Study guide
Section 3 of the official outline supplies about 31% of the SIE (23 of 75 scored questions). It covers how orders and settlement work, the mechanics of dividends and corporate actions, account types and registrations, anti-money laundering and recordkeeping duties, and the prohibited practices that generate many easy points for prepared candidates.
Orders, Quotes and Trade Capacity
A quote has a bid, the highest price buyers will pay (where customers sell), and an ask or offer, the lowest price sellers will accept (where customers buy); the difference is the spread. Market orders execute immediately at the best available price, so execution is certain but price is not. Limit orders set a maximum purchase price or minimum sale price, so price is protected but execution is not guaranteed. Buy limits are placed below the current market and sell limits above it. Stop orders become market orders once the stop price is reached: sell stops sit below the market to protect long positions, and buy stops sit above the market to protect short positions. A stop-limit order becomes a limit order when triggered and may never execute in a fast market. Day orders expire at the close; good-til-canceled orders remain working until executed or canceled. An order is discretionary if the representative chooses the asset, the action (buy or sell), or the amount; choosing only the time or price of execution is not discretion. Solicited means the rep recommended the trade; unsolicited means it was the customer's own idea, and tickets must be marked accordingly. Firms act in one of two capacities on a trade: as agent (broker), matching buyer and seller for a commission, or as principal (dealer), buying or selling from inventory for a markup or markdown; a firm may never charge both on a single trade. A long position profits when prices rise (bullish). Selling short means selling borrowed shares hoping to buy them back cheaper (bearish); potential losses are unlimited, and short sales must occur in a margin account.
Returns, Settlement and Corporate Actions
Total return combines income (interest and dividends) with realized and unrealized gains; return of capital is a nontaxable return of the investor's own money that reduces cost basis. Dividends may be paid in cash (taxable when received) or stock (not taxable at receipt, but per-share cost basis is adjusted). Four dividend dates matter: the board announces on the declaration date; the record date fixes which owners are paid; the payable date is when money goes out; and the ex-dividend date is the first day a buyer is no longer entitled to the dividend. Since U.S. settlement shortened to T+1 on May 28, 2024, the ex-date generally falls on the same day as the record date, so an investor must buy before the ex-date to receive the dividend, and the stock's price is reduced by the dividend that morning. Regular-way settlement is one business day after the trade date (T+1) for equities, corporate and municipal bonds, government securities and options; cash settlement is same-day. Most positions are held in book entry or street name rather than physical certificates. Current yield equals annual income divided by current market price, and a basis point is one one-hundredth of one percent. Common benchmarks: the S&P 500 (large-cap), the Dow Jones Industrial Average (30 large companies), the Russell 2000 (small-cap) and MSCI EAFE (developed international). Corporate actions: a 2-for-1 split doubles shares while halving the price and per-share cost basis, leaving total value unchanged; reverse splits do the opposite; buybacks shrink shares outstanding; tender and exchange offers invite holders to sell or swap shares; rights offerings let existing holders buy new shares; and shareholders who cannot attend meetings vote by proxy, with firms forwarding proxy materials to beneficial owners.
Account Types and Registrations
In a cash account the customer pays in full for every purchase. A margin account borrows from the firm: Regulation T sets the initial requirement at 50% of the purchase price, FINRA requires minimum equity of $2,000, and maintenance margin is 25% of long market value. Margin customers must receive a margin disclosure statement and sign a margin agreement hypothecating (pledging) their securities as collateral. Options accounts require delivery of the ODD and approval by a designated principal. Discretionary accounts require the customer's prior written authorization and the firm's acceptance, with every discretionary order marked as such. Fee-based accounts charge a percentage of assets, which suits active traders but not buy-and-hold investors; parking an inactive customer in one is reverse churning. Registrations: individual accounts; joint tenants with right of survivorship (JTWROS), where a deceased owner's interest passes to the survivors, versus tenants in common, where it passes to the estate; corporate accounts, which require a corporate resolution naming authorized traders; trust accounts governed by the trust document (revocable or irrevocable); and custodial UTMA accounts, with one custodian managing an irrevocable gift for one minor under the minor's Social Security number until the age of majority. Retirement accounts: traditional IRA contributions may be tax-deductible, grow tax-deferred, are taxed on withdrawal, incur a 10% penalty before age 59 1/2 (with exceptions), and require minimum distributions starting at age 73. Roth IRA contributions are made after-tax, qualified withdrawals are tax-free, there are no lifetime RMDs, and income limits restrict eligibility. For 2026 the IRA contribution limit is $7,500, plus a $1,100 catch-up for investors 50 and older. Employer plans such as 401(k)s and 529 education accounts round out the account menu.
Anti-Money Laundering, Books and Records, and Privacy
Money laundering disguises illegally obtained funds in three stages: placement (cash enters the financial system), layering (funds are moved through transactions to obscure the trail), and integration (the money re-emerges looking legitimate). Structuring, breaking cash deposits into amounts below reporting thresholds, is itself a crime. Every firm must maintain a written AML compliance program with a designated AML compliance officer, independent annual testing, and employee training, and under the USA PATRIOT Act a customer identification program (CIP) to verify each customer's identity. A Currency Transaction Report (CTR) is filed with FinCEN for cash transactions over $10,000 in a single day. A Suspicious Activity Report (SAR) is filed within 30 days for suspicious transactions involving $5,000 or more, and telling the customer a SAR was filed is prohibited. Firms must screen customers against OFAC's Specially Designated Nationals (SDN) list and block accounts of listed parties. Recordkeeping: blotters and general ledgers are kept six years; many other records are kept three years, with the most recent two years readily accessible. Customers receive trade confirmations at or before completion of the transaction (settlement), showing capacity and compensation, and account statements at least quarterly, or monthly when there is activity. Holding customer mail requires written instructions and time limits. Every firm maintains a business continuity plan (BCP) and discloses to customers how to reach the firm in an emergency. Under Regulation S-P, firms deliver initial and annual privacy notices, give customers the right to opt out of sharing nonpublic personal information with nonaffiliated third parties, and must safeguard customer records against unauthorized access.
Communications, Regulation Best Interest and Prohibited Activities
FINRA Rule 2210 classifies communications: correspondence goes to 25 or fewer retail investors within 30 days and is subject to review; retail communications reach more than 25 retail investors and generally require principal pre-approval; institutional communications go only to institutions. Telemarketing calls are permitted only between 8 a.m. and 9 p.m. in the called party's time zone, and firms must honor both firm-specific and national do-not-call lists. Know-your-customer rules require learning the essential facts about every customer, and Regulation Best Interest requires a broker-dealer making a recommendation to a retail customer to act in that customer's best interest without placing the firm's interests first, supported by delivering Form CRS, the relationship summary. Market manipulation includes spreading rumors, pump-and-dump schemes, marking the open or close (trading to paint the price at the bell), backing away (failing to honor a firm quote), front running (trading ahead of a known customer block order), excessive trading (churning), and freeriding (buying then selling without ever paying, penalized by a 90-day cash-up-front freeze). Insider trading is trading on material nonpublic information; both tippers and tippees are liable, with civil penalties up to three times the profit gained or loss avoided and criminal penalties up to $5 million and 20 years in prison for individuals, and up to $25 million for firms. Restricted persons, including member firms, their associated persons and immediate family, may not purchase equity IPOs. Also prohibited: borrowing from or lending to customers outside narrow firm-approved exceptions, sharing in customer accounts except proportionately with approval, guaranteeing customers against loss, paying commissions to unregistered persons, obtaining signatures of convenience, and falsifying records. If financial exploitation of a senior or other specified adult is suspected, firms may place a temporary hold on disbursements and should contact the account's trusted contact person.
Key terms
- Limit order
- — An order specifying a maximum purchase price or minimum sale price, guaranteeing price but not execution.
- Stop order
- — An order that becomes a market order once the stop price is reached, commonly used to protect existing positions.
- Ex-dividend date
- — The first day a stock buyer is not entitled to a declared dividend, generally the same day as the record date under T+1 settlement.
- Regular-way settlement
- — Standard settlement one business day after the trade date (T+1) for equities, corporate and municipal bonds, government securities and options.
- Regulation T
- — The Federal Reserve rule setting the initial margin requirement, currently 50% of a securities purchase.
- JTWROS
- — A joint account registration in which a deceased owner's interest passes automatically to the surviving owners.
- UTMA account
- — A custodial account holding irrevocable gifts managed by one custodian for one minor until the age of majority.
- Suspicious Activity Report (SAR)
- — A confidential report filed with FinCEN within 30 days of detecting suspicious activity involving $5,000 or more.
- Currency Transaction Report (CTR)
- — A report filed with FinCEN for cash transactions exceeding $10,000 in a single day.
- Regulation Best Interest
- — The SEC rule requiring broker-dealers to act in a retail customer's best interest when making recommendations, supported by Form CRS.
- Front running
- — Trading for a firm or personal account ahead of a known customer block order to profit from the expected price move.
- Freeriding
- — Buying and then selling a security without ever paying for it, penalized by a 90-day cash-up-front account freeze.
Exam tips
- Order placement map: buy limits and sell stops go below the current market; sell limits and buy stops go above it. If the question puts an order on the wrong side, that is the trap.
- Under T+1 the ex-dividend date generally equals the record date, so a buyer must purchase before the ex-date to get the dividend; buying on the ex-date is too late.
- Capacity language: 'from its own inventory' means principal and a markup or markdown; matching a buyer and seller means agent and a commission; a firm may never charge both on one trade.
- CTR vs. SAR: the CTR is objective (cash over $10,000 in a day) while the SAR is judgment-based ($5,000 or more and suspicious), and SARs are strictly confidential; telling the customer is itself a violation.
- Discretion means choosing the asset, the action, or the amount, and requires prior written authorization; picking only the time or price of execution is not discretion and needs no written authority.