Series 7 Exam Prep 98, Regulation and Prohibited Conduct Review

0:00We are covering the critical topic of regulation and prohibited conduct for the Series 7 exam. This area is dense with rules from FINRA, the SEC, and the MSRB, and you must know how they apply in practice. Let's start with the foundational principles that govern your conduct. Regulation best interest or reg BI requires you to put the retail customer's interests ahead of your own when making a recommendation. This is a higher standard than the old suitability rule. The exam will test this through scenarios where a recommendation might be suitable but not in the client's best interest, perhaps because a less expensive or less risky alternative exists. This ties directly into the Know Your Customer or KYC rule, which mandates you use reasonable diligence to know the essential facts about every client. You need to understand their financial situation, risk tolerance, and investment objectives to make appropriate recommendations under both suitability and reg BI standards.

1:01Beyond general principles, the Series 7 exam focuses heavily on specific prohibited activities. Let's look at a classic exam trap involving churning. Churning is excessive trading in a client's account to generate commissions, not to benefit the client. An exam question won't just say the trading was a lot. It will give you clues like a conservative client with a high turnover ratio or a cost to equity ratio that makes it nearly impossible for the account to be profitable. Another major violation is unauthorized trading, which is executing trades without the client's permission in a non-discretionary account. The key distinction here is discretionary authority. Without a written discretionary agreement, you need the client's approval for every trade. Selling away is another testable topic. This occurs when a representative sells securities that are not offered by their employing firm without the firm's knowledge and permission. The exam might present this as you helping a friend raise money for their new business by selling promissary notes to your clients.

2:06Even if your intentions are good, it's a serious violation. And of course, there's insider trading. Trading on material, non-public information, which is a violation of the Securities Exchange Act of 1934. Your firm's anti-money laundering, or AML, program, is also a critical area. You must be able to recognize red flags of money laundering, such as structuring deposits to fall just under the $10,000 reporting threshold for a currency transaction report, or CTR. Suspicious activity reports or SARs must be filed for suspicious transactions of $5,000 or more. The exam will test your understanding of these reporting requirements and your responsibility to escalate suspicious activity. Rules around communications, complaints, and record keeping are operational, but highly testable. Finra classifies communications into three categories, correspondence, retail, and institutional. A key exam point is the threshold for retail communication, a written communication distributed to more than 25 retail investors in a 30-day period, which generally requires principal pre-approval.

3:16Complaints are defined as any written grievance. If you receive one, you must forward it to your supervisor. You cannot ignore it or try to resolve it on your own. Record keeping has specific timeframes you must memorize. Most records, including communications, must be kept for three years. Customer complaints have a four-year retention period under Finra rules. AML-related records, like SARs and CTRs, must be kept for five years. Finally, protecting vulnerable investors, particularly seniors, is a major focus. Finra rule 2165 allows firms to place a temporary hold on disbursements from the account of a specified adult. If financial exploitation is reasonably suspected, a specified adult is anyone age 65 or older, or anyone 18 or older, with a mental or physical impairment. To help remember the core prohibited practices, use the namanic I can't use stolen information. I see you SI, insider trading, churning, unauthorized trading, selling away, and misrepresentation.

4:23For free practice questions, AI-powered explanations, and more exam prep tools, visit OpenExamPrep.com. That's OpenExamPrep, alloneword.com.