SIE Practice Exam Questions Part 1

Explanation
Backing away refers to one’s failure to fill quotes at their quoted prices for sale or purchase, as quoted by a market maker. It can result in a disturbance in the integrity of the markets and is an unethical practice.

Think of a market maker as a store that posts prices for buying and selling stocks. “Backing away” is like that store refusing to sell you something at the advertised price and quantity. It’s against the rules because they’re supposed to honor their posted prices. The other options are different types of market misconduct.

Treasury bills (T-bills) are short-term securities issued by the U.S. Treasury to help finance Debt securities, they are considered as low-risk investments backed by the full faith and credit of the U.S. government.

Treasury bills (T-bills) are short-term, low-risk securities issued by the U.S. Department of the Treasury to finance government debt. They mature within one year and are considered one of the safest investments since the U.S. government’s credit backs them. Corporate bonds, municipal bonds, and preferred stock involve higher risks and are not issued by the Treasury.

To receive a dividend, you must purchase the stock before the ex-dividend date. If you buy the stock on or after the ex-dividend date, you will not receive the dividend. Therefore, the correct date to buy the stock in order to receive the dividend is the ex-dividend date.

To receive a dividend, a customer must buy the stock before the ex-dividend date. The ex-dividend date is typically one business day before the record date. If you buy on or after the ex-dividend date, the previous owner will receive the dividend.

Incorrect Options:

The declaration date is merely the announcement date.

The record date is when the company determines the shareholders of record to whom the dividend will be paid, but you must have purchased the stock prior to the ex-dividend date to be considered a shareholder of record and to receive the dividend.

The payable date is the date the payment is distributed, not the purchase date. The ex-dividend date is the crucial cut-off point.

While corporate bonds, municipal bonds, and Treasury notes (C) all now settle on a T+1 basis. Mutual funds typically settle on a T+1 or T+2 basis, but they are not standardized to T+1. Mutual funds can vary in their settlement time frames depending on the specific fund and the fund manager’s settings.

While corporate bonds, municipal bonds, and Treasury notes (C) all now settle on a T+1 basis.

Mutual funds typically settle on a T+1 or T+2 basis, but they are not standardized to T+1.

Mutual funds can vary in their settlement time frames depending on the specific fund and the fund manager’s settings.

Because ETFs do not have forward pricing like mutual funds but can be traded at any point during the day at the prevailing market price. So, investors enjoy greater flexibility.

A unique advantage of ETFs over mutual funds is the ability to trade throughout the day at market prices, just like individual stocks. This provides investors with greater flexibility and the potential for more precise timing when buying or selling.

In contrast, mutual funds are bought and sold based on the NAV at the end of the trading day, which can limit flexibility.

Long-term bonds are sensitive to interest rate changes. With a rise in rates, the prices of long-term bonds would fall compared to short-term bonds, which become insensitive.

When interest rates rise, bond prices decrease due to their inverse relationship. Long-term bonds are more sensitive to interest rate changes because their cash flows occur over a longer duration, amplifying the impact of rate fluctuations.

Why Other Options Are Incorrect?

Rise more than short-term bonds: Interest rate increases always decrease bond prices.

Remain unchanged: Interest rate changes directly affect bond prices.

Short-term bond price falls more: Long-term bonds have a higher duration, making them more price-sensitive to rate changes.

An American option can be exercised at any time on or before the expiration date and is more flexible than a European option, which is exercisable only on its expiration date.

American options offer greater flexibility for exercising compared to European options.
This is correct because American options can be exercised at any time before or on the expiration date. On the other hand; European options can only be exercised on the expiration date. This gives American options a significant advantage in terms of flexibility.

Incorrect Options:

Option A: This statement is incorrect because it reverses the exercise rules. American options can be exercised anytime before expiration, not just on the expiration date, while European options can only be exercised on the expiration date.

Option B: This is incorrect because both American and European options can be used for a variety of assets, including index options and individual stocks. There is no strict rule about which type of option is more commonly used for specific assets.

Option C: European options generally have a lower premium than American options.

An increase in the reserve requirement means that banks have to hold more cash in reserve and therefore less they can lend out. It reduces the money supply, which in turn tends to raise interest rates.

When the Federal Reserve increases the reserve requirement, banks must hold more funds in reserve and have less money available to lend. This reduction in loanable funds typically raises interest rates, making borrowing more expensive.

The discount rate and open market operations are separate monetary tools. They are not directly affected by reserve requirement changes.

Congress can incentivize retirement savings by providing tax benefits available for 401(k) and IRA account contributions. Fiscal policy is taxation policy and government spending policy. It has the purpose of influencing economic activities.

Role of Fiscal Policy: Congress influences fiscal policy by creating laws that affect taxation and spending. Offering tax advantages for retirement savings plans like 401(k)s and IRAs is a direct fiscal measure to encourage individuals to save.

Why the Others Are Incorrect?

Lowering the federal funds rate and adjusting reserve requirements are monetary policy tools managed by the Federal Reserve, not Congress.

Increasing interest rates on mortgages do not align with promoting retirement savings.

Failure to disclose material information in Form U4 is a serious offense that may be subject to harsh regulatory penalties; suspension may be or a permanent ban from the securities industry.
Form U4 is a registration form for people in the securities industry. It requires disclosing important information like past disciplinary actions or financial issues. Material information is anything that could affect an investor’s decision.

Failing to disclose material information on Form U4 is a serious offense. Consequences can include suspension or being banned from the industry. Accurate disclosure on Form U4 is crucial for investor protection and industry integrity.

FINRA Rule 2150 sets strict guidelines for registered representatives sharing accounts with customers. Prior written approval from the representative’s firm is mandatory before such an arrangement can be established.

Leveraging simply means taking loans to increase the scale of investments. This could maximize potential returns, but it also maximizes potential losses. Consequently, the hedge fund becomes highly risky.

The use of leverage in a hedge fund increases its risk profile because it amplifies both the potential gains and losses. When a hedge fund uses borrowed money to invest, even a small unfavorable market movement can lead to larger-than-expected losses, making leverage a higher-risk strategy.

Thus, (C) is the correct answer, as leverage increases risk due to the potential for amplified losses.

Open-end funds or mutual funds price their shares at the NAV (Net Asset Value), which is calculated at the end of each business day. The price investors pay is the NAV plus any applicable sales charge.

An open-end investment company (mutual fund) prices its shares based on the Net Asset Value (NAV). This is calculated at the end of the trading day after the fund receives all the orders for that day. The NAV is determined by dividing the total value of the fund’s assets (minus liabilities) by the number of shares outstanding.

Incorrect Options:

The other options are incorrect because mutual fund shares do not trade on an exchange, nor are they influenced by supply and demand like stocks.

NAV is not determined by the previous day’s closing price or at the moment an order is placed, but after the market closes.

Because of the serious action taken against John by the Canadian regulators, U.S. rules (specifically Section 3(a)(39) of the Securities Exchange Act of 1934) would consider him “statutorily disqualified”. This means he is automatically prevented from working as a registered representative in the U.S. due to the foreign ban, no matter how qualified he is. This rule helps to uphold the integrity of the financial industry worldwide.

“Marking the close” refers to the practice of entering trades at or near the market’s close to manipulate the stock’s closing price. This action is often done to create a misleading appearance of a stock’s performance.

“Marking the close” is a manipulative practice involving strategically placing buy or sell orders for security right before the market closes. This activity aims to artificially affect the stock’s closing price, creating a false impression of its value or performance. The practice is illegal and unethical because it distorts market prices.

Pushing down the price before the close might be manipulative but is not the definition of “marking the close.” Influencing the opening price or spreading false rumors are different forms of market manipulation, not specifically “marking the close.”

A corporate resolution is required to open a margin account for a corporation. It specifies who within the corporation is authorized to make transactions on behalf of the company, ensuring proper authority for trading.

The corporate resolution is the specific document that authorizes the opening of a margin account and designates the individuals allowed to trade on it.

While the corporate charter and articles of incorporation establish the corporation’s existence and powers. They do not provide the necessary authorization for margin trading.

Bylaws govern internal operations, not specific transactional approvals.

Although the charter might allow margin trading, the resolution is the document that approves it. The resolution is the document that specifically says, “We, the board, approve opening this margin account and authorize X, Y, and Z to trade on it.” Thus, it is an essential, required document.

Book-entry settlement is more efficient and cost-effective compared to a physical delivery system. It facilitates easier trading by recording transactions electronically, without the need to physically transfer certificates.

Instead of dealing with physical paper stock certificates, book entry is like keeping track of ownership digitally. Imagine the hassle of printing, mailing, and securing those certificates every time a stock changes hands! That’s where book entry shines. It is much cheaper and faster because everything is handled electronically, kind of like online banking instead of writing checks. No more worrying about lost or damaged certificates. Transactions become smoother and less costly.

So, book entry is about making the entire stock trading process much more efficient and convenient for everyone involved.

Private equity hedge funds usually invest in privately owned businesses. Their goal is to restructure or expand these companies to increase their value over time. This process comes with higher risk because the investments are often illiquid, meaning they can be harder to sell quickly. However, the potential rewards can be much greater in the long run.

The corporate insider is the tipper because he disclosed the MNPI and the friend is the tippee who traded on that information.

OTC market refers to an over-the-counter, negotiated market where trades are done through inter-dealer networks rather than through a central marketplace.

Nature of the OTC Market: The OTC market is decentralized. This means that trades occur directly between dealers and investors via electronic networks or phone calls. There is no central trading floor.

Why the Others Are Incorrect?

Double-auction markets are characteristic of stock exchanges, not the OTC market.

Physical locations and listed securities are features of centralized exchanges like the NYSE.

Only new securities being traded are false; the OTC market also trades existing securities.