SIE Section 3: Trading, Customer Accounts and Prohibited Activities

Section 3 of the SIE is called Understanding Trading, Customer Accounts and Prohibited Activities. It carries 31% of the exam, which is 23 of the 75 scored questions. Only the products section is larger.

The section follows one trade from end to end, then covers the conduct that gets people fined, suspended, and barred.

Most questions read like a short story. You get a fact pattern and you name the order, the account, or the violation.

The four order types

An order type answers one question: at what price will this trade?

Order	How it fills	What it guarantees
Market	Right away, at the best available price	Execution, never price
Limit	At the limit price or better	Price, never execution
Stop	Turns into a market order at the stop price	Neither
Stop-limit	Turns into a limit order at the stop price	Neither

Where an order sits depends on its job. A buy limit and a sell stop sit below the current market price. A sell limit and a buy stop sit above it.

A day order dies at the close, and an order with no time instruction is a day order. A good-til-canceled (GTC) order stays open across trading days.

Three labels on every order ticket

Discretion is who chose the trade. The representative picks the security, the action, or the amount. That takes written customer authorization plus written principal acceptance. Picking the time or price of an order the customer already defined is not discretion.

Solicitation is who raised the idea. A solicited order follows a recommendation, and an unsolicited order is the customer's own.

Capacity is the side the firm took. Agency matches a buyer and a seller for a commission. Principal trades from the firm's own inventory for a markup or a markdown.

The maximum loss on a short stock position and on a naked call is unlimited, because a stock price has no ceiling.

Settlement runs on T+1

Trade date is the day both sides agree. Settlement date is the day money and securities change hands. Regular-way settlement is T+1, one business day after the trade date, and it has applied since May 2024.

Count business days, never calendar days. A Friday trade settles Monday, and a market holiday pushes it out one more day. Cash settlement finishes the trade the same day, if both sides agree in advance.

Almost every trade settles by book entry, and most customers hold in street name.

Corporate actions move through that same book-entry system. Mandatory ones, such as a split, land in the account by themselves. Voluntary ones, such as a tender offer, carry a deadline and need a reply.

Account types and registrations

Every account answers two questions: what may it do, and who owns it?

Account	What it allows
Cash	The customer pays in full. Regulation T sets payment at T+3
Margin	The firm lends part of the price. Regulation T sets the initial requirement at 50%
Options	A cash or margin account a principal approved, after the firm delivers the Options Disclosure Document

A margin customer can lose more than the amount deposited, and a cash customer cannot. Retirement and custodial accounts stay cash accounts, so any answer that puts an IRA on margin is wrong.

Registration decides what happens at death. Under joint tenants with right of survivorship (JTWROS), a dead owner's share passes to the surviving owners. Under tenants in common, it passes to that owner's estate.

Traditional IRA contributions are usually deductible, and withdrawals are taxed. Roth contributions are after-tax, and qualified withdrawals are tax-free. Required minimum distributions start at age 73 for a traditional IRA, and never apply to a Roth.

Know your customer, suitability, and best interest

Know your customer (FINRA Rule 2090) tells your firm to learn the essential facts about every customer. That duty runs whether or not anyone recommends anything.

Regulation Best Interest (SEC Rule 15l-1) starts only when you recommend a security, a strategy, or an account type to a retail customer. A retail customer is a natural person who uses the recommendation mainly for personal, family, or household purposes.

Four obligations carry the rule:

• Disclosure. Put the relationship, the fees, the limits, and every material conflict in writing.
• Care. Understand the risks, rewards, and costs, then match them to the customer's profile.
• Conflict of interest. Find conflicts, then disclose, reduce, or remove them. A sales contest tied to one security must be removed.
• Compliance. Keep written procedures that meet the rule.

Regulation Best Interest never requires the cheapest product. Cost is a factor you weigh, not a result you must reach. FINRA Rule 2111, the suitability rule, covers the customers Regulation Best Interest leaves out, such as institutional ones.

Both rules start with a recommendation, a call to action judged by content, context, and presentation. General commentary and an unsolicited order are not recommendations.

Prohibited practices you have to name

Intent separates manipulation from an ordinary trade. A large buy order near the close is legal. The same order, entered to set the closing price, is marking the close.

Practice	What happened
Churning	The representative controls the account and trades it beyond the customer's objectives, for commissions
Front running	The representative trades ahead of a customer order he knows is coming
Pump and dump	Someone buys a cheap stock, promotes it with false claims, then sells into the buying
Backing away	A market maker refuses to trade at the price and size of its own published quote
Freeriding	A customer sells stock in a cash account before paying for it. The account freezes for 90 days

Illegal insider trading is trading on material nonpublic information in breach of a duty of trust and confidence. Test both halves: material means a reasonable investor would want it, and nonpublic means the market has not received it. The SEC charges insiders, the lawyers and bankers who work for the company, tippers, and tippees. A tipper who never trades is still liable.

The SEC brings the civil case and can seek up to three times the profit gained or the loss avoided. The Department of Justice brings the criminal case, with fines up to $5 million and up to 20 years in prison. FINRA can bar you from the industry.

FINRA Rule 2150 bans improper use of customer funds and any guarantee against loss. Two answer choices are almost always wrong there: the customer agreed, and the representative paid the money back.

Anti-money laundering basics

Money laundering runs in three stages. Placement puts criminal cash into the financial system, layering moves it through many transactions to break the trail, and integration returns it looking earned.

Report	Trigger	Deadline
Currency Transaction Report (CTR)	More than $10,000 in currency for one person in one business day. No suspicion needed	15 days
Suspicious Activity Report (SAR)	$5,000 or more, and the firm knows or suspects crime or evasion, cash or not	30 days

Both reports go to FinCEN, and your firm may never tell a customer it filed a SAR. A name on the OFAC sanctions list means the firm blocks the assets in place rather than returning them.

Deposits of $9,500 on Monday and Tuesday trigger no CTR, because neither day breaks $10,000. That pattern is structuring, a crime by itself, so the firm files a SAR.

How to study this section

Section 3 rewards repetition on fact patterns. Learn the label, then practice matching conduct to it under time. How to study for the SIE exam sets a weekly schedule.

Work through the trading and accounts lessons in the free SIE course, then drill the matching items in the practice question bank. Timed sets by topic live in the practice tests directory, and the free practice test gives you a section breakdown in a few minutes.

Section 2 is the larger neighbor at 44%, so pair this with the products and risks overview. The capital markets guide covers Section 1 and the regulatory framework guide covers Section 4.

Check the source when a detail matters. FINRA publishes the SIE exam page and its rulebook, and investor.gov defines these terms in plain English.