PRODUCTS & THEIR RISKS: SIE EXAM CHEAT SHEET

> Exam weight (sourced from FINRA 2025 outline): Section 2 = 44% of scored items = 33 out of 75 questions. > This is by far the heaviest section on the SIE — nearly half the exam. Study this section above all others.

Products sub-categories covered (per FINRA 2025 SIE outline, Section 2.1): Equity Securities · Debt Instruments · Options · Packaged Products · Municipal Fund Securities · Direct Participation Programs (DPPs) · REITs · Hedge Funds · Exchange-Traded Products (ETPs)

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High-Yield Cues → Answers

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PRODUCTS: Type, Features & Risks

Equities (Stocks) — SIE outline Section 2.1.1

The SIE outline requires knowledge of equity types and governing rules:

• Common stock, preferred stock, rights, warrants, ADRs — all tested (SIE outline 2.1.1)

• SEC Rule 144 — governs control and restrictions on restricted/control securities (cited in SIE outline)

• SEC Rule 3a11-1 — defines "equity security" under the Exchange Act (cited in SIE outline)

• SEC Rule 10b-18 — governs issuer share buybacks (cited in SIE outline)

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Preferred Stock Risks:

• Call risk: Issuer redeems if rates fall → investor loses upside

• Credit risk: If issuer struggles, preferred may be suspended/cut

• Interest rate risk: Price falls if rates rise

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Debt Securities (Bonds & Notes) — SIE outline Section 2.1.2

Debt types tested on the SIE:

• Treasury securities (bills, notes, bonds, receipts)

• Agency securities (asset-backed, mortgage-backed)

• Corporate bonds

• Municipal securities (GO bonds, revenue bonds, special types)

• Money market instruments (CDs, bankers' acceptance, commercial paper)

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Bond Risk Hierarchy (all named risk types in the SIE outline, Section 2.2):

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Key Formula: `` Bond Price ↑ when rates ↓ (inverse relationship) Duration = approximate % price change for 1% rate move ``

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Municipal Bonds (Munis) — SIE outline Section 2.1.2

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MSRB rules for muni primary offerings (cited in SIE outline):

• MSRB Rule G-11 — Primary Offering Practices

• MSRB Rule G-32 — Disclosures in Connection with Primary Offerings

• MSRB Rule G-34 — CUSIP Numbers, New Issue and Market Information Requirements

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Investment Companies (Mutual Funds & ETFs) — SIE outline Section 2.1.4

Statutory authority: Investment Company Act of 1940 (Section 3(a) defines "Investment Company"; Section 4 classifies types; Section 5 subclassifies management companies)

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Mutual Fund Share Classes:

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FINRA Rule 2342 — "Breakpoint" Sales: Prohibits selling below a breakpoint to deny customer the volume discount. Tested on the SIE.

ETF vs. Mutual Fund (SIE outline Section 2.1.9):

• ETFs (Exchange-Traded Funds) and ETNs (Exchange-Traded Notes) are the two types of ETPs tested

• ETFs trade intraday (not locked to 4 PM NAV)

• Lower expense ratios typically; active vs. passive management distinction tested

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Direct Participation Programs (DPPs) — SIE outline Section 2.1.6

Governed by FINRA Rule 2310 (cited in SIE outline):

• Types: Limited partnerships, tenants in common (TIC)

• Pass-through tax treatment — income/losses flow directly to investors

• Unlisted — not traded on exchanges; generally illiquid

• SIE tests DPP structure concepts, NOT detailed tax math

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REITs (Real Estate Investment Trusts) — SIE outline Section 2.1.7

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• Tax advantage: REITs distribute at least 90% of taxable income to shareholders; avoid double taxation at corporate level (per IRC Section 856)

• Real estate equity or debt investments

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Options — SIE outline Section 2.1.3

FINRA Rule 2360 (Options) and CBOE Rule 1.1 (Definitions) are the key rules cited:

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Cue	Answer
Customer loses money on bad advice → SIPC?	NO. SIPC only covers firm failure, NOT bad advice/market losses (authority: SIPA 1970)
IA must register where?	SEC if $110M+ AUM; state if <$100M; either if $100M–$110M
Broker-dealer acts as principal → earns?	Markup (sell) or markdown (buy), NOT commission
T+1 settlement means?	Trade settles 1 business day after trade date (SEC Rule 15c6-1)
MSRB enforces its own rules?	NO — FINRA enforces MSRB rules for B-Ds; banks enforce for banks
SIPC covers commodity futures?	NO (excluded under SIPA 1970)
Regulation T requirement?	Investor deposits minimum 50% of purchase price (FINRA Rule 4210 sets maintenance minimums)
Registered rep leaves firm → registration?	Becomes inactive until joining another FINRA member
12b-1 fee authority?	Investment Company Act of 1940, Rule 12b-1 — Distribution of Shares by Registered Open-end Management Investment Company
Feature	Details
Ownership	Represents fractional ownership in corporation
Dividends	May be paid; NOT guaranteed; subject to board declaration
Voting rights	Common: yes; Preferred: typically no
Liquidation priority	Common: last; Preferred: before common, after debt
Risk type	Market risk (price fluctuation); company-specific risk
Feature	Details
Par value	Typically $1,000; amount repaid at maturity
Coupon/YTM	Fixed interest rate; YTM = all future cash flows discounted
Duration	Measure of interest rate sensitivity; longer duration = higher rate risk
Maturity	Short: <5 yr; Intermediate: 5–10 yr; Long: >10 yr
Risk Type	Definition	Mitigation
Credit risk	Issuer defaults	Credit rating; diversification
Interest rate risk	Rates ↑ → bond price ↓	Shorter duration; laddering
Reinvestment risk	Rates ↓ → coupon reinvested at lower rate	Buy and hold; laddering
Inflation/purchasing power risk	Purchasing power erodes	TIPS (inflation-protected)
Call risk	Issuer redeems early if rates ↓	Avoid callable bonds in low-rate environment
Liquidity risk	Hard to sell quickly	Investment-grade bonds > high-yield
Prepayment risk	Mortgage-backed borrowers prepay early	Agency MBS with prepayment protection
Currency risk	Foreign bond; exchange rate moves against investor	Hedge or use domestic equivalents
Political risk	Government action destabilizes investment	Diversification across geographies
Capital risk	Loss of principal	Diversification; credit quality
Market/systematic risk	Broad market declines	Diversification cannot eliminate this
Non-systematic risk	Company or sector-specific	Diversification CAN reduce this
Feature	Details
Issuer	State, county, or local government; public authority
Tax treatment	Interest is federally tax-exempt (and often state tax-exempt if issued in home state)
Types	GO (General Obligation): backed by full faith & credit; Revenue: backed by specific revenue stream
Risks	Credit, reinvestment, inflation, interest rate, liquidity
Suitable for	High-tax-bracket investors; NOT appropriate for IRAs (no additional tax benefit)
Feature	Details
Structure	Pool of investor capital; professionally managed
NAV	Net Asset Value = (Assets − Liabilities) ÷ Shares Outstanding
Pricing	Mutual funds: priced once daily at 4 PM ET; ETFs: trade continuously
12b-1 fee	Distribution fee authorized by Investment Company Act Rule 12b-1; paid annually from fund assets
Liquidity	Mutual funds: redeemable daily at NAV; ETFs: sell on exchange
Class	Front Load	Back Load	12b-1 fee	Use Case
A	HIGH	None	Moderate	Lump-sum investors; breakpoint discounts available
B	None	HIGH (declining)	HIGH	Short-term investors (generally avoid)
C	None	Low	HIGH	<1 year holding period
Institutional	None	None	None	High-net-worth/institutional
Type	Feature
Private	Not publicly traded
Registered, non-listed	SEC-registered but not exchange-traded
Listed	Traded on exchanges like stocks
Concept	Details
Puts	Right to sell at strike price; buyer profits if price falls
Calls	Right to buy at strike price; buyer profits if price rises
Premium	Price paid for the option contract
Strike price	Price at which the option can be exercised
Expiration date	Date after which the option is worthless
OCC	Options Clearing Corporation (OCC) clears all listed options
ODD	Options Disclosure Document — required disclosure before trading options
American vs. European	American: can exercise any time before expiry; European: only at expiry
In-the-money	Option has intrinsic value
Covered vs. uncovered	Covered: writer owns underlying; uncovered (naked): greater risk

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RISK MITIGATION STRATEGIES (SIE outline Section 2.2)

The SIE outline explicitly lists these mitigation strategies:

• Diversification — reduces non-systematic risk

• Portfolio rebalancing — realigns asset allocation over time

• Hedging — using options or inverse positions to offset risk

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Sources

All rule citations in this lesson are grounded in primary sources (verified 2026-06-29):

• [FINRA SIE Content Outline 2025](https://www.finra.org/sites/default/files/2025-10/SIE_Content_Outline.pdf) — Section 2 (44% / 33 questions); FINRA Rules 2261, 2262, 2310, 2330, 2342, 2360 (page 9); MSRB Rules D-12, G-17, G-30, G-45; CBOE Rule 1.1; Investment Company Act of 1940 Sections 3(a), 4, 5, Rule 12b-1; Exchange Act Rule 10b-18; SEC Rule 144; SEC Rule 3a11-1 (page 9)