As discussed in last week’s article, the SIE is your entrance into the financial world. As an exam that anyone can study for and take specializing in finance, getting it under your belt is a way to show prospective employers you’re serious and have a basic understanding of financial markets.
There are several sections to the exam, but the one that is perhaps hardest for those who already have an interest in financial markets are the sections regarding rules and regulations.
There are a lot of rules that govern financial markets, and their origins are with the securities acts that were established nearly a century ago. The Securities Act of 1933 (aka the Paper Act) has many rules on new issuances of securities, including stocks and bonds. The Securities Act of 1934 covers the buying and selling of these securities in the secondary market—that itself is easy to remember as the first act covers primary issues and the second act covers the secondary market.
There are many rules on what needs to be disclosed when primary issues are put into the market. These rules apply to nonexempt securities, which cover stocks, bonds, and other financial instruments that are issued by almost all private organizations. Exempt issues are, as you’d guess, exempt from these rules, and they include U.S. Treasuries and anything issued by the U.S. government and municipal securities, which makes sense enough. Surprisingly, banks and credit unions, public utility stocks and bonds, and commercial paper that matures in 270 days or less are also exempt. Fixed insurance policies are also exempt, but variable annuities are not, since they involve a separate account.
The rules apply to all interstate offerings of securities, since the U.S. government has jurisdiction there, but not to intrastate offerings—although each state has its own rules on securities governing those transactions.
Within the rules are several restrictions such as Reg D, which allows firms to offer private placement of securities without an S-1 (the prospectus for an asset going public). Reg D qualifying private placements cannot be traded for the first six months upon issuance, and then they can only sell the greater of either 1% of shares outstanding or the average weekly trading volume for the previous four weeks. These are usually offered to accredited investors, but keep in mind they can also be offered to 35 or less unaccredited investors per year.
Forget who accredited investors are? Financial institutions, insiders to the company issuing the asset (this includes owners of 10% or more of outstanding shares and their family members) are all accredited, but the most widely known definition is those who have a net income of at least $200,000 per year ($300,000 joint if married) for the previous two years who are expected to continue earning that much, or someone who has a net worth of at least $1 million excluding their primary residence. Registered representatives also quality.
Reg A allows an exemption for a security to be fully registered as well, provided that it is $20 million or less (if Tier 1) or $75 million of less (if Tier 2), and all securities in that offering have to be made within a year.
There are different from Reg T, which is a Federal Reserve rule regarding margin. Reg T requires 50% initial margin and 25% maintenance margin. It also states settlement dates for transactions: stocks and both corporate and municipal bonds settle in T+2, while Federal bonds and options settle in T+1 in margin accounts. For all but stocks and corporate bonds, payment dates are the same, but those assets require payment in T+4.
There are many, many more rules in the exam, and studying those rules is perhaps where most applicants who have an active interest in financial markets should spend much of their time as there’s a lot of memorization and these bits of information are tested pretty heavily. Trading, customer accounts, and prohibited activities takes up 31% of the test and the regulatory framework is 9%, so in total the rules and regulations part of the exam is nearly half of the total. Knowledge of capital markets, which is probably what got many applicants interested in the exam to begin with, is a mere 16% of the test (the rest is “Understanding Products and Their Risks” at 44%).