Understanding Trading, Customer Accounts and Prohibited Activities

Short answer

Section 3 is 23 of the 75 scored items. It covers order types and trade capacity, the components of investment return and the four dividend dates, settlement timeframes, corporate actions and their effect on price and cost basis, account types and registrations, anti-money laundering, books and records and privacy, communications and best interest obligations, and the prohibited activities.

Why it matters on this exam

Thirty-one percent, and the section with the most memorisable specifics. Together with section 2 it is three quarters of the exam.

Key concepts

Orders and capacity. Market, stop, limit, good-til-cancelled; discretionary versus non-discretionary; solicited versus unsolicited. Trade capacity is principal (the firm trades from its own account) versus agency (the firm acts for the customer). Long and short, naked and covered.
Components of return. Interest, dividends, realised and unrealised gains, and return on capital (the outline's wording). Dividends can be cash or stock.
The dividend dates. Record date, ex-dividend date, payable date. The ex-dividend date is the one to know cold: a buyer who purchases on or after it does not receive the dividend.
Measures of return. Yield, yield to maturity, yield to call, total return, basis points.
Settlement. Timeframes vary by product, expressed as T or T+1 in the outline. Physical versus book entry delivery.
Corporate actions. Splits, reverse splits, buybacks, tender offers, exchange offers, rights offerings, mergers and acquisitions. The exam focuses on the effect of a split on market price and cost basis — total value is unchanged, the per-share figures both adjust — and on proxies and voting.
Account types and registrations. Cash, margin, options, discretionary, fee-based versus commission, educational. Registrations run individual, joint, corporate, trust (revocable and irrevocable), custodial under UTMA, partnership and retirement, with IRA types, contributions and required minimum distributions.
Anti-money laundering. The stages of money laundering (the outline's examples are structuring, layering and placement; the classic three-stage model is placement, layering and integration, with structuring a placement technique), plus the AML compliance programme, the Suspicious Activity Report, the Currency Transaction Report, FinCEN, and OFAC with its SDN list.
Books, records and privacy. Retention requirements, confirmations and account statements, holding customer mail, business continuity plans, customer protection and custody, and Regulation S-P covering nonpublic personal information, privacy notices and safeguards.
Communications and best interest. Classifications and general requirements, telemarketing and the do-not-call list, know-your-customer, and what constitutes a recommendation.
Prohibited activities. Market manipulation — market rumours, pump and dump, front running, excessive trading, marking the close and the open, backing away, freeriding. Insider trading, material nonpublic information, and the penalties including fines, expulsion and incarceration. Then the restrictions on associated persons buying IPOs, borrowing from or sharing in customer accounts, financial exploitation of seniors, activities of unregistered persons, and signatures of convenience.

Common mistakes

Assuming a stock split changes the value of a holding. Two-for-one doubles the shares and halves the price and the per-share cost basis; the total is unchanged.
Confusing the SAR with the CTR. A CTR is a threshold-based currency report; a SAR is filed because the activity is suspicious, regardless of amount.

Worked example

A customer holds 100 shares with a cost basis of 60 a share when the issuer declares a two-for-one split. Afterwards the customer holds 200 shares with a cost basis of 30. The market price halves at the same time, so the position is worth what it was worth. Cost basis questions typically reduce to that: the split changes the per-share numbers and leaves the total alone.

Original practice questions

Understanding Trading, Customer Accounts and Prohibited ActivitiesDifficulty 3/5

A customer holds 100 shares with a cost basis of $60 per share when a two-for-one split is completed. What is the position afterwards?

A100 shares with a cost basis of $30 per share, the total having halved
B50 shares with a cost basis of $120 per share, the total unchanged
C200 shares with a cost basis of $30 per share, the total unchanged
D200 shares with a cost basis of $60 per share, the total having doubled

Show answer and rationale

Correct: C. A split changes the per-share figures and leaves total value alone. Shares double, price and per-share cost basis halve, and the customer is neither richer nor poorer for it.

D — The cost basis per share must adjust downward, or the split would create value from nothing.
A — The share count doubles in a two-for-one split; it does not stay the same.
B — That describes a one-for-two reverse split, which is the opposite corporate action.

Understanding Trading, Customer Accounts and Prohibited ActivitiesDifficulty 3/5

A registered representative notices a pattern of transactions with no apparent lawful purpose. Which report does this call for?

AA Currency Transaction Report, which is filed because of the nature of the activity
BAn OFAC blocking report, which is filed because of the nature of the activity
CA Form U4 amendment, which is filed because of the nature of the activity
DA Suspicious Activity Report, which is filed because of the nature of the activity

Show answer and rationale

Correct: D. The SAR is triggered by suspicion; for a broker-dealer it is mandatory when the activity involves at least $5,000, and voluntary below that. The CTR is triggered mechanically by a currency threshold, whether or not anything looks wrong.

A — A CTR is driven by a currency amount threshold, not by whether the activity looks suspicious.
B — OFAC reporting concerns blocked persons on the SDN list, not suspicious transaction patterns.
C — Form U4 reports the representative's own registration information, not customer activity.

Understanding Trading, Customer Accounts and Prohibited ActivitiesDifficulty 2/5

A firm fills a customer order from its own inventory rather than finding a counterparty. In what capacity did it act?

AAs principal, because the firm traded from its own account
BAs agent, because the firm traded from its own account
CAs a transfer agent, because the firm traded from its own account
DAs a municipal advisor, because the firm traded from its own account

Show answer and rationale

Correct: A. Principal means trading from the firm's own account and taking the other side. Agency means arranging the trade between the customer and someone else for a commission.

B — Acting as agent means arranging a trade with a third party, not supplying the securities itself.
C — A transfer agent maintains records of security ownership and does not fill customer orders.
D — A municipal advisor advises municipal issuers and has no role in filling a customer order.

All 6 Understanding Trading, Customer Accounts and Prohibited Activities questions →

Tools for this topic

Bond yield calculator — Enter a coupon, a price and a maturity and see all four yields at once, with the discount and premium ranking the SIE actually tests. For exam practice on a hypothetical bond you type in; not investment advice.

6 flashcards for Understanding Trading, Customer Accounts and Prohibited Activities

Practice this topic

Blueprint-mapped questions with full rationales for every choice.

Start practice

Primary references

Securities Industry Essentials (SIE) Examination Content Outline — Financial Industry Regulatory Authority (FINRA) · primary · retrieved 2026-09-22, verified 2026-09-22

Last reviewed: 2026-10-18Next review by: 2026-12-02Reviewed by: Openverse editorial team, Authoring and fact verificationHow we verify facts