Posted by Barb Gavitt, ITP, SILA-F ● October 14, 2022

The Ultimate Guide to the SIE Exam

 

SIE

The SIE (Securities Industry Essentials) exam was developed for those seeking to become securities industry professionals. It is an introduction to the basic characteristics of securities markets, different types of securities and their associated risks, economic conditions, types of customer accounts, different trading orders, prohibited practices, and industry regulations.  This exam will assess your knowledge of these areas. Along with passing the SIE, an individual must pass a qualification exam that is specific to the business the individual will be engaged in. You are not required to be associated with a firm to take the SIE exam. However, you must be associated with a FINRA member firm prior to taking a qualified exam, such as the Series 6 or Series 7. In this blog, we will discuss the structure of the SIE exam, highlight 4 highly-tested topics in the SIE exam, and provide examples of questions you may encounter.

How is the SIE exam structured?

The SIE exam consists of 85 multiple-choice questions, of which 75 questions are scorable. The 10 additional questions are “pretest” questions that are randomly distributed throughout the exam and do not count for or against your score. Once these questions have sufficient statistics to be considered valid questions, they will be added to the testing provider’s pool of scored questions. Since you will not know which questions are pretest, all questions should treated as if they count toward the successful completion of the exam. 

You will have 1 hour and 45 minutes to complete the exam and must correctly answer 70%  of the 75 scorable questions to pass

The SIE exam, like other FINRA exams, is presented in a bell curve. Exams presented in this manner should start with easier questions, move to more challenging questions, and end with easier ones. However, we recommend taking the exam with no expectations concerning question difficulty. It can be discouraging to encounter a question that you consider difficult when you were expecting an “easy” question. Answer each question to the best of your ability, and don’t let the order of difficulty dictate your overall confidence. Remember: if you have prepared for the exam properly, it won’t matter when the difficult concepts appear.

To pass the SIE exam, you must demonstrate that you have the knowledge needed in the four main exam sections. The four main SIE exam sections and question breakdown are as follows:

Sections Number of Questions Percentage of Questions
1. Knowledge of Capital Markets 12 16%
2. Understanding Products and their Risks 33 44%
3. Understanding Trading, Customer Accounts, and Prohibited Activities 23 31%
4. Overview of the Regulatory Framework 7 9%
Total  75 100%

View the SIE Examination Content Outline

What topics should I focus on when studying for the SIE exam?

When it comes to studying for the SIE, there are specific topics that are highly testable. The table above shows that 75% of the exam is based on product knowledge and associated risks, customer accounts, and prohibited activities. We have identified 4 areas of focus within these broad categories: 

  1. Types of securities
  2. Investment risks
  3. Customer accounts
  4. Prohibited practices

1. Types of Securities 

The exam expects you to have a basic understanding of different types of securities and investments. You will be presented with questions that require you to associate different investments with their specific characteristics. These questions often present the name, type. or category of the security, and you will have to choose the correct description of the security as the answer. This area may also focus on the benefits and restrictions specific to ownership of specific investment vehicles. 

Let’s look at a sample question:

A potential client is interested in a corporate investment that has the potential to provide capital appreciation while providing them with the right to vote on certain corporate matters. Which of the following securities can provide this person with those benefits?

A. American depositary receipts
B. Subordinated debentures
C. Call options
D. Common stock

 

This individual is looking for growth and the right to vote on corporate matters. Subordinated debentures are a type of corporate debt that is purchased for the income potential, not growth. Owners of debentures do not receive voting privileges. Call options are derivative securities and therefore do not provide investors with voting rights. American depositary receipts (ADRs) are receipts created from U.S. banks owning the actual foreign securities, allowing the receipts to trade on U.S. exchanges. Though they have large growth potential, the U.S. bank maintains the voting rights. Common stock ownership is the only choice that will allow this person growth potential along with the ability to vote on certain corporate actions. D is the correct choice.

The SIE exam will test your knowledge on many types of securities. Options contracts are one of the more difficult types of securities products you will need to understand. The following video shows a comparison of call and put options to aid in understanding those security types.

 

HubSpot Video

 

2. Investment Risks

Along with a basic knowledge of the different securities involved in the financial securities industry, the SIE exam expects you to understand the inherent risks involved with each investment choice. Those risks include, but are not limited to, market risk, credit risk, interest-rate risk, and inflation-rate risk. The exam may present an investment option and ask you to choose the greatest risk associated with that investment.

 Here's an example of an investment risk question:

When investing in collateralized mortgage obligations, which of the following would be considered the greatest risk associated with this specific type of investment?

A. Market risk
B. Prepayment risk
C. Credit risk
D. Currency risk

 

Since all investments have market risk, this is not specific to collateralized mortgage obligations (CMOs). Credit risk is the risk of the issuer being unable to meet its payment obligations. This risk is very limited with CMOs, which usually consist of government agency securities such as GNMAs and FNMAs. Currency risk is also called exchange-rate risk and is only found in foreign investments. Prepayment risk is the risk that the debts found in the pool of mortgages may be paid off early and cause the CMO to be retired early. This risk, along with extension risk, is found in all CMOs and would be the greatest of the risks listed specific to CMOs and other mortgage-backed securities. The correct answer choice is B.

The following video further explains the risks associated with these types of securities.

 

HubSpot Video

 

3. Customer Accounts

The SIE introduces the various types of customer accounts that can be established, including personal, business, and fiduciary accounts. You must understand the various business structure types and the documentation necessary to open these accounts. Test questions in this section may pertain to account types, types of trades, specific account requirements, customer account maintenance, the information require to open an account, and the information necessary to make recommendations.

Here's an example of a fiduciary account question:

A custodial account opened under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) must be opened under the:

A. Tax ID of the custodial trust
B. Social Security number of the custodian
C. Social Security number of the minor
D. Social Security number of the parents

 

The Social Security number used to open this type of account belongs to the minor. This makes answer C the correct choice, The account must be set up by a custodian who acts in a fiduciary capacity to manage the account. The custodian could be the child's parent, grandparents, or any other interested party. All assets belong to the minor, who is responsible for the taxes.

The following video explains the requirements for custodial accounts.

 

HubSpot Video

 

4. Prohibited Practices

The Financial Industry Regulatory Authority (FINRA) regulates member firms, their employees, and exchange markets. FINRA, along with the SEC, MSRB, CBOE, and state regulators work together to ensure the securities industry is fair when dealing with customers. The SIE exam will test on several prohibited activities, including forms of market manipulation, insider trading, improper use of customer securities or funds, and financial exploitation of seniors. You should be familiar with FINRA's conduct and suitability rules, along with prohibited, unethical, and fraudulent business practices.

Here is an example of a potential test question on market manipulation:

Which of the following statements best describes market manipulation?

A. Market manipulation is illegal and violations may result in civil or criminal penalties
B. There are no permissible forms of market manipulation
C. Only individuals associated with the securities industry are prohibited from participating in market manipulation
D. Market manipulation occurs only in the primary market

 

The only permissible form of market manipulation is stabilization. The Securities Exchange Act of 1934 prohibits ALL persons from participating in ALL other forms of market manipulation. Anyone that engages in market manipulation may be subject to civil and criminal penalties depending on the offense and if the behavior was intentional. Therefore, A is the correct answer choice. Intentional violations of law are fraudulent and punishable at the criminal level. Unintentional violations are typically punishable at the civil level.

The following video explains market manipulation.

HubSpot Video

 

How many math questions are on the SIE exam?

Candidates are often concerned about memorizing formulas for math questions on the exam. While there may be a few questions that require calculation, there are only a couple of potential formulas to remember. Formulas for dividend yield, current yield, and parity are the most likely to appear on the exam. The section on bond yields may also seem intimidating. While understanding the various yields are important, in most cases, the only formula that requires calculation on the exam is for the current yield. It is much more important to have an understanding of the things that can cause changes in bond yields and prices. The most common questions are those regarding the inverse relationship between yields and prices.

Here’s an example of a math question you could see on the SIE exam:

An investor purchased a 6% corporate debenture at 95. Which of the following statements is true?

A. The current yield is lower than the nominal yield
B. The yield to maturity is higher than the current yield
C. The nominal yield is higher than the current yield
D. The current yield is equal to the nominal yield

 

The investor purchased the debenture at 95, or $950, making this a discount bond. A bond will sell at a discount when new bonds are issued with higher interest rates than the coupon (nominal yield) of the existing bond. As interest rates rise, the price of existing bonds will fall. When trading at a discount, the current yield is higher than the nominal yield and the yield to maturity is always higher than both the nominal and current yield. This makes answer choice B the correct answer. A bond will sell at a premium when new bonds are issued with lower interest rates than the coupon (nominal yield) of the existing bond. Therefore, as interest rates fall, the price of existing bonds will rise. When trading at a premium, the current yield is lower than the nominal yield and the yield to maturity is always lower than both the nominal and current yield.

The following video discusses bonds trading in the secondary market.

 

HubSpot Video

 

How can I start studying for the SIE exam?

A.D. Banker offers a Securities Industry Essentials (SIE) Online Course that includes videos, practice exams, audio, activities, key facts, and can be supplemented with flashcards, study manuals, and web classes. 

We recommend you spend 30-50 hours studying for your exam. Additionally, we recommend you spend most of your time reading the content. This strategy leads to comprehension, as opposed to memorization. Practice tests should be used as assessment tools to gauge your understanding; they should not be your exclusive way of learning the material. 

Our guide to passing your licensing exam on your first attempt provides more information on how to best utilize our online course – check it out, and then get started today!

 

Topics: Securities, Series 6, Series 7, SIE, FINRA, Series 63

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