Table Of ContentSecurities Industry Essentials
License Exam Manual
2nd Edition
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At press time, this edition contains the most complete and accurate information currently available.
Owing to the nature of license examinations, however, information may have been added recently
to the actual test that does not appear in this edition. Please contact the publisher to verify that you
have the most current edition.
This publication is designed to provide accurate and authoritative information in regard to the
subject matter covered. It is sold with the understanding that the publisher is not engaged in
rendering legal, accounting, or other professional services. If legal advice or other expert assistance is
required, the services of a competent professional should be sought.
SECURITIES INDUSTRY ESSENTIALS LICENSE EXAM MANUAL, 2ND EDITION
©2020 Kaplan, Inc.
The text of this publication, or any part thereof, may not be reproduced in any manner whatsoever
without written permission from the publisher.
If you find imperfections or incorrect information in this product, please visit www.kaplanfinancial
.com and submit an errata report.
Published in February 2020 by Kaplan Financial Education.
Revised April 2020.
Printed in the United States of America.
ISBN: 978-1-07-880324-3
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CONTENTS
Introduction ix
PART 1 UNDERSTANDING PRODUCTS AND THEIR RISKS
UNIT 1
Individual Securities—Equities 3
Learning Objectives 3
Introduction 3
Lesson 1.1: The Basic Securities 3
Lesson 1.2: Common Stock 6
Lesson 1.3: Rights, Warrants, and Rule 144 13
Lesson 1.4: American Depositary Receipts (ADRs) and Preferred Stock 17
UNIT 2
Individual Securities—Debt 23
Learning Objectives 23
Introduction 23
Lesson 2.1: The Basics of Bonds 24
Lesson 2.2: Bond Ratings and Features 28
Lesson 2.3: Zeros and Types of Corporate Debt 31
Lesson 2.4: Municipal Bonds 37
Lesson 2.5: Treasuries 40
Lesson 2.6: Agency Issues and Taxation 42
Lesson 2.7: Money Markets and Asset-Backed Securities 45
UNIT 3
Derivatives 49
Learning Objectives 49
Introduction 49
Lesson 3.1: Basic Options 49
Lesson 3.2: Intrinsic Value, Time Value, and the Option Premium 55
Lesson 3.3: Nonequity Options 58
Lesson 3.4: Option Calculations 61
Lesson 3.5: Hedging Risk With Options 64
Lesson 3.6: Generating Premium Income 66
Lesson 3.7: Administration and Compliance 69
UNIT 4
Packaged Investments 73
Learning Objectives 73
Introduction 73
Lesson 4.1: Investment Company Act of 1940 74
Lesson 4.2: Variable Annuities and Life Insurance 79
Lesson 4.3: Share Classes 81
iii
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iv Contents
Lesson 4.4: Breakpoints 84
Lesson 4.5: Pricing 87
Lesson 4.6: Disclosure and Taxation 89
UNIT 5
Other Investment Vehicles 95
Learning Objectives 95
Introduction 95
Lesson 5.1: 529 Plans 95
Lesson 5.2: LGIPs and ABLEs 98
Lesson 5.3: Direct Participation Programs 99
Lesson 5.4: DPP Suitability and Taxation 103
Lesson 5.5: REITs 105
Lesson 5.6: Hedge Funds 106
Lesson 5.7: Exchange-Traded Funds and Exchange-Traded Notes 107
UNIT 6
Types of Risk 111
Learning Objectives 111
Introduction 111
Lesson 6.1: Systematic Risk 112
Lesson 6.2: Nonsystematic Risk 114
Lesson 6.3: Risk Mitigation 116
PART 2 KNOWLEDGE OF CAPITAL MARKETS
UNIT 7
The Securities Act of 1933 and the Primary Markets 121
Learning Objectives 121
Introduction 121
Lesson 7.1: The Primary Markets 121
Lesson 7.2: Participants in the Primary Market 125
Lesson 7.3: Nonexempt Registration 129
Lesson 7.4: Exemptions to Registration 134
Lesson 7.5: Disclosure Documents 138
UNIT 8
The Securities Exchange Act of 1934 and the Secondary Markets 143
Learning Objectives 143
Introduction 143
Lesson 8.1: The Secondary Markets 143
Lesson 8.2: Exchanges and the OTC 146
UNIT 9
The Government Regulators 155
Learning Objectives 155
Introduction 155
Lesson 9.1: The SEC and the Treasury 156
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Contents v
Lesson 9.2: The Federal Reserve Board 159
Lesson 9.3: SIPC, FDIC, and NASAA 159
UNIT 10
The Self-Regulatory Organizations 163
Learning Objectives 163
Introduction 163
Lesson 10.1: Financial Industry Regulatory Authority 163
Lesson 10.2: Other SROs 165
UNIT 11
Economic Indicators 167
Learning Objectives 167
Introduction 167
Lesson 11.1: Economic Indicators 167
UNIT 12
The Business Cycle 173
Learning Objectives 173
Introduction 173
Lesson 12.1: The Business Cycle 173
UNIT 13
The Federal Reserve 177
Learning Objectives 177
Introduction 177
Lesson 13.1: The Federal Reserve 177
UNIT 14
Fiscal Policy and Trade 183
Learning Objectives 183
Introduction 183
Lesson 14.1: Fiscal Policy 184
Lesson 14.2: Currency Rates and the Balance of Trade 185
UNIT 15
Industries and Companies 189
Learning Objectives 189
Introduction 189
Lesson 15.1: Types of Industries 189
Lesson 15.2: Financials 191
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vi Contents
PART 3 UNDERSTANDING TRADING, CUSTOMER ACCOUNTS, AND
PROHIBITED ACTIVITIES
UNIT 16
Placing a Trade 199
Learning Objectives 199
Introduction 199
Lesson 16.1: Market Attitude and Trade Types 199
UNIT 17
Quotes 205
Learning Objectives 205
Introduction 205
Lesson 17.1: Quotes 205
UNIT 18
Position, Strategies, and Trade Authority 209
Learning Objectives 209
Introduction 209
Lesson 18.1: Positions and Strategies 209
Lesson 18.2: Trade Authority 212
UNIT 19
Settlement 217
Learning Objectives 217
Introduction 217
Lesson 19.1: Settlement Dates and Good Delivery 217
UNIT 20
Investment Returns 221
Learning Objectives 221
Introduction 221
Lesson 20.1: Investment Returns 221
Lesson 20.2: Taxation and Benchmarks 224
UNIT 21
Corporate Actions 229
Learning Objectives 229
Introduction 229
Lesson 21.1: Corporate Actions 230
UNIT 22
Nonqualified Accounts 237
Learning Objectives 237
Introduction 237
Lesson 22.1: Nonqualified Accounts 237
Lesson 22.2: Trust, Custodial, and Education Accounts 242
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Contents vii
UNIT 23
Qualified Plans 249
Learning Objectives 249
Introduction 249
Lesson 23.1: Individual Retirement Accounts and Employer-Sponsored Plans 249
UNIT 24
Account Features 257
Learning Objectives 257
Introduction 257
Lesson 24.1: Cash Accounts, Fee-Based Accounts, and Margin Accounts 257
UNIT 25
AML/BSA 265
Learning Objectives 265
Introduction 265
Lesson 25.1: Anti-Money Laundering Rules 265
UNIT 26
General Suitability 271
Learning Objectives 271
Introduction 271
Lesson 26.1: Making Suitable Recommendations 271
UNIT 27
Communications With the Public 277
Learning Objectives 277
Introduction 277
Lesson 27.1: Communications With the Public 277
UNIT 28
Record Keeping Requirements under SEC 17a-3 & 4 285
Learning Objectives 285
Introduction 285
Lesson 28.1: Record Keeping Requirements 286
UNIT 29
Prohibited Activities 289
Learning Objectives 289
Introduction 289
Lesson 29.1: Insider Trading, Market Manipulation, and Restricted Persons 289
Lesson 29.2: Other Customer Care Rules 294
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viii Contents
PART 4 OVERVIEW OF THE REGULATORY FRAMEWORK
UNIT 30
Associating With a Broker-Dealer 305
Learning Objectives 305
Introduction 305
Lesson 30.1: Associating With a Broker-Dealer 305
Lesson 30.2: Other Personnel Rules 308
UNIT 31
Terminating Association With a Broker-Dealer 311
Learning Objectives 311
Introduction 311
Lesson 31.1: The U-5 Form and Retesting 311
UNIT 32
Ongoing Expectations of Associated Persons 315
Learning Objectives 315
Introduction 315
Lesson 32.1: Ongoing Expectations of Associated Persons 315
Common Abbreviations 321
Glossary 322
Index 369
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INTRODUCTION
Thank you for choosing Kaplan for your educational needs, and welcome to the Securities
Industry Essentials (SIE) License Exam Manual (LEM). This manual applies adult learning
principles to give you the tools you’ll need to pass your exam on the first attempt.
Why Do I Need to Pass the SIE?
All individuals interested in pursuing employment as representative-level registrants must take
the SIE. Individuals do not have to be associated with a FINRA member firm to be eligible
to take the SIE. However, passing the SIE alone will not qualify an individual for registration
with FINRA. An individual who has passed the SIE will also need to pass the appropriate
specialized knowledge examination associated with the registration category pertaining to the
individual’s job function to be eligible for registration with FINRA.
Specialized knowledge examinations are available for the following representative categories:
Investment Company and Variable Contracts Products Representative (Series 6)
General Securities Representative (Series 7)
Direct Participation Programs Representative (Series 22)
Equity Trader (Series 57)
Investment Banking Representative (Series 79)
Private Securities Offerings Representative (Series 82)
Research Analyst (Series 86/87)
Operations Professional (Series 99)
Are There Any Prerequisites?
There are no prerequisite exams to pass before sitting for the SIE.
What Is the SIE Exam Like?
The SIE exam is a 1 hour and 45 minute (105 minutes), 75-question exam. Each exam will
contain 10 pretest questions, randomly distributed and unscored. Therefore, each exam
contains 75 scored and 10 unscored questions. The SIE is administered by FINRA and offered
as a computer-based exam at Prometric testing centers around the country.
What Score Must I Achieve to Pass?
All candidate test scores are placed on a common scale using a statistical adjustment process
known as equating. Equating scores to a common scale accounts for the slight variations in
difficulty that may exist among the different sets of exam items that candidates receive. This
allows for a fair comparison of scores and ensures that every candidate is held to the same
passing standard, regardless of which set of exam items they received. Currently, the score
needed to pass is 70%.
ix
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x Introduction
What Topics Will I See on the Exam?
The questions you will see on the SIE exam do not appear in any particular order. The
computer is programmed to select a new, random set of questions for each exam taker,
selecting questions according to the preset topic weighting of the exam. Each SIE candidate
will see the same number of questions on each topic, but a different mix of questions. The SIE
exam is divided into four sections.
Test Topic # of Questions % of Exam
Knowledge of Capital Markets 12 16%
Understanding Products and Their Risks 33 44%
Understanding Trading, Customer Accounts, 23 31%
and Prohibited Activities
Overview of the Regulatory Framework 7 9%
When you complete your exam, you will receive a printout that identifies your performance
in each area.
PREPARING FOR THE EXAM
How Is the LEM Organized?
The LEM consists of units and unit tests. In addition to the regular text, each unit has some
unique features designed to help with quick understanding of the material. When additional
emphasis is valuable to your comprehension, the following distinctions are made.
TAKE NOTE
Each Take Note provides special information designed to amplify important points.
TEST TOPIC ALERT
Each Test Topic Alert reviews content that is especially likely to appear on the exam.
EXAMPLE
Each Example provides practical applications that convert theory into understanding.
KNOWLEDGE CHECK
Knowledge Checks are a quick interactive review of what you just read. These ensure
you understand and retain the material.
Additional Study Resources
To accompany and supplement your LEM, your study package may contain additional study
resources. Be sure to spend some time on your homepage, view the best practices video, and
understand all that is available to help you study.
SecuritiesPro™ QBank—Coordinating with the LEM, the SecuritiesPro™ QBank includes
a large number of questions that are similar in style and content to those you will encounter
on the exam. You may use it to generate tests by a specific unit or combination of units. The
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