12.1 Regulatory Framework

Series 7 General Securities Representative

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1 Introduction

About the Series 7 How to Use This Guide

2 Chapter 1: Equity Securities

1.1 Common Stock Basics 1.2 Dividends and Stock Splits 1.3 Preferred Stock 1.4 Rights and Warrants 1.5 ADRs and Foreign Securities

3 Chapter 2: Debt Securities

2.1 Bond Fundamentals 2.2 Bond Yields and Pricing 2.3 Corporate Bonds 2.4 Bond Features and Risks

4 Chapter 3: U.S. Government & Agency Securities

3.1 Treasury Securities 3.2 Agency Securities 3.3 Mortgage-Backed Securities 3.4 Money Market Instruments

5 Chapter 4: Municipal Securities

4.1 Municipal Bond Basics 4.2 General Obligation Bonds 4.3 Revenue Bonds 4.4 Municipal Bond Analysis 4.5 Municipal Securities Rules

6 Chapter 5: Investment Companies

5.1 Investment Company Basics 5.2 Mutual Funds (Open-End Funds) 5.3 Mutual Fund Pricing and Fees 5.4 Closed-End Funds and ETFs 5.5 Investment Company Taxation

7 Chapter 6: Variable Products & Annuities

6.1 Annuity Basics 6.2 Variable Annuities 6.3 Annuity Taxation 6.4 Variable Life Insurance

8 Chapter 7: Alternative Investments & DPPs

7.1 Direct Participation Program Basics 7.2 Types of DPPs 7.3 DPP Suitability and Risks 7.4 Real Estate Investment Trusts (REITs) 7.5 Hedge Funds and Other Alternatives

9 Chapter 8: Options

8.1 Options Basics 8.2 Long and Short Option Positions 8.3 Hedging Strategies 8.4 Spreads and Combinations 8.5 Index and Non-Equity Options 8.6 Options Account Requirements

10 Chapter 9: Customer Accounts

9.1 Account Types 9.2 Cash Accounts 9.3 Margin Accounts 9.4 Margin Calculations 9.5 Fiduciary and Institutional Accounts

11 Chapter 10: Retirement & Education Plans

10.1 ERISA and Qualified Plans 10.2 Defined Benefit vs. Defined Contribution 10.3 Individual Retirement Accounts 10.4 Education Savings Plans 10.5 Plan Distributions and Taxation

12 Chapter 11: Securities Markets & Trading

11.1 The Primary Market 11.2 The Secondary Market 11.3 Order Types and Execution 11.4 Trade Settlement and Reporting 11.5 Market Participants

13 Chapter 12: Rules, Regulations & Ethics

12.1 Regulatory Framework 12.2 Suitability Requirements 12.3 Communications with the Public 12.4 Prohibited Activities 12.5 Customer Protection Rules 12.6 Ethics and Professional Conduct

12.1 Regulatory Framework

Key Takeaways Explain This Topic AI

The SEC is the top federal securities regulator, created by the Securities Exchange Act of 1934.

FINRA is the largest self-regulatory organization (SRO) and administers the Series 7 (125 scored questions, scaled passing score of 72).

The MSRB writes municipal-securities rules but has no enforcement power; FINRA and the SEC enforce them.

State (Blue Sky) administrators register agents and securities and pursue fraud within their state.

The Federal Reserve sets margin under Regulation T, and FinCEN administers the Bank Secrecy Act and AML rules.

Last updated: October 2026

The Regulatory Pyramid

U.S. securities oversight is layered. At the top sits the federal Securities and Exchange Commission (SEC) ; beneath it sit self-regulatory organizations (SROs) such as the Financial Industry Regulatory Authority (FINRA) and exchanges; and alongside both sit state administrators enforcing Blue Sky laws . The Series 7 expects you to attribute each duty to the correct body and to know who can do what to a registered representative.

The SEC

The SEC was created by the Securities Exchange Act of 1934 (which governs the secondary market), not by the Securities Act of 1933 (which governs new issues). This is a classic trap: the 1933 Act predates the SEC, so the Federal Trade Commission briefly administered it. The SEC has rulemaking, registration, disclosure, and enforcement authority, and it is the ultimate appeal body above FINRA disciplinary decisions.

SEC Division Primary focus
Corporation Finance Issuer disclosures: 10-K, 10-Q, 8-K, S-1
Trading & Markets Broker-dealers, exchanges, SROs, SIPC
Investment Management Advisers (Advisers Act of 1940) and funds (Company Act of 1940)
Enforcement Civil actions, cease-and-desist, penalties
FINRA, the Dominant SRO

FINRA was formed in 2007 from the NASD and NYSE member-regulation functions. It writes rules in numbered series (2000 = duties/conflicts, 3000 = supervision, 4000 = financial/operational, 5000 = offerings/trading), administers qualification exams including the Series 7 General Securities Representative exam, and operates arbitration for customer and intra-industry disputes. FINRA's disciplinary powers reach both firms and individuals.

FINRA sanction Applies to Effect
Censure Firm or person Formal reprimand
Fine Firm or person Monetary penalty
Suspension Person Temporary removal
Bar Person Permanent removal from the industry
Expulsion Firm Membership revoked

Trap: FINRA cannot imprison anyone, seize assets, or bring criminal charges — those are powers of the U.S. Department of Justice and the courts. FINRA's harshest tool against an individual is a permanent bar .

State Administrators (Blue Sky)

State regulators register agents , investment-adviser representatives , and securities offered intrastate, and they prosecute fraud affecting state residents. The North American Securities Administrators Association (NASAA) coordinates them and authors the Uniform Securities Act . The National Securities Markets Improvement Act of 1996 (NSMIA) preempts state registration of federal covered securities (e.g., exchange-listed stocks, investment-company shares), but states keep anti-fraud authority and notice-filing fees.

Rulemaking-Only and Specialized Bodies

Municipal Securities Rulemaking Board (MSRB): writes municipal rules and runs EMMA (Electronic Municipal Market Access) for disclosure, but has no enforcement authority — FINRA and the SEC enforce its rules against dealers.

Federal Reserve Board: sets initial margin via Regulation T (currently 50% on marginable equity); Reg U covers bank credit, Reg X covers borrowers.

FinCEN (Treasury): administers the Bank Secrecy Act , anti-money-laundering programs, SARs, and CTRs.

SIPC: a nonprofit, not a government agency, that protects customers if a broker-dealer fails (covered in 12.5).

The Five Foundational Federal Statutes

The Series 7 leans on a short list of laws. Tie each to its purpose:

Statute What it governs

Securities Act of 1933 The primary market: registration and prospectus delivery for new issues (the "paper Act" or "truth in securities")

Securities Exchange Act of 1934 The secondary market: exchanges, broker-dealers, the SEC itself, margin, and anti-fraud Rule 10b-5

Investment Company Act of 1940 Mutual funds, closed-end funds, and unit investment trusts
Investment Advisers Act of 1940 Registration and conduct of investment advisers
Securities Investor Protection Act of 1970 Created SIPC to protect customers when a firm fails

A frequent trap pairs the 1933 Act with the secondary market — wrong. New issues = 1933; trading among investors = 1934.

FINRA Membership and Registration

A broker-dealer joins FINRA through the New Member Application (NMA) , and a representative registers by passing the SIE (Securities Industry Essentials) co-requisite plus the Series 7 . The Series 7 itself has 125 scored questions (130 total, including 5 unscored pretest items ), a 225-minute (3-hour-45-minute) time limit, a scaled passing score of 72 (FINRA publishes no fixed number of correct answers), a $395 fee, and is delivered at Prometric test centers. A representative must be associated with a member firm to be registered; leaving the firm ends the registration unless the person re-associates within two years.

How a Disciplinary Case Moves

When FINRA's Department of Enforcement brings a complaint, a hearing panel decides it; the National Adjudicatory Council (NAC) hears appeals within FINRA; from the NAC, a respondent may appeal to the SEC , then to a federal court of appeals . This appellate ladder is why the SEC sits "above" FINRA — it reviews FINRA's disciplinary decisions but delegates day-to-day member regulation to the SRO. Code of Arbitration disputes (customer or industry) follow a separate FINRA Dispute Resolution track, not the disciplinary one.

On the Exam

Expect questions that ask who created the SEC (the 1934 Act), the strongest FINRA sanction against a person (a bar, not jail), which body writes but cannot enforce municipal rules (MSRB), and who sets margin (the Fed via Reg T). Pair the 1933 Act with new issues and the 1940 Acts with funds/advisers. Memorize the FINRA-vs-SEC split: FINRA is the front-line SRO; the SEC is the federal overseer and appellate authority above the NAC.