Securities Industry Essentials (SIE) Exam Prep
Document 2026/2027 | FINRA & SEC
Foundations of the Securities Industry | 75
Verified Questions with Detailed Rationales
SECTION 1: KNOWLEDGE OF CAPITAL MARKETS
(Questions 1-15)
Q1. Which of the following best describes the role of the primary
market?
A) Investors trade existing securities among themselves.
B) Securities are issued for the first time to raise capital for the issuer.
C) Only government bonds are traded.
D) Transactions occur exclusively through auction markets.
Correct Answer: B
Rationale: The primary market is where securities are initially issued by
companies or governments to raise capital through Initial Public Offerings
(IPOs) or follow-on offerings. Proceeds from the sale go directly to the issuing
entity. Secondary markets (A) involve trading existing securities among
investors, and the issuer does not receive proceeds from those transactions .
Q2. Which federal law primarily regulates the secondary trading of
securities?
A) Securities Act of 1933
B) Securities Exchange Act of 1934
C) Investment Company Act of 1940
D) Dodd-Frank Wall Street Reform Act
Correct Answer: B
Rationale: The Securities Exchange Act of 1934 created the Securities and
Exchange Commission (SEC) and governs the secondary trading of
securities, including broker-dealer regulation, reporting requirements for
,public companies, and anti-fraud provisions. The 1933 Act (A) covers initial
public offerings. The 1940 Act (C) regulates investment companies such as
mutual funds .
Q3. A broker-dealer that acts as a middleman in a trade, buying and
selling from its own inventory, is acting as a(n):
A) Agent
B) Principal
C) Market maker
D) Underwriter
Correct Answer: B
Rationale: When a broker-dealer trades from its own account (inventory), it
acts as a principal, taking ownership of the securities and assuming the risk
of price fluctuation. A principal makes money on the spread between bid and
ask prices. When a broker-dealer facilitates a trade between two customers
without taking ownership, it acts as an agent and earns a commission .
Q4. The Securities and Exchange Commission (SEC) has all the
following powers EXCEPT:
A) Registering new securities issues.
B) Enforcing securities laws against violators.
C) Setting interest rates for the economy.
D) Overseeing public company financial reporting.
Correct Answer: C
Rationale: The SEC regulates securities markets and enforces federal
securities laws, including registering new securities (A), investigating and
prosecuting violators (B), and overseeing financial reporting by public
companies (D). Interest rates are set by the Federal Reserve Board (the
Fed), not the SEC. The SEC is an independent agency of the U.S.
government .
Q5. FINRA is best described as a:
A) Federal government agency under the Department of Treasury.
B) Self-Regulatory Organization (SRO) that oversees broker-dealers.
C) Division of the SEC that enforces insider trading laws.
D) Banking industry regulator equivalent to the FDIC.
Correct Answer: B
Rationale: FINRA (Financial Industry Regulatory Authority) is a Self-
Regulatory Organization (SRO) that writes and enforces rules governing
, broker-dealers and their registered representatives. FINRA is not a
government agency; it operates under SEC oversight. Its primary mission is
investor protection and market integrity .
Q6. Rule 144 under the Securities Act of 1933 governs:
A) The resale of restricted and control securities.
B) The registration of investment companies.
C) The margin requirements for stocks.
D) The disclosure requirements for proxy statements.
Correct Answer: A
Rationale: Rule 144 provides a safe harbor for the resale of restricted
securities (acquired in unregistered private placements) and control
securities (held by affiliates such as officers, directors, or large
shareholders). It establishes holding periods, volume limitations, and filing
requirements to ensure orderly trading of these securities. The holding
period is 6 months for reporting companies and 12 months for non-reporting
companies .
Q7. An SEC Rule 506(b) offering may raise capital from:
A) Only accredited investors.
B) An unlimited number of accredited investors and up to 35 non-accredited
investors.
C) Only non-accredited investors.
D) Only foreign investors.
Correct Answer: B
Rationale: Rule 506(b) of Regulation D allows an unlimited number
of accredited investors and up to 35 non-accredited investors to
participate in a private placement. However, if any non-accredited investors
are included, the issuer must provide extensive disclosure documents similar
to a registered offering. General solicitation and advertising are prohibited
under Rule 506(b) .
Q8. The secondary market includes all of the following EXCEPT:
A) New York Stock Exchange (NYSE)
B) Nasdaq
C) A private placement of shares to a hedge fund
D) An institutional trade of existing shares
Correct Answer: C
Document 2026/2027 | FINRA & SEC
Foundations of the Securities Industry | 75
Verified Questions with Detailed Rationales
SECTION 1: KNOWLEDGE OF CAPITAL MARKETS
(Questions 1-15)
Q1. Which of the following best describes the role of the primary
market?
A) Investors trade existing securities among themselves.
B) Securities are issued for the first time to raise capital for the issuer.
C) Only government bonds are traded.
D) Transactions occur exclusively through auction markets.
Correct Answer: B
Rationale: The primary market is where securities are initially issued by
companies or governments to raise capital through Initial Public Offerings
(IPOs) or follow-on offerings. Proceeds from the sale go directly to the issuing
entity. Secondary markets (A) involve trading existing securities among
investors, and the issuer does not receive proceeds from those transactions .
Q2. Which federal law primarily regulates the secondary trading of
securities?
A) Securities Act of 1933
B) Securities Exchange Act of 1934
C) Investment Company Act of 1940
D) Dodd-Frank Wall Street Reform Act
Correct Answer: B
Rationale: The Securities Exchange Act of 1934 created the Securities and
Exchange Commission (SEC) and governs the secondary trading of
securities, including broker-dealer regulation, reporting requirements for
,public companies, and anti-fraud provisions. The 1933 Act (A) covers initial
public offerings. The 1940 Act (C) regulates investment companies such as
mutual funds .
Q3. A broker-dealer that acts as a middleman in a trade, buying and
selling from its own inventory, is acting as a(n):
A) Agent
B) Principal
C) Market maker
D) Underwriter
Correct Answer: B
Rationale: When a broker-dealer trades from its own account (inventory), it
acts as a principal, taking ownership of the securities and assuming the risk
of price fluctuation. A principal makes money on the spread between bid and
ask prices. When a broker-dealer facilitates a trade between two customers
without taking ownership, it acts as an agent and earns a commission .
Q4. The Securities and Exchange Commission (SEC) has all the
following powers EXCEPT:
A) Registering new securities issues.
B) Enforcing securities laws against violators.
C) Setting interest rates for the economy.
D) Overseeing public company financial reporting.
Correct Answer: C
Rationale: The SEC regulates securities markets and enforces federal
securities laws, including registering new securities (A), investigating and
prosecuting violators (B), and overseeing financial reporting by public
companies (D). Interest rates are set by the Federal Reserve Board (the
Fed), not the SEC. The SEC is an independent agency of the U.S.
government .
Q5. FINRA is best described as a:
A) Federal government agency under the Department of Treasury.
B) Self-Regulatory Organization (SRO) that oversees broker-dealers.
C) Division of the SEC that enforces insider trading laws.
D) Banking industry regulator equivalent to the FDIC.
Correct Answer: B
Rationale: FINRA (Financial Industry Regulatory Authority) is a Self-
Regulatory Organization (SRO) that writes and enforces rules governing
, broker-dealers and their registered representatives. FINRA is not a
government agency; it operates under SEC oversight. Its primary mission is
investor protection and market integrity .
Q6. Rule 144 under the Securities Act of 1933 governs:
A) The resale of restricted and control securities.
B) The registration of investment companies.
C) The margin requirements for stocks.
D) The disclosure requirements for proxy statements.
Correct Answer: A
Rationale: Rule 144 provides a safe harbor for the resale of restricted
securities (acquired in unregistered private placements) and control
securities (held by affiliates such as officers, directors, or large
shareholders). It establishes holding periods, volume limitations, and filing
requirements to ensure orderly trading of these securities. The holding
period is 6 months for reporting companies and 12 months for non-reporting
companies .
Q7. An SEC Rule 506(b) offering may raise capital from:
A) Only accredited investors.
B) An unlimited number of accredited investors and up to 35 non-accredited
investors.
C) Only non-accredited investors.
D) Only foreign investors.
Correct Answer: B
Rationale: Rule 506(b) of Regulation D allows an unlimited number
of accredited investors and up to 35 non-accredited investors to
participate in a private placement. However, if any non-accredited investors
are included, the issuer must provide extensive disclosure documents similar
to a registered offering. General solicitation and advertising are prohibited
under Rule 506(b) .
Q8. The secondary market includes all of the following EXCEPT:
A) New York Stock Exchange (NYSE)
B) Nasdaq
C) A private placement of shares to a hedge fund
D) An institutional trade of existing shares
Correct Answer: C
