SIE Practice Exam 9

Answer: Custodian

Safekeeping a client's securities, settling its trades, and collecting its dividends and interest are the classic functions of a custodian — typically a bank or broker-dealer serving institutions such as pension plans and mutual funds. Keep the neighboring roles straight: a transfer agent serves the issuer by maintaining ownership records and handling certificates; a trustee administers a bond issue under a trust indenture on behalf of the bondholders; and a clearing corporation like NSCC nets settlement obligations between broker-dealers industry-wide rather than serving a single investor.

The Trap: custodian-vs-transfer-agent-vs-trustee

• Trustee under a bond indenture: Misconception: custodian vs. trustee — an indenture trustee administers a bond issue and acts for the bondholders as a class under the trust indenture, a different role from safekeeping a client's assets.
• Transfer agent: Misconception: transfer agent vs. custodian — a transfer agent works for the ISSUER, maintaining shareholder records and handling certificates, not safekeeping one investor's portfolio.
• Clearing corporation, such as the NSCC: Misconception: confusing investor-level safekeeping with the industry netting utility — a clearing corporation nets and settles obligations BETWEEN broker-dealers; it does not serve one pension plan directly.

Verified against: transfer agent vs. custodian vs. trustee misconception pair)

Answer: The clearing (carrying) firm to which the introducing broker-dealer routes its business.

In a fully disclosed introducing/clearing arrangement, labor is divided: the introducing firm handles the customer relationship (opens accounts, takes orders), while the clearing or carrying firm holds the cash and securities, settles the trades, and maintains the books — which is why SIPC and account-statement questions hinge on identifying the carrying firm (A). Option B is the core trap: 'my broker holds my stock' feels right but is wrong whenever the broker is an introducing firm. Option C confuses the transfer agent (the issuer's record-keeper and certificate processor) with a custodian of customer assets. Option D misunderstands SIPC, which is liquidation insurance for custody at a failed broker-dealer — not a depository. A memorable frame: the introducing firm takes your order; the clearing firm owns the kitchen and the vault.

The Trap: Assuming the introducing firm that opened the account holds the customer's assets (the clearing/carrying firm does)

• The introducing broker-dealer, because it opened the account and services the customer.: Misconception: 'introducing BD vs. clearing/carrying BD' — the introducing firm never holds customer assets; it introduces the business to a carrying firm that has custody. Think restaurant analogy: the introducing firm takes the order; the clearing firm has the kitchen and the vault.
• Each issuer's transfer agent, which safeguards all shareholders' cash and securities.: Misconception: 'transfer agent vs. custodian' — a transfer agent maintains the issuer's ownership records, issues/cancels certificates, and pays dividends; it does not hold custody of brokerage customers' cash and securities.
• SIPC, which takes custody of customer assets at all member firms.: Misconception: treating SIPC as an ongoing custodian — SIPC holds nothing day-to-day; it is a backstop that activates only when a member broker-dealer fails and is liquidated.

Verified against: transfer agent misconception pairs)

Answer: "The rate action is monetary policy carried out by the Federal Reserve, and the tax cut is fiscal policy enacted by Congress and the President."

Monetary policy is conducted by the Federal Reserve through the FOMC — managing the money supply and credit conditions with tools such as open market operations, the discount rate, and its target for the federal funds rate (a rate determined in the market between banks, which the FOMC targets rather than sets directly). Fiscal policy is conducted by Congress and the President through taxation, government spending, and the federal budget — the Keynesian toolset. An easy way to keep them straight: the Fed has no power to tax, and Congress does not conduct interest-rate policy. Option B flips the two; option C wrongly classifies policy by its stimulative goal rather than by who wields the tool; option D gives the Fed a taxing power it does not have.

The Trap: Flipping monetary policy (Federal Reserve — money supply and rates) with fiscal policy (Congress and the President — taxes and spending)

• "The Federal Reserve carried out both actions, because it can adjust tax rates during a recession.": The "Fed taxes" misconception: the Federal Reserve has no authority over taxation — taxing and spending powers belong to Congress and the President.
• "The rate action is fiscal policy, and the tax cut is monetary policy.": This is exactly backward: cutting the federal funds rate target is monetary policy conducted by the Fed, and cutting taxes is fiscal policy conducted by Congress and the President.
• "Both are monetary policy, because any government action intended to stimulate the economy is monetary policy.": Conflates the GOAL (stimulus) with the ACTOR: policies are classified by who conducts them and with what tools, not by their purpose — tax changes are fiscal regardless of intent.

Verified against: Federal Reserve Act (FOMC monetary policy) vs. Congressional/Executive fiscal policy (taxation and spending)

Answer: It is a combined (split) offering: GreenGrid receives the proceeds of the 4 million new shares, and the venture investors receive the proceeds of their 3 million shares

The universal discriminator is "who gets the check?" The 4 million newly issued shares are a follow-on (additional primary) component: the issuer receives those proceeds, and the new shares dilute existing holders. The 3 million shares sold by the venture investors are a secondary offering component: the proceeds go to the selling shareholders, no new shares are created, and there is no dilution from that portion. Together they form a combined (split) offering. Do not let the word "secondary" mislead you — a secondary offering is part of a registered distribution under the Securities Act of 1933, complete with a prospectus, whereas the secondary market is ordinary investor-to-investor trading (on an exchange or over the counter). The deal is partly dilutive (from the new shares) even though insiders are selling alongside.

The Trap: Follow-on vs secondary offering vs secondary market — misassigning who receives the proceeds and whether the deal dilutes

• GreenGrid receives the proceeds from all 7 million shares: Treats the whole deal as a follow-on; proceeds from the 3 million existing shares go to the selling shareholders, not the issuer.
• The offering causes no dilution because existing shareholders are participating: Misses that the 4 million newly issued shares increase the share count and dilute existing holders; only the secondary component (existing shares changing hands) is non-dilutive.
• Because existing shares are being sold, the transaction occurs in the secondary market and no prospectus is required: Confuses a secondary OFFERING with the secondary MARKET: sales by selling shareholders in an underwritten deal still run through the 1933 Act registration and prospectus process.

Verified against: Securities Act of 1933 combined (split) offering framework — primary/follow-on and secondary offering components

Answer: The company receives the proceeds from the 2 million new shares, while the founding family receives the proceeds from its 1 million shares.

In a combined (split) offering, the newly issued shares are a follow-on primary component — the issuer receives those proceeds, and the new shares dilute existing holders — while the founders' shares are a secondary component: the selling shareholders receive those proceeds, and no new shares are created. "Who gets the check?" is the fastest way to sort offering types. Registration under the Securities Act of 1933 governs disclosure, not who receives the money, so a registered offering can still route proceeds to selling shareholders. Also keep a secondary offering separate from the secondary market: a secondary offering is distributed through the primary-market underwriting process, while the secondary market is the everyday investor-to-investor trading that happens afterward. Finally, dilution comes only from newly created shares — shares that already exist cannot dilute anyone.

The Trap: Secondary offering conflated with secondary market / assuming all registered-offering proceeds go to the issuer

• The 1 million founder shares dilute existing shareholders because they increase the number of shares available to the public.: Misconception: every offering is dilutive. Only newly created shares dilute existing holders. The founders' 1 million shares already exist and are outstanding, so selling them transfers ownership without increasing the total share count.
• All of the proceeds go to Meridian Foods because the entire offering is registered under the Securities Act of 1933.: Misconception: registration means the issuer receives all the proceeds. Registration under the Securities Act of 1933 governs disclosure, not who gets the money — the proceeds of the 1 million shares sold by the founding family go to those selling shareholders, not to Meridian Foods.
• The entire transaction takes place in the secondary market because existing shareholders are selling shares.: Misconception: a 'secondary offering' is not the same as the 'secondary market.' The founders' shares are distributed through the primary-market underwriting process as part of the registered offering; the secondary market is the investor-to-investor trading that happens afterward.

Verified against: Securities Act of 1933

Answer: A corporation sells a new issue of bonds to investors through its underwriters

The primary market is where an issuer sells securities to investors and the issuer receives the proceeds — this is the territory of the Securities Act of 1933, which requires registration and prospectus delivery for new issues. A corporation selling a new bond issue through underwriters is therefore a primary-market transaction. The other three choices are all secondary-market activity (governed by the Securities Exchange Act of 1934): selling listed shares on the NYSE is the ordinary secondary market; exchange-listed stock trading over the counter is called the third market; and institutions trading directly with each other over an ECN, with no broker-dealer in the middle, is the fourth market. The quickest test is to follow the money — if the issuer gets the check, it is a primary-market transaction.

The Trap: primary vs. secondary market — who receives the proceeds

• Two pension funds trade a large block of stock directly with each other over an ECN: Fourth-market trap: direct institution-to-institution trading with no broker-dealer intermediary is the fourth market — a secondary-market venue students misfile because it looks unusual.
• An investor sells 200 shares of an exchange-listed stock on the NYSE: Secondary-market trap: investor-to-investor trading on an exchange is the secondary market; the issuer receives nothing. Targets the core primary-vs-secondary confusion (who gets the money).
• An institution buys exchange-listed stock in the over-the-counter market: Third-market trap: listed securities trading OTC (off-exchange) is the third market — still secondary-market, investor-to-investor activity.

Verified against: who-gets-the-proceeds anchor)

Answer: It omits the final public offering price and the effective date

A preliminary prospectus, or red herring, may be distributed during the cooling-off period under the Securities Act of 1933 to gauge investor interest, but it is deliberately incomplete: the final public offering price and the effective date are omitted because they are not yet set. It cannot be used to accept orders or money — only non-binding indications of interest may be taken before the registration becomes effective. Delivering it implies no SEC approval; the SEC reviews disclosure but does not approve or endorse any security. Finally, a representative must not mark up or highlight any prospectus, since altering a disclosure document turns it into an unapproved sales communication.

The Trap: red herring contents — no final price, no effective date

• Its delivery indicates that the SEC has approved the offering: The SEC never approves, endorses, or passes on the merits of any offering. It reviews registration statements for full and fair disclosure only, and delivering a prospectus implies no SEC approval.
• It may be used to accept a binding order from the customer: A red herring may be sent to customers during the cooling-off period, but it can never be used to take orders. No sales, binding orders, or payments are permitted before the effective date — only non-binding indications of interest may be accepted.
• The representative may highlight the sections most favorable to the offering before sending it: A prospectus must never be altered, annotated, or highlighted. Marking it up converts a regulated disclosure document into an improper, unapproved sales piece.

Verified against: red herring misconception pair)

Answer: A shelf registration

This describes a shelf registration under SEC Rule 415: a seasoned issuer files one registration statement and can then sell the securities in portions over time — generally up to three years — reaching the market quickly whenever conditions are attractive, without filing a new registration for each sale. A standby commitment is different: it is an underwriter's promise to buy whatever shares existing shareholders do not subscribe for in a rights offering. Regulation A is an exemption from full registration (using an offering circular, subject to dollar caps), and a Regulation D private placement avoids registration altogether and results in restricted securities — neither involves a registration statement kept 'on the shelf' for future takedowns.

The Trap: shelf registration identity — confusing Rule 415 with exemptions or standby underwriting

• A standby commitment: Underwriting-term confusion: 'standby' sounds like securities waiting on standby, but a standby commitment is an underwriter's agreement to purchase shares left unsold in a rights offering.
• A private placement under Regulation D: Exempt-transaction confusion: a Reg D placement avoids registration entirely and produces restricted stock; the scenario describes a registered public offering sold over time.
• A Regulation A offering: Streamlined-offering confusion: Regulation A is an exemption from full registration using an offering circular, with dollar caps — not a registration that stays effective for future sales.

Verified against: SEC Rule 415 (shelf registration)

Answer: A general obligation bond issued by a city

Municipal securities are exempt securities under the Securities Act of 1933 — like U.S. government and agency securities, bank securities, commercial paper with maturities of 270 days or less, nonprofit/religious issues, and insurance policies and fixed annuities, they need not be registered at all. A variable annuity is the exception among insurance products: because its value rides on a securities separate account, it is itself a security and must be registered. Stock sold under Rule 506(b) relies on an exempt transaction — the exemption covers that particular sale, not the security, which emerges as restricted stock. A 20-year corporate bond gets no exemption; only short-term corporate paper (270 days or less) qualifies. One principle applies across the board: an exemption excuses only registration — the antifraud provisions of the federal securities laws apply to every offering, exempt or not.

The Trap: exempt security vs. exempt transaction

• A corporate bond maturing in 20 years: Commercial-paper overreach trap: the short-term corporate debt exemption applies to paper with maturities of 270 days or less; long-term corporate bonds must be registered.
• A variable annuity issued by an insurance company: Fixed-vs-variable trap: insurance policies and FIXED annuities are exempt, but a variable annuity is a security whose value depends on a separate account and must be registered.
• Common stock sold to investors in a Rule 506(b) private placement: Exempt-security-vs-exempt-transaction trap: Reg D exempts the TRANSACTION, not the security — the stock itself is not an exempt security and comes out of the placement restricted.

Verified against: exempt security vs. exempt transaction pair)

Answer: The proceeds go to the venture capital firm, and the number of shares outstanding does not change

When existing shareholders — such as founders or venture capital investors — sell their shares to the public in a registered distribution, it is a secondary offering: the selling shareholders receive the proceeds, no new shares are created, and current holders are not diluted. Contrast this with a follow-on (subsequent) offering, in which the issuer sells additional newly issued shares — the issuer gets the money and existing owners are diluted. And do not confuse a secondary OFFERING with the secondary MARKET: the offering is a registered distribution under the Securities Act of 1933, complete with a prospectus, even though the issuer collects nothing. The reliable discriminator is always the same question: who gets the check?

The Trap: secondary offering vs. follow-on offering vs. secondary market

• This is a secondary-market transaction, so no prospectus is required: Secondary-offering vs. secondary-market conflation: a secondary offering is a registered distribution conducted through the primary-market process with a prospectus — not ordinary exchange trading.
• This is a follow-on offering that increases XYZ's total shares outstanding: Follow-on conflation: a follow-on (subsequent) offering means the ISSUER sells newly created shares, which is dilutive; here only existing shares change hands, so nothing new is issued.
• XYZ receives the offering proceeds because the shares are sold through a registered offering: Who-gets-the-check trap: in a secondary offering the selling shareholders — not the issuer — receive the proceeds; registration does not change where the money goes.

Verified against: Securities Act of 1933 secondary offering framework (registered distribution by selling shareholders)