12.1 Regulatory Framework

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.

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.

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:

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 as of October 27, 2025), a 225-minute (3-hour-45-minute) time limit, a 72% passing score (90 of 125), 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.