Regulatory Framework
The securities industry operates under a complex regulatory framework involving federal agencies, self-regulatory organizations, and state regulators. Understanding this structure is essential for Series 7 representatives.
The Securities and Exchange Commission (SEC)
The SEC is the primary federal regulator of the securities industry, created by the Securities Exchange Act of 1934.
SEC Authority and Functions
| Function | Description |
|---|---|
| Rulemaking | Creates regulations for securities markets |
| Enforcement | Investigates and prosecutes violations |
| Registration | Oversees registration of securities, exchanges, broker-dealers |
| Disclosure | Requires public companies to disclose material information |
| Investor Education | Provides resources for investors |
SEC Divisions
| Division | Focus |
|---|---|
| Corporation Finance | Public company disclosures (10-K, 10-Q, 8-K) |
| Trading and Markets | Broker-dealers, exchanges, SROs |
| Investment Management | Investment advisers, mutual funds |
| Enforcement | Investigations and prosecutions |
| Economic and Risk Analysis | Market research and data analysis |
FINRA (Financial Industry Regulatory Authority)
FINRA is the largest self-regulatory organization (SRO) for broker-dealers in the United States.
FINRA Responsibilities
| Responsibility | Description |
|---|---|
| Member Regulation | Oversees broker-dealer firms |
| Qualification Exams | Administers Series 7, 63, 66, etc. |
| Continuing Education | Requires ongoing training |
| Rule Enforcement | Investigates complaints, disciplines violations |
| Market Surveillance | Monitors trading for manipulation |
| Dispute Resolution | Arbitration and mediation services |
FINRA Rulemaking Authority
FINRA creates rules that member firms must follow:
- 2000 Series: Duties and conflicts
- 3000 Series: Supervision and compliance
- 4000 Series: Financial and operational rules
- 5000 Series: Securities offering and trading
- 6000 Series: Quotation and transaction reporting
FINRA Enforcement
FINRA can impose sanctions on member firms and associated persons:
| Sanction | Description |
|---|---|
| Censure | Official reprimand |
| Fine | Monetary penalty |
| Suspension | Temporary bar from industry |
| Bar | Permanent removal from industry |
| Expulsion | Firm removed from membership |
State Securities Regulators
State regulators (often called "Blue Sky" regulators) oversee securities activities within their states.
State Authority
| Function | Description |
|---|---|
| Registration | Register securities, agents, investment advisers |
| Enforcement | Investigate state law violations |
| Investor Protection | Handle complaints from state residents |
Coordination with Federal Regulators
- NASAA (North American Securities Administrators Association) coordinates state efforts
- Many rules are "uniform" across states (Uniform Securities Act)
- Federal law generally preempts state law for national securities
Other Regulatory Bodies
MSRB (Municipal Securities Rulemaking Board)
MSRB creates rules for the municipal securities market:
- Regulates dealers and municipal advisors
- Does NOT have enforcement authority
- Operates EMMA (Electronic Municipal Market Access)
- Rules enforced by FINRA and SEC
Federal Reserve Board
The Fed has authority over:
- Margin requirements (Regulation T, U, X)
- Bank holding companies
- Payment systems
Treasury Department / FinCEN
FinCEN (Financial Crimes Enforcement Network) oversees:
- Bank Secrecy Act compliance
- Anti-money laundering programs
- Suspicious activity reporting
Regulatory Examinations
FINRA Examinations
FINRA conducts examinations of member firms:
| Exam Type | Description |
|---|---|
| Cycle Exams | Regular scheduled examinations |
| Cause Exams | Triggered by complaints or concerns |
| Sweep Exams | Industry-wide focus on specific issue |
Examination Focus Areas
- Supervision and compliance
- Books and records
- Customer protection
- Sales practices
- AML compliance
On the Exam
The Series 7 exam frequently tests:
- SEC's role and divisions
- FINRA's regulatory functions
- Difference between SEC (federal) and FINRA (SRO)
- State regulator authority
- MSRB's rulemaking-only authority
Which regulatory body creates rules for the municipal securities market but does NOT have enforcement authority?
Which of the following sanctions can FINRA impose on a registered representative who violates industry rules?
Which federal agency has authority over margin requirements under Regulation T?
The SEC was created by which legislation?
12.2 Suitability Requirements
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