FINRA Series 7 / SIE Exams SIE: Trading, Customer Accounts, and Prohibited Practices Flashcards

24 sample cards from the SIE: Trading, Customer Accounts, and Prohibited Practices deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. What manipulative practices are 'painting the tape' and 'matched orders'?

   Painting the tape is executing trades (often wash sales) to create the false appearance of active trading/volume; matched orders are prearranged buy and sell orders entered to simulate activity and manipulate price. Both are prohibited.

2. What is 'marking the close' (or marking the open)?

   Entering orders/trades near the end (or start) of the trading session specifically to manipulate the closing (or opening) price of a security. It is a prohibited form of market manipulation.

3. What is 'spoofing' as a manipulative trading practice?

   Placing orders with the intent to cancel them before execution to create a false impression of supply or demand and move the price, then trading on the other side. It is prohibited.

4. What is 'material nonpublic information' (MNPI) for insider-trading purposes?

   Information that a reasonable investor would consider important in making an investment decision and that has not yet been disseminated to the general public. Trading on MNPI is illegal.

5. Under the Insider Trading and Securities Fraud Enforcement Act of 1988, what are the civil penalties for insider trading?

   Civil penalties of up to three times (treble) the profit gained or loss avoided, plus possible criminal penalties (fines up to $5 million for individuals and imprisonment up to 20 years).

6. Who is a 'tipper' versus a 'tippee' in insider trading?

   A tipper is the insider who improperly conveys material nonpublic information; a tippee is the person who receives the tip. Both can be held liable if they trade or pass on the information.

7. What is 'churning' and why is it prohibited?

   Excessive trading in a customer's account by a rep primarily to generate commissions rather than to benefit the customer. It violates suitability/best-interest obligations and is prohibited.

8. What is 'front running'?

   A rep or firm entering an order for its own (or a related) account ahead of a large customer order that is expected to move the market price, in order to profit. It is a prohibited trading abuse.

9. What is 'unauthorized trading'?

   Executing transactions in a customer's account without the customer's prior authorization (and without written discretionary authority). It is prohibited.

10. What is a 'breakpoint sale' abuse in mutual funds?

    Recommending purchases just BELOW a breakpoint (sales-charge discount level) so the customer pays a higher sales charge and the rep earns more commission, instead of informing the customer of the available discount. It is prohibited.

11. What law established the framework requiring broker-dealers to maintain anti-money-laundering (AML) programs?

    The Bank Secrecy Act (BSA), as expanded by the USA PATRIOT Act. Firms must have a written AML compliance program.

12. What are the required components ('pillars') of a firm's AML program?

    (1) Designated AML compliance officer, (2) written internal policies/procedures and controls, (3) ongoing employee training, (4) independent testing/audit, and (5) risk-based Customer Due Diligence (CDD) including beneficial ownership identification.

13. When must a Currency Transaction Report (CTR) be filed, and with whom?

    For cash transactions exceeding $10,000 (in a single day, including aggregated transactions) — filed with FinCEN, generally within 15 days.

14. What is a Suspicious Activity Report (SAR) and a key rule about notifying the customer?

    A SAR is filed with FinCEN for suspicious transactions of $5,000 or more (filed within 30 days of detection). The firm must NOT notify ('tip off') the customer that a SAR has been filed.

15. What is OFAC and the SDN list, and what must firms do?

    The Office of Foreign Assets Control (OFAC, part of the U.S. Treasury) administers economic sanctions and maintains the Specially Designated Nationals (SDN) list. Firms must screen customers against it and block/reject prohibited transactions.

16. What are the three stages of money laundering?

    (1) Placement — introducing illicit cash into the financial system; (2) Layering — moving funds through complex transactions to obscure the source; (3) Integration — reintroducing the 'cleaned' funds as apparently legitimate assets.

17. Under FINRA rules, how are 'retail communication,' 'correspondence,' and 'institutional communication' defined by audience?

    Retail communication = distributed to more than 25 retail investors within 30 calendar days; Correspondence = to 25 or fewer retail investors within 30 days; Institutional communication = to institutional investors only (no retail).

18. Which type of communication generally requires principal approval BEFORE first use, and which requires only supervision/review?

    Retail communications generally require principal approval prior to first use (or filing). Correspondence and institutional communications require supervision and review procedures but not prior principal approval of each item.

19. Under Regulation Best Interest (Reg BI), what must a broker-dealer deliver to retail customers summarizing the relationship?

    Form CRS (Customer/Client Relationship Summary), disclosing services, fees, conflicts of interest, and the standard of conduct. Reg BI requires acting in the retail customer's best interest when making recommendations.

20. What is the general FINRA guideline (the '5% policy') regarding markups, markdowns, and commissions?

    It is a guideline (not a rigid rule) that markups, markdowns, and commissions should generally be fair and reasonable — around 5% — considering factors like security type, price, transaction size, and services rendered.

21. What are the general SEC/FINRA record retention requirements for most broker-dealer books and records?

    Most records must be kept for at least 3 years (first 2 years in an easily accessible place). Certain records — such as articles of incorporation, partnership agreements, and stock/bond ledgers — must be kept for the life of the firm; customer account records are kept longer (e.g., 6 years).

22. How often must broker-dealers send customer account statements?

    At least quarterly; statements must be sent monthly for any month in which there is account activity (such as a trade, deposit, or withdrawal).

23. When must a trade confirmation be delivered to a customer?

    At or before the completion of the transaction (i.e., by settlement date). The confirmation must disclose trade details such as security, quantity, price, capacity (agent/principal), commission/markup, and settlement date.

24. What is the Consolidated Audit Trail (CAT) and its purpose?

    A FINRA/SEC system that captures and stores comprehensive order and trade data (the lifecycle of orders) across U.S. equity and options markets, enabling regulators to efficiently track and reconstruct market activity and detect manipulation.

What this deck covers

SIE: Trading, Customer Accounts, and Prohibited Practices flashcards FAQ