FINRA launched the Securities Industry Essentials (SIE) examination late last year. The regulator’s intent was to position the SIE exam as an introduction to the securities industry. The exam is designed to assess a candidate’s knowledge of the fundamentals of the securities industry. Test content focuses on products and their risks, the process of raising capital, the structure of securities markets, and the role of various regulatory agencies.
By design, the intent of the SIE exam is to focus on the basics. Why just the basics? Remember, passing the SIE exam alone does not qualify an individual for registration with a FINRA member firm. To become registered, successful SIE candidates need to gain sponsorship with a member firm and then pass one or more “top-off” exams. These top-off exams are narrower in focus and cover specific products and their regulation in far greater depth. Additionally, the top-off exams assume the candidate understands the basics of a given product and are designed to be more focused on suitability issues.
In 2018 alone, Kaplan had more than 18,000 students purchase SIE exam prep materials. Enough of those students have now sat for the exam that we can learn more about the most common challenges they’ve encountered. In this article, we will examine some of those challenges and offer some helpful tips on how to remedy them.
The SIE exam is, above all else, a reading comprehension exercise. There are very few math computations on the test. Exam writers expect students to be comfortable with the specialized language of finance, as well as common acronyms. Students are strongly encouraged to review the glossary found in the back of the Kaplan License Exam Manual (LEM). The glossary is a great first step in demystifying some of the industry-specific language students may encounter on their exams.
We also strongly recommend students complete the 75-question SIE Practice Test provided by FINRA. Spending the time to review the practice test will pay dividends by exposing SIE exam candidates to a test created by the same writers who author the real exam. Remember, FINRA exams are written by committee and, unlike other standardized tests such as the SAT, the language and sentence structure may vary between individual questions. Some questions may contain legal jargon contained within various FINRA rules, while others may employ more of a conversational tone. The point of taking FINRA’s SIE Practice Test is to gain exposure to several different writing styles and “spins” on topics prior to taking your actual test.
If you’ve spent some time with the study material, you’ll notice some words have multiple meanings. For example the word principal could refer to:
A) a bond’s face value,
B) a person in a managerial position at a brokerage firm, or
C) the capacity of a firm on a given trade.
Students may encounter this “one word has several meanings” quandary on the SIE exam as well. For example, exam writers could use the word covered in several different contexts:
1) Covered is a situation in which the writer of an option has the underlying deliverable. For example:
2) The word covered may also be used as slang to mean a protected or hedged position. This is not strict financial terminology but more akin to, “Don’t worry, I’ve got this position covered.”
In this case, a put option covers or protects a long position since the put locks in a minimum sales price on a potential closing out (sale) of the client’s long position. A call option covers or protects a short position since the call locks in a maximum purchase price on a potential closing out (buying back) of the client’s short position.
3) The third use of the term covered involves the closing out an options position. Remember, buyers create their initial position with an opening purchase, while writers create their initial position with an opening sale. In this context:
As noted in Kaplan’s LEM, the terms options writers, options sellers, and going short a contract and option could all be used to express the same concept. Conversely options owners, options buyers, and going long a contract reference the same ideas. Remember, the SIE exam is written by committee, and the writers may employ their own favored terminology.
Remember, the SIE exam focuses on reading comprehension. Students can expect very few calculations on their exam. Many students report only seeing one or two calculation items. Here are the three formulas that are the most likely to be tested:
*Note: Remember to multiply the quarterly dividend provided in the question by 4.
Students can expect that approximately 25% of their exam questions will move beyond mere definitions and tie together various concepts from different sections of Kaplan’s LEM and/or address suitability issues with a given product. In these tough questions, students are expected to extend their factual knowledge of a product or rule into a conceptual understanding. Here are a few examples of these more challenging questions:
We spend some time in the LEM going through the FRB tools and detail the concepts of FRB tightening (raising rates) and loosening (lowering rates). The exam could employ slang terminology in this area. Tightening becomes the FRB being hawkish, and loosening is referenced as the FRB being dovish.
If the FRB is hawkish, investors should shorten their maturities. Why?
Exam takers must tie together three facts to get to the right answer.
1) Hawkish means rising rates.
2) Rising rates translates into lower future bond prices based on the inverse relationship between yield and price.
3) Short term bonds will be hurt less by rising rates due to their lesser relative price volatility when compared to long term issues. Remember, maturity magnifies the price move.
Dovish is the opposite expectation and implies potentially lower future interest rates and higher future bond prices. If this is the expectation, bond investors should lengthen maturities to take advantage of the anticipated upward positive price movement in bonds.
A second example of the extension beyond definitions could be the exam writer providing a brief description of the client and then asking a question about the appropriate debt security recommendation. There will be hints in the question such as the person’s age, job, income, risk tolerance, investment horizon, and so on. To get these questions correct, you need to have a firm grasp of the relative safety profile and tax status of each debt instrument.
For example, high earners should be steered toward municipals because of the tax-free status of these issues’ coupons. Safety seekers should consider treasuries due to these issues’ default-free status. While middle-of-the-road investors (middle-aged, average incomes) might be best served with an investment in a high grade corporate bond issue. If you encounter an investor who appears to want equity exposure as well, go with the convertible corporate bond since this will provide indirect appreciation potential. If the question leads with a client’s near-immediate need for funds, pick the shortest maturity conservative investment.
After identifying nine series exams with common content (6, 7, 22, 57, 79, 82, 86/87, 99), FINRA decided to restructure their licensing process. The common content is now tested in the new Securities Industry Essentials (SIE) exam. Download this free guide to learn more about how the new securities licensing process works, the rationale for the change, SIE tested exam content, and how it could change hiring and recruiting practices.