FINRA Updated SIE Exam Questions and Answers by saskia

The writer, or seller, of a call option receives the option premium and assumes the obligation to sell the underlying stock at the strike price if assigned. The maximum gain for the call writer is limited to the premium received. If the option expires worthless, the writer keeps that premium and has no further obligation. However, the loss exposure can be unlimited when the call is uncovered because there is no theoretical ceiling on how high the underlying stock price can rise. If the stock rises substantially above the strike price, the call writer may be required to deliver shares at the strike price while acquiring them in the market at a much higher price. Therefore, choice B is correct. Choice A would incorrectly limit the writer’s loss. Choice C describes neither a call writer nor a typical option seller. Choice D incorrectly states unlimited gain. The SIE outline requires knowledge of options, including calls, premiums, expiration dates, strike prices, covered versus uncovered positions, exercise, assignment, and long versus short strategies. The writer of a call is short the option and carries limited reward with potentially unlimited risk. Reference: Section 2.1.3 Options.

Churning is the prohibited practice of excessive trading in a customer’s account—often a discretionary account—primarily to generate commissions or other compensation for the broker rather than to meet the customer’s investment objectives. That makes B correct. The core elements regulators look for are: control over the account (discretion or de facto control), excessive frequency/volume relative to the customer’s profile, and an intent or effect of generating commissions at the customer’s expense. Churning violates ethical standards and anti-fraud principles because it places the broker’s interest ahead of the customer’s.

Choice A, kiting, typically refers to exploiting the time it takes for checks to clear by writing checks against insufficient funds—this is a banking/payment fraud concept, not excessive trading. Choice C, freeriding, refers to buying securities in a cash account and then selling them before paying for them, using sale proceeds to cover the purchase—this is linked to cash account payment violations and Regulation T concepts, not overtrading. Choice D, front running, involves trading ahead of a customer order or block trade (or ahead of research) to profit from an expected price move—again, not the same as excessive trading to generate commissions.

The SIE emphasizes prohibited practices in customer accounts, including excessive trading, conflicts of interest, and supervisory obligations. Recognizing churning is essential because it is a classic example of misconduct where the customer’s best interest is subordinated to compensation incentives.

The correct answer is C, A unit investment trust (UIT). Under the Investment Company Act of 1940, an investment company is defined as a company that pools investor funds to invest in securities portfolios. UITs are one of the three types of registered investment companies, along with mutual funds (open-end) and closed-end funds.

Step-by-step, a UIT is a fixed portfolio of securities that is professionally selected but not actively managed. Once created, the portfolio generally remains unchanged for the life of the trust. Investors purchase units representing an ownership interest in that portfolio.

Choice A, a variable annuity, is an insurance product, although it may invest in subaccounts that resemble mutual funds. Choice B, a private equity fund, is typically privately offered and exempt from registration under the Investment Company Act, so it is not considered a registered investment company. Choice D, a REIT, is a company that invests in real estate and is not classified as an investment company under the Act.

Thus, among the choices, only a UIT qualifies as a registered investment company, making Answer C correct.

The correct answer is C, $99,000. A breakpoint sale violation occurs when a registered representative fails to inform a customer about available sales charge discounts (breakpoints) for larger mutual fund purchases. These discounts reduce the front-end load as the investment amount increases.

Looking at the breakpoint schedule, a significant reduction occurs at $100,000, where the sales charge drops from 6% to 5%. If a customer invests $99,000, they fall just short of the breakpoint and pay a higher sales charge than necessary.

This raises a red flag because the RR should consider strategies such as:

Informing the client to invest slightly more (e.g., $100,000) to qualify for a lower sales charge

Using a Letter of Intent (LOI) to reach the breakpoint over time

Applying rights of accumulation if applicable

Choices A ($26,000) and B ($55,000) are not suspicious because they are not just below a major breakpoint threshold. Choice D ($101,000) already qualifies for the lower 5% charge.

Thus, $99,000 is most indicative of a potential breakpoint sale violation, making choice C correct.