customer’s account, must be sent at least quarterly by the firm.
28. Holding Customer Mail: If a customer will be travelling, they can request
that their broker-dealer hold on to their mail, such as trade confirmations
and account statements, for up to three months. The customer must make
this request in writing.
29. Regulation S-P: Regulation S-P established privacy standards to ensure
broker-dealers maintain the security and confidentiality of customer
information. Reg S-P requires firm to provide clients with privacy notices at
account opening and annually thereafter explaining what information the
firm gathers about them, where this information is shared, and how the
firm safeguards this data. Clients also have the option to opt out of having
certain information shared with third parties unless at the request of a
regulator (i.e. the IRS or FINRA) or otherwise legally required. Clients must
be given 30 days to opt out.
30. Commingling: Customer and firm assets must be segregated from one
another. Mixing the two is a violation referred to as commingling.
31. Securities Investor Protection Corporation (SIPC): SIPC is a not-for-profit
corporation that protects each separate customer account in the event
a broker-dealer goes bankrupt. Specifically, each separate customer is
protected for up to $500,000 total, but not more than $250,000 in cash.
Importantly, SIPC coverage protects customers’ cash and securities from
a broker-dealer’s failure, but not from market losses. Note, that SIPC does
not protect non-securities, such as a commodities or futures.
32. SIPC General Creditor: If the SIPC limit of coverage is exceeded, the
customer becomes a general credit of the broker-dealer.
33. SIPC Securities Valuation Date: In the event of a broker-dealer insolvency,
the market value used to determine the amount of an investor’s claim is
based on the date the bankruptcy filing is made with the court.
34. Clearing Versus Introducing Firm: A clearing firm is responsible for
processing and settling customer transactions, as well as maintaining
custody of customer cash and securities. This contrasts with an introducing
firm which has the direct relationship with the client and can accept
customer orders but does not handle customer assets or the mechanics of
the actual trade. In a margin account, the securities positions are
maintained by the clearing firm rather than the introducing firm.

SIE Class Summary
35. Depository Trust & Clearing Corporation (DTCC): A clearing corporation

with the primary role of facilitating the exchange, payment, and
settlement process for securities transactions. The largest clearing
corporation is the National Securities Clearing Corporation (NSCC). It is a
subsidiary of the DTCC, which is jointly owned by all broker-dealers.
36. Vulnerable Investors: FINRA defines vulnerable investors as those aged 65
and older as well as any person aged 18 or older who the firm or its reps
reasonably believe has a mental or physical impairment that renders the
individual unable to protect his or her own interests. If the firm believes
that there has been or will be financial exploitation of a vulnerable
investor by a party able to transact the account (e.g. the account’s
trusted contact) then the firm can institute a 15-business day hold on the
account to review the facts and circumstances. If after the 15-business
day hold the firm has reason to believe that the malfeasance is ongoing,
they can extend the hold on the account an additional 10 business days.
37. Inherited Securities’ Cost Basis: When an investor inherits securities, the
investor’s cost basis is adjusted to the fair market value of the security at
the time of death. This is referred to as a “stepped-up basis.”
Chapter 12 – Tax-Advantaged Accounts and Products
1. Traditional IRA (pre-tax / tax-deferred): Traditional IRA contributions are

usually pre-tax, have tax-deferred earnings and growth, and all
distributions are taxed as ordinary income.
2. IRA Contribution Limits: The maximum contribution to an IRA is the lesser of
$6,000 (this was updated from $5,500 on January 1st, 2019) or 100% of the
individual’s earned income. Note, that only earned income (e.g. salary)
can be contributed to an IRA. Investment income, such as capital gains or
dividends, and income from a retirement plan (e.g. a pension plan) is not
considered earned income and therefore cannot be contributed.
• Example: If an individual earns $3,000 from a part time job, $10,000
of investment income, and $40,000 of pension income, they can
only contribute $3,000 to their IRA.
3. Spousal IRA: A contribution of up to $6,000 per year may be made by a
working spouse to a spousal IRA account in the non-working spouse’s
name.
4. Catch-Up Contribution: If an individual is 50 or older, they can contribute
an additional $1,000 to their IRA ($7,000 total).

SIE Class Summary
5. Excess Contributions: If an investor makes an excess contribution (e.g.

more than $6,000) to a Traditional or Roth IRA, they will be assessed a 6%
tax penalty by the IRS.
6. IRA Rollovers: Individuals can move their IRA investments from one plan
provider to another (e.g. Fidelity to Wells Fargo). This is referred to as a
rollover and must be completed within 60 days to avoid potential tax
liabilities and early withdrawal penalties.
7. Roth IRA (post-tax / tax-free): Contributions to a Roth IRA are always
made with after-tax dollars. The earnings in the plan grow and
accumulate tax-free and qualified distributions from a Roth are tax-free.
To be qualified, distributions must be made after reaching age 59 ½ and
the money must have been in the plan for at least five years.
8. Roth IRA Eligibility: An individual is only eligible to contribute to a Roth IRA
if their modified adjusted gross income is below a certain threshold. In
2020, the limit is $139,000 and this figure is adjusted annually for inflation.
Focus on the concept rather than memorizing the specific threshold.
9. Roth IRA Early Withdrawals: An individual under age 59.5 with a valid
exception (e.g. first-time home buyer, qualified education expenses,
death, disability, and major medical expenses) can withdraw funds from a
Roth IRA that they have had for less than five years without being subject
to a 10% early withdrawal penalty. However, in this situation the individual
will be taxed on the earnings.
10. Required Minimum Distributions (RMD): The owner of a traditional IRA is
required to begin taking distributions from the account by April 1st of the
year following their turning 72. The amount they are required to withdraw
is referred to as the RMD and is calculated based on the owner’s account
value and life expectancy. For Roth IRAs, because there is no age limit for
making contributions, RMDs are not required from a Roth IRA until death of
the account owner. Note that beginning in 2020, the Secure Act has
raised the RMD age from 70 ½ to 72.
11. SEP-IRA: A simplified employee pension (SEP-IRA) is a type of employer-
sponsored retirement plan that is typically offered by small businesses
because it is inexpensive to set up and maintain. Instead of companies
having to establish a new plan, a SEP-IRA allows the company to
contribute directly to each employee’s IRA. Take note that only the
employer, not the employee, can contribute to a SEP-IRA.
12. Simple IRA: A Savings Inventive Match Plan for Employees (SIMPLE) is a
type of employer sponsored retirement plan available to small businesses.
It can only be used by companies that have 100 employees or less.

SIE Class Summary
13. Guaranteed Investment Contract (GIC): A GIC is an insurance contract

that function like a time deposit. An investor agrees to deposit cash with
the insurance company for a fixed period and in return the insurance
company provides them with a guaranteed rate of interest as well as the
return of principal.
14. Fixed Versus Variable Annuities: In a fixed annuity, the investor earns a
guaranteed fixed return. The risk of negative performance of the
investments is assumed by the insurance company. However, the investor
still faces inflationary risk (the fixed return will not keep place with inflation).
In a variable annuity, the investor earns a variable return based on the
market performance of the investments they select within the insurance
company’s separate account. The investor bears the risk of any reduced
payout (market risk). A variable annuity calculates the market value of its
separate account units daily.
15. General Versus Separate Account: The general account of the insurance
company seeks to provide a fixed return by investing customer premiums
into conservative investment options, such as Treasury securities and high-
grade corporate bonds. The separate account of the insurance company
seeks to provide a variable return by investing in a wider range of
securities including equities and mutual funds.
16. Accumulation Units: When an individual invests money into a variable
annuity, the dollars invested into the insurance company’s separate
account purchase accumulation units. Each unit represents an interest in
the underlying subaccount. The value of each unit will fluctuate based on
the value of the securities in the portfolio. Therefore, both the number of
accumulation units will vary (the number will increase as the individual
invests more money) as will the value of each unit.
17. Variable Annuity Payouts: The payouts received by an investor from their
variable annuity will fluctuate each month based on the performance of
their separate account.
18. Variable Annuity Payout Options: When an investor annuitizes, they begin
to receive payments from the insurance company. One factor that
impacts their monthly payment is the payout option the investor has
chosen. A life option or life annuity makes payments for the life of the
investor, but no payments to their beneficiary upon death. In contrast, a
joint and last survivor option guarantees payments over two lives. Once
the investor dies, the insurance company will then make payments to the
beneficiary until their death. Because the life option is expected to have a
shorter duration and is therefore riskier to the investor, it makes higher
monthly payments.

SIE Class Summary
19. Surrender Charges: A surrender charge is a fee paid by an investor to the

insurance company if the investor withdraws their capital prior to
annuitization.
20. 1035 Exchange: A 1035 exchange allows an investor to transfer from one
variable annuity to another with no tax consequences. Note that
surrender charges may still apply.
21. 403(b) Plans: A tax-sheltered annuity, also known as a 403(b) plan, is a
retirement plan used by employees of public schools and non-profits.
Similar to a 401(k), it allows individuals to make pre-tax (tax-deductible)
contributions. The investments in the plan grow tax-deferred and all
distributions from the plan are taxed as ordinary income.
22. 529 Plan: A 529 plan is a tax-advantaged to save for education.
Contributions to the plan are made with after-tax dollars. The earnings in
the plan grow and accumulate tax-free and distributions for qualified
education (e.g. tuition and books) are completely tax-free at the federal
level. Technically, because 529 plans are offered by states, the maximum
amount that can be contributed will vary state to state. Additionally, there
is no age limit on the beneficiary of a 529 plan. While a 529 plan is set up
typically for a minor, a parent can open a 529 for themselves if the
distributions are used for qualified educational expenses. An adult can
also set up a 529 plan regardless of income.
23. Coverdell Education Savings Account: Similar to 529 plans, a Coverdell is
another tax-advantaged investment account to save for education. The
tax treatment is identical to that of a 529 plan. However, 529 plans are the
much more popular of the two plans as a Coverdell has a much lower
maximum contribution limit: $2,000 per year per child. Additionally, a
Coverdell can be opened for any student who is under the age of 18, but
the assets must be withdrawn or transferred by the time the student
reaches the age of 30.
24. ABLE Accounts: An ABLE account is a tax-advantaged savings account
for individuals with disabilities. It may be opened for persons with
disabilities up to the age of 26. It allows for a donor to contribute after-tax
dollars on behalf of an individual with disabilities. The earnings in the plan
grow and accumulate tax-free and distributions for qualified disability
expenses (e.g. education, housing, health care, transportation, etc.) are
completely tax-free at the federal level.
25. Non-Qualified Retirement Plans – Credit Risk: Non-qualified corporate
retirement plans carry credit risk if the employer is insolvent or files for
bankruptcy. A non-qualified plan does not meet certain federal legal
requirements under ERISA (the federal law). The ERISA criteria are not
tested.

SIE Class Summary
Chapter 13 – FINRA Registration
1. SEC Mission: The primary mission of the SEC is to maintain integrity of US

markets and protect investors. FINRA is overseen by the SEC and its
primary mission is to regulate broker-dealers and registered
representatives. FINRA can make rules but they must be approved by the
SEC before they are effective.
2. Self-Regulatory Organization (SRO): A SRO is a regulatory body,
empowered by and accountable to the SEC, that has been delegated
certain enforcement responsibilities within the securities industry. The
primary mission of SROs is to provide investor protection and promote
market integrity. Examples include FINRA and the MSRB. Note that the SEC
is a government agency, not an SRO.
3. Municipal Securities Rulemaking Board (MSRB): The MSRB is SRO
responsible for regulating the municipal securities industry. Importantly, the
MSRB regulates municipal securities firms, advisors, and professionals, but
not municipal issuers. Municipal issuers (e.g. New York City) are not subject
to regulation by the SEC or SROs.
4. MSRB Rules: Although the MSRB creates rules, it has no enforcement
authority. Instead, MSRB rules are enforced by FINRA and other regulators.
5. Pre-Dispute Arbitration Clause: FINRA rules require all registered
representatives to sign a pre-dispute arbitration agreement as part of their
Form U4. This clause requires any future dispute between the firm and rep,
for example a financial disagreement, to be settled through an arbitration
proceeding rather than the court. An exception is that any disputes
regarding harassment or discrimination will only go to arbitration if both
the firm and employee agree; otherwise, they will go to the court.
6. Arbitrators: FINRA arbitrators can be from both inside the industry and
outside the industry. Those from outside are called public arbitrators. A law
degree is not a required credential for arbitrators. Industry cases are
decided by industry arbitrators, while cases involving the public must
include arbitrators from the public sector.
7. Fingerprinting Requirements: All registered representatives of a broker-
dealer must submit fingerprints to FINRA as part of their registration. This
requirement also applies to any partners of the firm or clerical staff who
are involved in the handling or processing of securities or money.
However, a partner of the firm or clerical employee not involved in those
activities are exempt from fingerprinting requirements. For example, a
partner of a broker-dealer, who has invested capital into the firm, but has

SIE Class Summary
no other involvement (e.g. a silent partner) is not required to submit

fingerprints.
8. Passing the SIE: When an individual passes the SIE exam, it does not qualify
them to engage in securities business (e.g. solicit business or enter
transactions). Instead, to become fully registered, the individual must also
pass a top-off exam (e.g. Series 7 or Series 79). Note, the SIE credential is
valid for four years.
9. Amended U4: All individuals seeking to be registered must complete a
Form U4 upon joining a broker-dealer. Additionally, firms and reps have an
obligation to amend and update any information required by Form U4 as
changes occur within 30 days. For example, if an individual engages in an
outside business activity away from the firm, changes their address, or has
lien (e.g. tax lien) filed against them, an amended U4 must be filed.
10. Registered Rep Credit: Registered reps are required to notify compliance
of any activity that may impact their credit. One example of such activity
is a short sale of a home (mortgage) by a registered rep. This occurs if a
rep sells a home for less than the outstanding mortgage balance owed to
the lender (i.e. bank), with the bank then accepting the less-than-full
repayment of the mortgage. Because the rep is unable to pay off their
mortgage balance in full, this will have a negative impact to their credit.
11. Form U5: A firm must file a Form U5 electronically with FINRA within 30 days
of a registered rep’s termination. The firm must provide a copy of the U5 to
the departing rep within 30 days and keep the terminated rep’s file
updated for two years after termination.
12. Registered Rep Termination: After a registered representative is terminated
from a firm (i.e. a Form U5 is filed), the individual must keep their address
updated with FINRA for two years after termination.
13. Statutory Disqualification: A statutory disqualification will occur if within the
past ten years the individual has been convicted of a felony or a securities
related misdemeanor. In this situation, the individual cannot be employed
with a broker-dealer unless they receive a waiver from FINRA.
14. FINRA Investigation: If FINRA believes that a registered rep has committed
a rules violation, they can investigate the matter. As part of this
investigation, FINRA will typically send a written request for information to
both the firm and rep, which seeks basic information about the event or
complaint. Additionally, FINRA can require that the rep submit to an
interview and meet with regulators as part of the investigation.
15. Regulatory Element: Regulatory element continuing education must be
completed within 120 days of an individual’s second anniversary of
registration and every three years thereafter (e.g. year 2, 5, 8, 11, etc.).

SIE Class Summary
16. Registered Rep Re-Association: A registered rep who leaves the industry
for between two and four years would need to retake their top-off exam
(e.g. Series 7 or 79) to re-register. However, they would not need to
complete the regulatory element CE until the 2nd anniversary of their new
registration.
17. Firm Element: Firm element continuing education must be completed at
least annually, though firm policies can require it to be completed more
frequently. It must be completed by all covered persons, meaning all
registered individuals and supervisors who interact with customers.
18. State Securities Laws: In addition to federal regulations, each state has
securities laws in place designed to protect the investing public. These
state regulations are often referred to as blue sky laws.
19. NASAA: The North American Securities Administrators Association (NASAA)
is a membership organization for state securities administrators.
20. State Registration: Registered reps must be registered in each state they
conduct business. If a client of a registered rep moves to another state,
the rep cannot make a trade for that client until becoming registered in
that state. If the client wishes to trade, the rep should forward the trade to
someone at the firm who is registered in that state.
21. Fiduciary Standard: Fiduciaries are legally obligated to act in the best
interest of persons they represent. Examples of fiduciaries includes
administrators of pension plans and Investment Advisers. Importantly,
representatives of broker-dealers are not subject to a fiduciary standard.
Instead, they are subject to a suitability standard.
22. Investment Advisers: Investment advisers (IAs) are firms that provide
securities related advice for a fee. Larger advisers (defined as those with
over $100mm in assets under management) must register with the SEC.
Smaller advisers, those with less than $100mm in assets, must register in
each state they operate.
Chapter 14 – Business Conduct Rules
1. Broker-dealer Books & Records (including advertisements): Broker-dealers’

business records, which include advertisements, must be maintained for
three years after the record is created. In the case of an advertisement
used multiple times, the three-year clock restarts each time the ad is
deployed. For the first two years of the record retention period the record
must be easily accessible (i.e. stored on-site).
2. Insider Trading: Insider trading is the illegal practice of trading (buying or
selling) securities based on material non-public information.

SIE Class Summary
3. Inside Information: If a registered rep holds non-public material

information, they can accept an unsolicited order from a customer.
4. Penalties for Insider Trading: The 1934 Act provides for both civil and
criminal penalties for insider trading. Civil penalties up to a maximum of
three times the profits gained, or losses avoided. This is also referred to as
treble damages. Criminal penalties include up to $5 million in fines and 20
years in prison.
5. Bureaus within US Treasury Department: The Internal Revenue Service (IRS),
Office of the Comptroller of the Currency (OCC) and the Financial Crimes
Enforcement Network (FinCen) are all bureaus of the US Treasury
Department that help to prevent money laundering.
6. Role of the IRS: The IRS is responsible for the collection of taxes and
enforcement of tax laws. However, it is the responsibility of Congress to
pass tax legislation.
7. Currency Transaction Report (CTR): A CTR must be filed with FinCEN
whenever a financial institution receives a cash deposit in excess of
$10,000 in a single business day from a customer. This can include a
deposit of cash, a traveler’s check, a cashier’s check, money order, or a
combination of the aforementioned which exceeds the limit. For
example, if a customer deposits a $3,000 money order and $8,000
traveler’s check in a single day, a CTR must be filed.
8. Suspicious Activity Reports (SAR): A SAR must be filed with FinCEN upon
discovery of suspicious activity. Examples include insufficient or
questionable account information, avoidance of recordkeeping
requirements, unanticipated changes in transaction patterns, and
inconsistent business activity, which are all red flags for suspicion of money
laundering activity.
9. Anti-Money Laundering (AML) Compliance Programs: AML compliance
programs are subject to annual independent audit and testing. The
testing can be completed by someone from within or outside the firm.
10. Customer Identification Program (CIP): The Customer Identification
Program is a provision of the USA Patriot Act that requires financial
institutions to verify the identity of each customer who opens an account.
The purpose is to help the government fight terrorism and money
laundering activities.
11. Outside Business Activities (OBAs): A registered rep that wishes to engage
in outside employment (e.g. a second job) away from their firm must
notify their firm prior to engaging in the activity. For example, a registered
rep that wants to accept a weekend job as a bartender must first notify

SIE Class Summary
their firm. Note that passive investments are exempt from the rule (i.e. do
not require notification).
12. Selling Away: Sometimes referred to as private securities transactions,
selling away is when a registered rep conducts securities business away
from their firm. FINRA rules require the rep to notify their firm of this activity
and if the rep will receive any compensation to first receive permission
from their firm.
13. Sharing in Customer Accounts: A registered rep and customer can share
in the profits and losses in an account only with permission of the firm and
customer. The sharing must be proportionate to each person’s financial
contribution to the account. A registered rep does not need permission
from their firm to be a beneficiary to a trust account.
14. Continuing Commissions: A retired registered rep who had a continuing
commissions arrangement as part of their retirement can continue to
receive commissions for legacy clients even after the rep’s retirement.
15. Gifts and Entertainment: Under FINRA and MSRB rules, gifts to a client or
potential client are limited to $100 per client per year. However,
entertainment expenses – events where the rep attends – are not
considered gifts. For example, if a rep takes a client to dinner and the bill
is $250, this is permitted. Likewise, attending a baseball game where the
tickets cost more than $100 is permitted provided the rep attends.
• When valuing tickets under the gift limit rule, a broker-dealer should
use the higher of the cost or face value of the tickets. For example,
if a registered representative purchases a ticket for $250 that has a
face value of $100 and gifts the ticket to a client this would be a
violation assuming the registered rep does not attend along with
client since the cost of $250 exceeds the $100 limit.
16. Borrowing from or Lending to Members: Registered reps are generally
prohibited from personally lending money to clients unless the firm has
written procedures in place allowing for the activity. Assuming that is the
case, a registered rep is allowed to lend or borrow money from a client
with no notice or permission required if the client is a bank or family
member. Firm permission is required if the loan is based on an outside
business or personal relationship with the client or if the client is a
registered person at the same firm.
17. Customer Complaints: Under FINRA and MSRB rules, all written complaints
must be forwarded to a supervisor. Note, that verbal complaints do not
need to be reported.

SIE Class Summary
18. Heightened Supervision: A firm would likely heighten its supervision over a
registered representative who had a history of notable events on their
Form U4 (e.g. customer complaints).
19. Political Contributions: The MSRB has strict political contribution rules to
prevent pay-to-play, which is the practice of municipal firms and their
representatives making contributions to candidates in exchange for
receiving business opportunities. These rules apply to municipal finance
professionals (MFPs), which is any rep involved with municipal securities
business except for those limited to retail sales. Specifically, an MFP can
give a maximum contribution of $250 per election to a candidate they
are eligible to vote for. If a violation occurs, the firm is prohibited from
doing any negotiated business with that municipality for two years. Note
that contributions made by spouses of MFPs are not subject to the $250
limit unless the contribution was directed by the MFP.
20. Annual Compliance Meeting: To ensure that a firm’s supervisory
procedures and all FINRA rules are being adhered to, all registered
employees of a firm must attend an annual compliance meeting
conducted by the firm’s chief compliance officer. The meeting may be
conducted electronically (e.g. by video conference), but all participants
must have the opportunity to ask questions and receive immediate
feedback.
21. Retail Communications: Retail communications include any written or
electronic communication distributed to more than 25 retail investors
within a 30-calendar-day period. Because these communications are
seen by individuals, they require principal approval before first use and
are highly regulated. For example, retail communications cannot predict
or project the performance of a security, imply that past performance
forecasts future results, or include exaggerated claims. Take note that the
following activities would be permitted:
I. A hypothetical illustration of mathematical principles, as long as it
does not specifically predict or project the performance of an
investment or investment strategy, and
II. A price target, but only if contained in a research report.
22. Communications through Personal Email & Social Media: A registered
representative is allowed to communicate with clients through a personal
email address and personal social media account as long as they receive
prior permission from their supervisor and the firm appropriately monitors
the communications. Supervision is required for contacts with both current
and prospective investors.
23. Business Continuity Plans: All firms must have a written business continuity
plan to address emergencies and business disruption. Customer must

SIE Class Summary
receive a summary of the plan at account opening and it must be on the

firm’s website. Customers must also be mailed a summary of the plan
upon request.

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SIE Class Summary

Version: 2021 V9 Confidential—For Knopman Marks Students Only Page 1 of 39

Chapter 1 – Equity Securities

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receive shares in the underlying company. Importantly, warrants do not

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cumulative preferred shareholders, they must receive both current and

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Chapter 2 – Debt Securities

1. Discount Versus Premium Bond: When the market value of a bond is

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• Example: When an investor purchases a bond at a premium, the

Chapter 3 – Types of Bonds

1. Unsecured Corporate Debt: Unsecured corporate debt is not backed by

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4. Non-Marketable US Government Securities: The US government issues

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20. Tax-Equivalent Yield: To determine the interest an investor must earn on a

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Chapter 4 – Investment Company Securities

1. Summary Prospectus: The SEC allows a mutual fund to deliver a summary

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Chapter 5 – Other Managed Products

1. REITs: A real estate investment trust (REIT) is a company that owns or

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8. Interest in a Limited Partnership: An interest in a limited partnership is an

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10. Covered Call Breakeven: A covered call is a strategy where an investor

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Chapter 7 – Suitability and Investment Risks

1. Institutional Threshold: Under FINRA suitability rules, an individual with

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Chapter 8 – Issuing Securities

1. Preliminary Prospectus: A preliminary prospectus can be used to market

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9. Regulation S: Reg S is an exempt transaction which allows an issuer to raise

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Chapter 9 – The Secondary Market and Equity Trading

1. Settlement: Settlement is the legal transfer of securities to a buyer’s

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6. Market Orders: Market orders are executed immediately at the best

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An example is when an investor is randomly solicited with positive

Chapter 10 – Economics and Monetary Policy

1. Elasticity: Elasticity refers to the sensitivity of supply and demand of a

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Chapter 11 – Customer Accounts

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number, employment status, investment experience and objectives. The

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dealer to lend stock held in the customer’s account to other investors to

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