SIE Study Guide — Provost Prep

1

Market Participants & Market Structure

CORE ▼

Key Participants

Entity	Role	Key Rule
Broker-Dealer	Executes trades for clients (broker) or its own account (dealer)	Must register with FINRA + SEC
Investment Adviser	Provides advice for compensation	Registered with SEC or state
Issuer	Entity that sells securities to raise capital	Discloses material info via prospectus
Market Maker	Continuously quotes bid/ask prices	OTC market — no exchange required
Custodian	Holds customer assets	Often a bank or broker-dealer
Transfer Agent	Maintains ownership records	Issues/cancels certificates
Clearing Agency	Settles trades	DTC / NSCC

Market Types

Primary market — Issuer sells new securities (IPO, rights offering). Proceeds go to issuer.
Secondary market — Investors trade existing securities. Proceeds go to seller, not issuer.
Exchange market — Centralized (NYSE, Nasdaq). Listed securities.
OTC market — Decentralized, dealer-to-dealer. Many bonds + smaller stocks trade OTC.
Third market — Exchange-listed securities traded OTC.
Fourth market — Institutions trade directly via ECNs, no broker.

⚠ Exam Trap

When a customer buys in an IPO, the proceeds go to the issuer — not to prior shareholders. If an insider sells shares in a secondary offering, that money goes to the insider.

🧠 MEMORY HOOK

Primary = brand new car off the lot (issuer gets paid). Secondary = used car sale (seller gets paid).

Capital Markets vs. Money Markets

Feature	Money Market	Capital Market
Maturity	< 1 year	> 1 year
Examples	T-Bills, CP, BAs, CDs	Stocks, bonds, mortgages
Risk	Lower	Higher

A company completes an IPO and sells 2 million shares at $20 each. Who receives the $40 million raised?

A. The underwriter

B. The issuing company

C. The selling shareholders

D. FINRA

In a primary market transaction, the issuer receives the proceeds. An IPO is a primary offering — the company itself sells new shares and pockets the proceeds to fund operations.

2

Overview of Regulation

CORE ▼

Regulatory Framework

Regulator	Type	Key Role
SEC	Federal agency	Enforces federal securities laws, oversees FINRA and exchanges
FINRA	SRO	Regulates broker-dealers, writes conduct rules, runs exams
MSRB	SRO	Makes rules for municipal securities (BD and bank dealers)
SIPC	Non-profit	Protects customers if BD fails (NOT investment losses)
State regulators	Govt agencies	Blue sky laws — register securities and agents in-state
Federal Reserve	Federal agency	Monetary policy, regulates Reg T (margin)

Key Legislation

Securities Act of 1933 — Governs new issues (primary market). "Truth in Securities." Requires registration + prospectus.
Securities Exchange Act of 1934 — Governs secondary market trading. Created the SEC.
Investment Company Act of 1940 — Regulates mutual funds.
Investment Advisers Act of 1940 — Regulates investment advisers.
Maloney Act of 1938 — Authorized SROs for OTC dealers (created NASD, now FINRA).
SIPC Act of 1970 — Created SIPC to protect brokerage customers.

📌 SIPC Coverage

SIPC protects up to $500,000 total per customer ($250,000 max in cash). It covers missing securities if a BD fails — not market losses. Insurance products (annuities) are NOT SIPC-covered.

⚠ Exam Trap

FINRA writes the rules but the SEC has authority over FINRA. FINRA can be overruled by the SEC. MSRB writes rules for muni dealers but FINRA enforces them for BD dealers; OCC enforces them for bank dealers.

🧠 MEMORY HOOK

'33 = New issues (born in the primary market). '34 = Existing trading (alive in the secondary market).

3

Equity Securities

CORE ▼

Common vs. Preferred Stock

Feature	Common Stock	Preferred Stock
Voting rights	Yes (statutory/cumulative)	Generally No
Dividend	Variable (board discretion)	Fixed rate; paid first
Liquidation priority	Last (residual)	Before common, after bonds
Interest rate risk	Moderate	High (acts like a bond)

Types of Preferred Stock

Cumulative preferred — Missed dividends (arrears) accumulate and must be paid before common receives anything.
Convertible preferred — Can convert to common shares at a set ratio. Conversion dilutes common stockholders.
Callable preferred — Issuer can redeem at set price. Benefits issuer when rates fall.
Participating preferred — Shares in extra dividends beyond fixed rate (rare).

Rights & Warrants

Rights — Short-term (weeks); allow existing shareholders to buy new shares below market price. Protect against dilution.
Warrants — Long-term (years); attached to bond offerings to sweeten the deal. Strike price is above market at issuance.

⚠ Exam Trap

Rights have a subscription price below market (sweet deal for existing holders). Warrants are above market at issuance (a future bet on growth). Rights are short-lived; warrants can last years.

ADRs (American Depositary Receipts)

Allow US investors to hold foreign shares without dealing with foreign markets. Issued by US banks, denominated in USD, but carry currency risk. Dividends are paid in USD after currency conversion.

Liquidation Priority (memorize this order)

🧠 PRIORITY ORDER

Secured creditors → Unsecured creditors → Subordinated debt → Preferred stockholders → Common stockholders
Mnemonic: Super Ugly Salamanders Prefer Chips

4

Debt Securities

⚡ HIGH PRIORITY ▼

Students consistently struggle with bond pricing, yield relationships, and yield calculations. This chapter gets heavy exam weight.

Bond Basics

Par value = $1,000 (face value). Coupon rate is always based on par.
Coupon = Annual interest payment. E.g., 6% coupon on $1,000 = $60/year = $30 every 6 months.
Maturity = When the issuer repays par. Longer maturity = more interest rate risk.
Current Yield (CY) = Annual coupon ÷ Current market price.
YTM (Yield to Maturity) = Total return if held to maturity (includes any discount/premium gain/loss).
YTC (Yield to Call) = Return if issuer calls the bond early at the call price.

The Yield Order — Bond Exam Favourite

When a bond trades at a discount (price < par):

Nominal (CPN)

Lowest

Current Yield

↑ Higher

YTM

↑↑ Higher

YTC

↑↑↑ Highest

At a premium the order reverses: Nominal > CY > YTM > YTC

📐 Key Formulas

Current Yield = Annual Coupon / Market Price
Approx YTM = [Coupon + (Par − Price)/Years] / [(Par + Price)/2]
Dollar value of coupon = Par × Coupon Rate
Bond basis points = 1 bp = 0.01% change in yield

🔧 Interactive Bond Calculator

Par Value ($)

Coupon Rate (%)

Market Price ($)

Years to Maturity

Annual Coupon

Current Yield (CY)

Approx YTM

Status

Yield Order

Bond Price & Interest Rate Relationship

📌 The Teeter-Totter Rule

Bond prices and interest rates move in opposite directions. When rates rise, existing bonds (with lower coupons) become less attractive — their prices fall. When rates fall, existing bonds are more valuable — their prices rise.

Types of Bonds

Bond Type	Issuer	Tax Treatment	Key Feature
Treasury Bills	US Govt	Federal only (exempt state)	<1 yr; sold at discount
Treasury Notes	US Govt	Federal only	2–10 yr; pays semiannual coupon
Treasury Bonds	US Govt	Federal only	10–30 yr
TIPS	US Govt	Federal only	Principal adjusts with CPI
Municipal Bonds	State/local govt	Federal exempt + in-state exempt	GO vs. Revenue bonds
Corporate Bonds	Corporations	Fully taxable	Highest yield for taxable investors
Zero Coupon	Various	Taxed as "phantom income"	Issued at deep discount; no cash interest

Municipal Bond Deep Dive

GO Bonds — Backed by taxing power. Safest munis. Voted on by residents.
Revenue Bonds — Backed by revenues from a specific project (toll road, hospital). Higher yield than GOs. No taxing power.
Industrial Development Bonds (IDB) — Issued by municipalities but benefit private businesses. Subject to AMT.
Tax-equivalent yield = Municipal yield ÷ (1 − tax bracket). Tells a taxable investor what taxable bond yield they'd need to match.

📐 Tax-Equivalent Yield Formula

TEY = Municipal Yield / (1 − Investor's Tax Rate)

Example: 4% muni yield for an investor in 32% bracket:
TEY = 4% / (1 − 0.32) = 4% / 0.68 = 5.88%
→ They'd need a 5.88% taxable bond to equal the muni's after-tax return.

⚠ Exam Trap

Municipal bonds held in an IRA lose their tax advantage — IRA withdrawals are taxed as ordinary income regardless. High-bracket investors benefit most from munis in taxable accounts.

A bond has a 6% coupon and is currently trading at $900. What is its current yield?

A. 6.00%

B. 6.67%

C. 5.40%

D. 5.00%

Current Yield = Annual Coupon / Market Price = $60 / $900 = 6.67%. Since the bond is at a discount, CY > nominal (coupon) rate. The yield is higher because you're getting the same $60 but paid less for the bond.

5

Packaged Products

CORE ▼

Mutual Fund Structure

Open-end fund (mutual fund) — Issues unlimited shares; priced at NAV; sold/redeemed directly with fund. Most common type.
Closed-end fund — Fixed shares; trades on an exchange at market price (can be above or below NAV); bought/sold through a broker.
ETF — Hybrid: trades intraday like a stock but tracks an index like a fund. Generally more tax-efficient than mutual funds.
Unit Investment Trust (UIT) — Fixed portfolio; no active management; dissolves at maturity.

📐 NAV Calculation

NAV = (Total Assets − Total Liabilities) / Shares Outstanding

POP (Public Offering Price) = NAV + Sales Charge
Sales Charge % = (POP − NAV) / POP ← always divided by POP, not NAV

Share Classes

Class	Load Timing	Best For
Class A	Front-end load (at purchase)	Long-term investors; breakpoints lower cost
Class B	Back-end (CDSC — fades over time)	No upfront cost; higher 12b-1 fees
Class C	Level load (annual 12b-1)	Short-term; no CDSC after ~1 yr

⚠ Exam Trap

Sales charge % is always calculated using POP as the denominator — not NAV. "What % is the load?" → use POP. Letter of Intent (LOI) allows investors to qualify for breakpoints over a 13-month period — retroactively if needed.

ETFs vs. Mutual Funds

	Mutual Fund	ETF
Trading	Once daily at NAV	Intraday on exchange
Management	Active or passive	Mostly passive (index)
Taxes	Taxable capital gain distributions	In-kind creation — more tax-efficient
Min Investment	Often $1,000+	Price of 1 share

6

Options

⚡ HIGH PRIORITY ▼

Options is the #1 topic students find confusing. Learn the 4-position cheat sheet cold and everything else follows.

The 4 Positions — Master Cheat Sheet

🟢 Long Call

Market ViewBullish

Max GainUnlimited

Max LossPremium paid

Break-evenStrike + Premium

Obligation?No (right to buy)

🔵 Long Put

Market ViewBearish

Max GainStrike − Premium

Max LossPremium paid

Break-evenStrike − Premium

Obligation?No (right to sell)

🔴 Short Call

Market ViewBearish/Neutral

Max GainPremium received

Max LossUnlimited

Break-evenStrike + Premium

Obligation?Yes (must sell)

🟡 Short Put

Market ViewBullish/Neutral

Max GainPremium received

Max LossStrike − Premium

Break-evenStrike − Premium

Obligation?Yes (must buy)

🔧 Interactive Options Calculator

Position

Strike Price ($)

Premium ($)

Max Gain

Max Loss

Break-Even

Market View

Long Call Payoff Diagram (Visual)

Key Concepts

Option contract = 100 shares. Premium quoted per share, so $3 premium = $300 total cost.
In-the-money (ITM) — Call: stock price > strike. Put: stock price < strike.
Out-of-the-money (OTM) — No intrinsic value; only time value.
At-the-money (ATM) — Stock price = strike price.
Intrinsic value — How far ITM the option is.
Time value = Total premium − Intrinsic value. Decays to zero at expiration (theta decay).

⚠ Exam Trap

The question will say "an investor buys a call" — that's always long call. "Writes a put" = short put. "Sells a call" = short call. Buyers have rights; writers have obligations. Long positions pay premium; short positions receive it.

Covered vs. Naked Calls

Covered call — Writer owns the underlying stock. Limits upside but generates income. Approved for most IRA accounts.
Naked (uncovered) call — Writer does NOT own the stock. Unlimited risk. Requires substantial margin. Most risky single option strategy.

An investor buys 1 XYZ Jul 45 Call at a premium of $4. What is the breakeven price?

A. $41

B. $45

C. $49

D. $4

Long Call breakeven = Strike + Premium = $45 + $4 = $49. The investor needs the stock to rise to $49 just to break even — at $49 the option profit of $4 exactly offsets the $4 premium paid.

7

Alternative Investments

CORE ▼

Direct Participation Programs (DPPs)

Pass-through entities — income/losses flow directly to investors.
Types: Real estate (most common), oil & gas, equipment leasing, agriculture.
General Partner (GP) — Manages the program; unlimited liability.
Limited Partner (LP) — Passive investor; losses limited to amount at risk.
Illiquid — no secondary market. Long holding periods (7–10+ years).
Suitable only for accredited investors with high risk tolerance and long horizons.

REITs

Trades like a stock (if publicly listed) but invests in real estate.
Must distribute at least 90% of taxable income as dividends.
Dividends taxed as ordinary income (not qualified dividend rate).
Equity REIT = owns properties. Mortgage REIT = owns mortgages. Hybrid = both.

Hedge Funds & Private Equity

Not registered investment companies — exempt under Regulation D.
Limited to accredited investors (income >$200K or net worth >$1M excluding home).
Hedge funds — use leverage, short-selling, derivatives. "2 and 20" fee structure common.
Private equity — buy companies, improve them, sell. Illiquid; long lock-up periods.

⚠ Exam Trap

DPP losses can only offset income up to the investor's "amount at risk." A limited partner cannot deduct losses beyond their investment. Passive activity loss rules may further limit deductions.

8

Economic Factors & Business Cycles

CORE ▼

Business Cycle Phases

Phase	Characteristics	Best Sectors
Expansion	GDP rising, employment up, inflation building	Cyclicals, tech, industrials
Peak	Highest GDP; inflation high; rates rising	Energy, materials
Contraction/Recession	GDP falling 2+ quarters; unemployment rising	Defensives (utilities, healthcare, consumer staples)
Trough	Lowest point; unemployment peaks	Financials, early cyclicals

Economic Indicators

Indicator	Type	Example
Leading	Predict the future	Stock prices, building permits, new orders
Coincident	Move with economy now	GDP, employment, industrial production
Lagging	Confirm past trends	Unemployment rate, CPI, interest rates

Monetary vs. Fiscal Policy

Monetary policy — Federal Reserve. Controls money supply and interest rates. Tools: fed funds rate, discount rate, reserve requirements, open market operations.
Fiscal policy — Congress + President. Controls government spending and taxation.
Expansionary policy — Lower rates (monetary) or increase spending/cut taxes (fiscal). Stimulates economy.
Contractionary policy — Raise rates or cut spending. Slows inflation.

📌 Inflation Impact on Investments

Rising inflation → Fed raises rates → Bond prices fall → Growth stocks hurt most (their far-future earnings are discounted more). Value stocks and commodities tend to hold up better. TIPS protect against inflation as principal adjusts upward.

🧠 MEMORY HOOK

Fed = Monetary (Money/rates). Congress = Fiscal (Federal spending/taxes).

9

Customer Accounts

CORE ▼

Account Types

Account Type	Key Feature	Notes
Cash account	Pay in full within settlement	Most common; no leverage
Margin account	Borrow to buy securities	50% Reg T initial requirement
Discretionary	Broker can trade without calling first	Requires written authorization; must be marked
JTWROS	Joint tenancy with right of survivorship	Survivor inherits; common for spouses
TIC	Tenants in common	Each owner has distinct share; passes to estate
Custodial (UGMA)	Adult manages for minor	Irrevocable gift; taxed to minor
Trust	Trustee manages for beneficiary	Follow trust document; no trustee lending

New Account Essentials

New Account Form — Required before any trade. Collect: name, address, DOB, SSN, employment, financial situation, investment objectives.
Customer Identification Program (CIP) — Must verify identity within 30 days of account opening (BSA/Patriot Act).
Beneficial ownership — For legal entities, must identify natural person(s) with ≥25% ownership.
W-9 / W-8BEN — Tax certification for domestic / foreign account holders.

⚠ Exam Trap

In a JTWROS account, either owner can give instructions. In a TIC account, each owner's share passes to their estate — not the other account holder. Know which survivorship rules apply.

Pattern Day Trader Rule

Execute 4+ day trades in 5 business days → designated Pattern Day Trader. Must maintain $25,000 minimum equity in margin account. Day trading buying power = 4× maintenance margin excess.

10

Suitability & Recommendations

CORE ▼

Suitability Obligation

Under FINRA Rule 2111, registered representatives must have a reasonable basis to believe a recommendation is suitable based on the customer's profile. Three components:

Reasonable-basis suitability — The product is suitable for at least some investors.
Customer-specific suitability — Suitable for this particular customer's profile.
Quantitative suitability — Not recommending excessive trading (churning).

Reg BI (Best Interest) — Applies to Broker-Dealers

Higher standard than suitability: must act in customer's best interest, not just suitable.
Disclosure obligation, care obligation, conflict of interest obligation, compliance obligation.
Key document: Form CRS (Customer Relationship Summary) — 2-page plain-language disclosure given to retail customers.

Customer Profile Factors

Age, investment time horizon, risk tolerance, financial situation, tax status, investment experience, liquidity needs, investment objectives.

Objective	Best Investments	Avoid
Safety / Capital Preservation	T-bills, CDs, money market	Stocks, DPPs, options
Income	Bonds, preferred stock, REITs, dividend stocks	Growth stocks, options
Growth	Common stock, growth funds, ETFs	T-bills, bonds (long-term)
Speculation	Options, DPPs, penny stocks	T-bills (too conservative)

⚠ Exam Trap

Reg BI applies to broker-dealers recommending to retail customers. Investment Advisers (RIAs) have a fiduciary duty — even higher standard. RIAs must act in the client's best interest at all times, not just at the time of recommendation.

11

Trading & Settlement

CORE ▼

Order Types

Order	Execution	Price Guarantee
Market order	Immediate at best available price	Execution guaranteed; price not
Limit order	Only at limit price or better	Price guaranteed; execution not
Stop order	Becomes market order when stop is hit	Neither guaranteed
Stop-limit order	Becomes limit order when stop is hit	Price guaranteed; execution not
Trailing stop	Stop moves with price	Neither guaranteed

Settlement Periods

Regular-way settlement for equities — T+1 (trade date plus 1 business day) effective May 2024.
Corporate bonds — T+1.
Municipal bonds — T+2 (some still T+3 by contract).
US Government securities — Next business day (T+1).
Options — T+1 for premiums (the option itself).
Cash settlement — Same day (only when agreed).

⚠ Exam Trap

Buy stop orders are placed above the current market price (to catch breakouts or cover shorts). Sell stop orders are placed below market price (to protect profits or limit losses). Stop orders do NOT guarantee execution price.

Short Selling

Borrow and sell shares you don't own; hope to buy back cheaper later.
Requires a margin account. Initial Reg T margin: 50%.
Maximum gain = Stock goes to $0 (price falls 100%).
Maximum loss = Unlimited (stock price can rise infinitely).
Must pay dividends to the lender while short.
Uptick rule (SSR) — If a stock falls 10%+ in a day, short selling only allowed on upticks for rest of that day + next day.

12

Prohibited Practices

CORE ▼

Core Prohibited Practices

Practice	Definition
Churning	Excessive trading to generate commissions; violates suitability
Front-running	Trading ahead of a known client order for personal gain
Insider trading	Trading on material, non-public information (MNPI)
Painting the tape	Coordinated trades to create false impression of activity
Marking the close	Trades near market close to manipulate closing price
Spoofing	Placing orders with no intent to fill — to move the price
Pump and dump	Hype a stock, sell it at the high; illegal promotion
Free-riding	Buying securities without paying for them (cash account violation)
Commingling	Mixing customer funds with firm's own funds
Selling away	Selling securities outside firm's offered products without approval

Insider Trading Rules

MNPI = information that is both material (would affect investor decisions) and non-public.
Tipper AND tippee can both be liable.
Civil penalty: up to 3× profit gained or loss avoided. Criminal: up to $5 million / 20 years prison.
Chinese wall (information barrier) — Required at firms to prevent info flow between research/banking and trading departments.

⚠ Exam Trap

Free-riding occurs in a cash account when a customer buys and sells securities before paying for them. Punishment: account frozen for 90 days (can only trade with cash in advance). This is different from a margin account where borrowing is permitted.

13

Insurance Products — Annuities & Life Insurance

⚡ HIGH PRIORITY ▼

Annuities and variable products are a major SIE topic. The fixed vs. variable distinction and the accumulation/annuitization phases trip up many students.

Annuity Comparison

Feature	Fixed Annuity	Variable Annuity	Indexed Annuity
Return	Guaranteed rate	Tied to subaccounts (like mutual funds)	Tied to market index (e.g., S&P 500)
Risk to investor	None (insurer bears it)	Investor bears market risk	Some (participation rate, cap)
Regulator	State insurance only	SEC + FINRA + state insurance	State insurance only (usually)
License needed	Life insurance only	Series 6 or 7 + life insurance	Life insurance (usually)
SIPC coverage	No	No	No
Inflation protection	No	Yes (market-linked)	Partial

Annuity Phases

Accumulation phase — Money goes in (premiums). Grows tax-deferred. Each premium buys accumulation units.
Annuitization phase — Payouts begin. Accumulation units convert to annuity units. Number of annuity units is fixed; their value fluctuates monthly based on AIR (Assumed Interest Rate) vs. actual performance.

AIR (Assumed Interest Rate)

If actual fund performance > AIR → payment increases.
If actual performance < AIR → payment decreases.
If actual = AIR → payment stays the same.

🧠 MEMORY HOOK

AIR is the bar. Beat the bar = check goes up. Miss the bar = check goes down.

Payout Options

Option	Description	Key Risk
Life only	Payments for annuitant's lifetime	Die early = estate gets nothing
Life + period certain	Guaranteed payments for X years minimum	Slightly lower payment
Joint and survivor	Continues for second life after first dies	Lower monthly payment
Lump sum	Single payment at annuitization	Fully taxable in year received

Tax Treatment of Annuities

Growth is tax-deferred — no taxes while accumulating.
Withdrawals taxed as ordinary income on the gain portion (LIFO — gains come out first).
Withdrawals before age 59½ — 10% IRS penalty on the taxable portion.
No step-up in cost basis at death (unlike stocks).
1035 Exchange — Tax-free transfer from one annuity to another (or life insurance to annuity). Cannot go from annuity to life insurance.

Life Insurance Types

Type	Cash Value?	Premium	Investment Choice
Term life	No	Lowest	No
Whole life	Yes (guaranteed growth)	Fixed, level	No
Universal life	Yes (flexible)	Flexible	No (insurer invests)
Variable life	Yes (subaccounts)	Fixed	Yes — owner picks
Variable universal life	Yes (subaccounts)	Flexible	Yes — owner picks

⚠ Exam Trap

Variable life and variable annuities are securities — require FINRA registration. Fixed and indexed products are insurance only — state insurance license only. The word "variable" = securities registration required.

During the annuitization phase of a variable annuity, the actual fund return is higher than the AIR. What happens to the monthly payment?

A. Stays the same

B. Increases

C. Decreases

D. Converts to a fixed payment

When actual performance exceeds the AIR, monthly annuity payments increase. The number of annuity units is fixed, but their value goes up when performance beats the AIR benchmark. Think: beat the bar = bigger check.

14

Retirement & Education Accounts

CORE ▼

IRA Comparison

Feature	Traditional IRA	Roth IRA
Contribution limit	$7,000 ($8,000 if 50+) [2024]	Same limits
Tax deductibility	May be deductible	Never deductible
Growth	Tax-deferred	Tax-free
Withdrawals	Taxed as ordinary income	Tax-free (if qualified)
RMDs	Starting at age 73	None during owner's life
Early withdrawal penalty	10% before age 59½	10% on earnings before 59½
Income limit	No income limit to contribute	Phases out at higher incomes

Employer Plans

Plan	Who Contributes	2024 Limit	Notes
401(k)	Employee (+ employer match)	$23,000 ($30,500 if 50+)	Most common corporate plan
403(b)	Employee	$23,000	Non-profit / school / hospital employees
SEP-IRA	Employer only	Up to 25% of comp / $69,000	Self-employed
SIMPLE IRA	Both	$16,000 ($19,500 if 50+)	<100 employees; employer must match
Defined Benefit (pension)	Employer	Actuarially determined	Guarantees specific payout in retirement

Education Accounts

529 Plan — State-sponsored; contributions after-tax; growth and withdrawals tax-free for qualified education expenses. No federal deduction (some state deductions). No income limits.
Coverdell ESA — $2,000/year max; income limits apply; can use for K-12 and college. Must be used by age 30.
UGMA/UTMA — Custodial account; irrevocable gift; taxed to minor; becomes theirs at majority.

⚠ Exam Trap

Roth IRA contributions (not earnings) can be withdrawn any time tax- and penalty-free — you already paid tax on them. Only the earnings portion is subject to the 10% penalty if taken before 59½ and the account is < 5 years old. Traditional IRA — the entire withdrawal is subject to tax + penalty.

15

Regulatory Framework

CORE ▼

Registration Requirements

Broker-Dealers — Must register with SEC + FINRA. State registration also required.
Registered Reps — Must be associated with a member firm; pass qualifying exams; U4 form filed.
Investment Advisers (RIAs) — >$100M AUM: SEC registration. <$100M: state registration.
Investment Adviser Representatives (IARs) — Register with state.

Key FINRA Rules

Rule	Description
FINRA 2010	Standards of Commercial Honor — broad ethical conduct standard
FINRA 2111	Suitability — recommendations must be suitable
FINRA 3110	Supervision — firms must supervise registered persons
FINRA 4512	Customer Account Info — must collect and keep current
FINRA 2210	Communications with the Public — fair and balanced
FINRA 4511	Recordkeeping — 3 or 6 year rules

AML / BSA Requirements

Broker-dealers must have a written Anti-Money Laundering (AML) program.
Currency Transaction Reports (CTR) — Required for cash transactions > $10,000.
Suspicious Activity Reports (SAR) — Filed for suspicious activity of $5,000+. Must NOT tell the customer a SAR was filed.
FinCEN — Financial Crimes Enforcement Network. Administers BSA.

⚠ Exam Trap

The $10,000 CTR threshold applies to cash — not checks or wires. Structuring (deliberately breaking transactions to stay under $10K) is itself a crime. SARs are confidential — you cannot tell the customer one was filed.

Communications Categories

Retail communication — Written material to >25 retail customers in 30 days. Requires pre-approval by principal.
Correspondence — Written to ≤25 retail customers. Review by principal but not necessarily pre-approval.
Institutional communication — To institutional investors only. Can be spot-checked.

16

Key Calculations & Formulas

⚡ HIGH PRIORITY ▼

The SIE includes calculation questions. Know these formulas and you'll pick up easy points others miss.

Complete Formula Reference

📐 EQUITY

Earnings Per Share (EPS) = Net Income / Shares Outstanding
P/E Ratio = Market Price / EPS
Dividend Yield = Annual Dividend / Market Price
Book Value per Share = (Total Assets − Total Liabilities) / Shares Outstanding
Rights — Subscription Price: given in question; always below market

📐 BONDS

Annual Coupon = Par × Coupon Rate
Current Yield = Annual Coupon / Market Price
Approx YTM = [Coupon + (Par − Price) / Years] / [(Par + Price) / 2]
Tax-Equivalent Yield = Muni Yield / (1 − Tax Rate)
Dollar Value of 1 Basis Point = $1,000 × 0.0001 = $0.10 per $1,000 par

📐 MUTUAL FUNDS

NAV = (Total Assets − Liabilities) / Shares Outstanding
POP = NAV + Sales Charge
Sales Charge % = (POP − NAV) / POP
NAV Change: decreases when dividends/capital gains distributed (price drops by exact amount)

📐 OPTIONS

Long Call B/E = Strike + Premium
Long Put B/E = Strike − Premium
Short Call B/E = Strike + Premium
Short Put B/E = Strike − Premium
Intrinsic Value (call) = Market Price − Strike (if > 0)
Intrinsic Value (put) = Strike − Market Price (if > 0)
Time Value = Total Premium − Intrinsic Value

📐 MARGIN

Reg T Initial Margin = 50% of purchase price
Equity = Market Value − Debit Balance
Margin Call Trigger (maintenance): FINRA minimum = 25%; firms often require 30–35%
Short Account — Max gain: 100% (if stock goes to $0)
Short — Maintenance margin: 30% of market value of securities sold short

📐 ANNUITIES & INSURANCE

After-tax return on annuity withdrawal: LIFO — gains come out first, taxed as ordinary income
1035 Exchange: Tax-free; annuity → annuity or life → annuity
AIR Rule: Actual > AIR → payment up; Actual < AIR → payment down

🔧 Quick Calculation Practice

Formula

Result

A mutual fund has total assets of $50 million, liabilities of $2 million, and 4 million shares outstanding. What is the NAV per share?

A. $12.50

B. $12.00

C. $13.00

D. $11.50

NAV = (Total Assets − Liabilities) / Shares = ($50M − $2M) / 4M = $48M / 4M = $12.00 per share.

📘 SIE Study Guide

HOW TO USE THIS GUIDE

Key Participants

Market Types

Capital Markets vs. Money Markets

Regulatory Framework

Key Legislation

Common vs. Preferred Stock

Types of Preferred Stock

Rights & Warrants

ADRs (American Depositary Receipts)

Liquidation Priority (memorize this order)

Bond Basics

The Yield Order — Bond Exam Favourite

Bond Price & Interest Rate Relationship

Types of Bonds

Municipal Bond Deep Dive

Mutual Fund Structure

Share Classes

ETFs vs. Mutual Funds

The 4 Positions — Master Cheat Sheet

🟢 Long Call

🔵 Long Put

🔴 Short Call

🟡 Short Put

Long Call Payoff Diagram (Visual)

Key Concepts

Covered vs. Naked Calls

Direct Participation Programs (DPPs)

REITs

Hedge Funds & Private Equity

Business Cycle Phases

Economic Indicators

Monetary vs. Fiscal Policy

Account Types

New Account Essentials

Pattern Day Trader Rule

Suitability Obligation

Reg BI (Best Interest) — Applies to Broker-Dealers

Customer Profile Factors

Order Types

Settlement Periods

Short Selling

Core Prohibited Practices

Insider Trading Rules

Annuity Comparison

Annuity Phases

AIR (Assumed Interest Rate)

Payout Options

Tax Treatment of Annuities

Life Insurance Types

IRA Comparison

Employer Plans

Education Accounts

Registration Requirements

Key FINRA Rules

AML / BSA Requirements

Communications Categories

Complete Formula Reference