Series 7 Regulations Notes

Series 7 Regulations

Securities Act of 1933

  • Characteristics
    1. Covers the Primary (new issues) market
    2. Unless exempt, you must file with the SEC
    3. Act of 1933 rules are all 3 numbers (144, 506, etc)
    4. Act of 1934 rules are alpha-numeric
  • If you make an interstate offer, of non-exempt securities, in a non-exempt transaction:
    1. Must file registration statement with the SEC
    2. Then there is a 20 day “cool off” period prior to the effective date
      • No promotion of the issue during cool off period!!
    3. On the effective date
      • Sell the securities with a prospectus

Exempt Securities

  • Fed has jurisdiction when the transaction crosses state lines (interstate)
    1. Intrastate exemption (Rule 147)
      • If issuers primary place of business is in the state and all purchasers are state residents, then you are exempt from SEC registration
      • Still must be registered in the state under the states “blue sky” laws
      • Lock-up period on resale: first 6 months after issuance, it can only be resold within the state
      • Can’t be traded in the public markets because they aren’t registered
  • Exempt securities / exempt issues do not have to registered
    1. Governments, agencies, and Munis are exempt
    2. Money market instruments are exempt (CP – max 9 months)
    3. Already regulated issuers
      • Bank, insurance companies, common carrier issues (railroads, trucking, airlines, etc. – regulated by ICC)
      • Investment company issues ARE registered and not-exempt!
    4. Miscellaneous
      • Not for profit, church bonds, SBIC’s
  • Non-exempt:
    1. Anything corporate related
    2. Investment companies
    3. Variable annuities
    4. DPP’s
    5. REIT’s


Exempt Transactions

Regulation D private placement exemption

  • If you sell to a maximum of 35 non-accredited investors, and you sell to an unlimited number of accredited investors, then you are exempt from SEC registration
    1. Accredited if annual income = $200,000+ ($300k if married) OR
    2. Net worth = $1M (not including home) OR
    3. Be an institution with at least $5M of investable assets OR
    4. Be an officer or director of the issuer
  • “Restricted private placement stock” aka “legend stock”
    1. Says they cannot be publicly traded
    2. To resell, your choices are:
      • Register them with the SEC
      • Use Rule 144
  • Disclosure document = PPM (private placement memo)
  • Regulation Crowdfunding (exemption)
  • Lot of little investors funding a start-up
  • Must be sold through a FINRA registered broker-dealer
  • No accreditation for the investors
  • Max amount that can be raised = $1M


Rule 144 Stock

Converts restricted stock to registered stock

Used when you own stock of a private company that goes public

How to do a public resale of restricted (PP) stock or control stock:

  1. Company must have gone public and be current in its SEC filings
  2. Seller must have held stock, fully paid, at risk for at least 6 months
  3. Seller files Form 144 with the SEC (notice of sale)
    1. Can do this every 3 months
    2. Sell greater of 1% of outstanding shares or the weekly average of the prior 4 weeks trading volume

How to avoid the 144 Rule

  1. Die – then your estate can sell it immediately
  2. Sell a small amount every 90 days (5 + 5)
    1. Max 5,000 worth max of $50,000
  3. Leave the company as an officer
    1. Once you’re out for 3 months you can sell all

Control stock:

  1. Registered stock held by a top-level officer
  2. Although they are registered, they are restricted for sale
  3. From above, 1 and 2 don’t apply, but #3 does!

Rule 144A

Allows issuers to sell minimum of $500k blocks of private placements to “QIBs” (qualified institutional buyers) without registering with the SEC or providing a prospectus

Can be traded from QIB to QIB on Portal, the market setup to trade these private placement units – still not very actively traded

QIB = institution with at least $100M assets. No individuals!


Simplified E-Z Registration Rules

  1. Regulation A (A+)
    1. Simplified registration for a small $$ offering
      1. $20M (A)
      2. $50M (A+)
    2. File an abbreviated registration statement with the SEC
    3. 20-day review period, then
    4. You can sell with an offering circular
    5. You CAN promote/advertise your offering during the 20-day period!!
  2. Rule 415 – Shelf Registration Rule
    1. If you are a seasoned issuer (already SEC registered), you don’t have to go through the full process to do new issues
    2. Can file a “blanket registration statement” that goes on the SEC shelf – good for 3 years
      1. Give 2 day notice to the SEC, and you can sell
    3. Cheaper, faster, and allows the company to time the market


Registering with the SEC (the hard way)

  1. File a registration statement with the SEC
    1. Primarily for IPO’s
  2. Enters the 20 day cool off period (quiet period)
    1. SEC reviews the filing for “full and fair disclosure”
    2. SEC does not approve or disapprove, just collect disclosure
    3. Can issue deficiency letter, if not enough info disclosed
      1. Then must file an extended statement, and then 20 day cool off period starts again
    4. Not allowed to advertise/promote the issue!!
    5. Can do:
      1. Take IOI’s
      2. Distribute preliminary prospectus
        1. AKA “red-herring”
        2. Does not include public offering price!
      3. Final offering price not set until the end of the 20th day period
        1. Investor pays the flat price, commissions and all else is already built-in
      4. Effective date is the first day you can sell with a prospectus
        1. Any purchased must get the prospectus at or prior to confirmation of sale
        2. Electronic delivery is okay as long as customer has a valid email address
          1. For stocks and bonds, but not mutual funds! (investment companies)
        3. Underwriters spread is embedded in the price! Investor pays Public Offering Price, flat!


Types of Underwritings

  1. Firm Commitment
    1. Underwriter is acting as a principal, taking full liability for the issue
    2. Managing underwriter signs up a syndicate agreement among underwriters
    3. Setup as:
      1. Eastern account
        1. Undivided by selling responsibility
        2. Undivided as to liability
      2. Western Account
        1. Divided by responsibility
        2. Divided as to liability
      3. Syndicate member:
        1. 10% of a $5M underwriting in a Western account
        2. At the termination of the offering, $1M is unsold in the acc.
  • Your firm sold $300k, your firms remaining liability is?
    1. $200,000 – firm took on $500k, sold 300k
    2. IF Eastern, 100k, cause 10 syndicate members that share the responsibility together
  1. Take down = the spread that the syndicate member earns on Munis
  1. Selling Group
    1. Set up by a manager, essentially a group of “Finders”
    2. Agents with no responsibility, who are finding buyers for the syndicate
  • Earn a commission from the spread/underwriting discount
  1. Best Efforts
    1. Underwriter is acting as an agent, taking no liability
  2. Best Efforts – All or None
    1. Underwriter is agent, either sells all of the deal or it is cancelled
    2. Requires an escrow agent
  3. Stand-by
    1. Used in a rights offering
    2. Firm stands-by on a firm commitment basis to buy the unsubscribed shares and then offer them to the public as a principal



Industry insiders cannot buy common stock IPO’s from underwriters. Insiders are:

  1. FINRA member firms, for their own accounts
    1. Their officers, employees (all), and their immediate family
  2. Fiduciaries to member firms and their immediate family
    1. Lawyers, accountants, etc. basically any person who is inside the deal
  3. Institutional Portfolio Managers and their immediately family
    1. For personal purchase!!
    2. You can buy for your fund

Enforced: anyone who wants to buy an IPO must sign a letter that states they do not fall within the prohibited category, and this letter must be renewed annually

“Positive affirmation” – renewals thereafter are “negative renewals” (aka you don’t do anything unless your status changes)

Applies to common stock only!

(Preferred stock dividend payments are partially tax excluded for corporations – 70% of dividends are excluded from tax) – preferred stock is directly interest rate sensitive

If IPO price starts dropping:

Syndicate manager has an obligation to stabilize

Placed by manager only

Will place a stabilizing bid, buying back the stock at the initial asking price – only legal way to directly influence a market

Bid is at or just below the public offering price – never above


Securities Exchange Act of 1934

Regulates the secondary trading market


  1. Manipulation is Fraud (Rule 10b-5)
    1. “Catch all fraud rule”
    2. If it is not explicitly prohibited under this act, but the SEC doesn’t like it, it becomes fraud by way of this rule
    3. Applies to both exempt and non-exempt securities (rest is non-exempt only)
  2. Insider Rules
    1. Statutory insider
      1. Officer, director, or 10%+ shareholder
        1. Must report their insider status to the SEC (Form 3)
        2. Report your trades in the company’s stock (Form 4) within 2 business days of the trade
        3. Cannot short your own companies stock!
        4. If you have any short swing profits (profits within 6 months) you must pay it back to the company
      2. Insider trading act amendments of 1988
        1. Formalized the TIPPER <> TIPPIE Doctrine
        2. TIPPEE
          1. Trebble damages, pay back 3x the profits
          2. Fine up to $5M per trade
          3. Jail
          4. Liability to the shareholders for any losses they incurred
        3.  TIPPER
          1. If recklessly disregarded the trading laws:
          2. $25M fine (up to) (has to be a trade made)
          3. Fines are made out to the Department of Treasury
        4. Informer Bounty
          1. From 10%-30% of the take
          2. If you rat out an inside trader
  3. SEC Creation Act
  4. Short Sale Rules (Regulation SHO)
  5. Proxy Rules / Tender Offer Rules
    1. Anyone who accumulates a 5% holding or greater in a company, with the intention of exercising control must:
      1. File 13d within 10-days of crossing the 5% threshold
        1. Not to the shareholders!
      2. Tender offer:
        1. Made by a company, for its own stock or bonds
          1. Bonds: 5 business days
          2. Each sweetening is 5 day extension
        2. Made by an outsider, for the company’s stock or bonds
          1. Maker of the offer is treated as an insider!
          2. 20 business days is the minimum life of the offer
          3. Each sweetening of the offer extends it for 10 business days
  6. Exchanges Register – SRO’s under SEC Oversight
    1. Exchanged become self-regulatory organizations and must register
      1. FINRA, MSRB are SRO’s too
    2. Hierarchy of registration:
      1. Exchanges register
      2. Broker-dealer members have to register (FINRA)
      3. Officers, traders, salespersons of the broker-dealer
        1. FINRA CRD (Central Regulation Depository)
        2. BrokerCheck (FINRA) – details of all registered reps and dealers
          1. Employment history
          2. Licenses held (states)
          3. Outside business activities (don’t have to be paid)
          4. Disciplinary record
  7. Reports by Issuers
    1. 10K, 10Q, 8K (special report of significant events)
      1. 4 days to file the 8K, half
  8. Margin to FRB
    1. FRB sets Reg T margins (broker to customer)
    2. Regulation U
      1. Controls credit on securities from banks to their customers (brokers)
  9. Stabilization
    1. Stabilizing bid post IPO, just follow the rules
    2. Only legal market influence


Trust Indenture Act of 1939

Corporate bond issues, over $50M must have a trust indenture / trustee appointment to protect the bondholders

Does not apply to Govt, Agency, or Muni’s

Investment Advisors Act of 1940

Anyone who gives advice about securities for a fee must register with the SEC, as an RIA (registered investment adviser)

Excluded: broker-dealers, banks, professionals who only give incidental advice (lawyers, etc.)

$100M of assets or more as RIA, then you register with SEC and are subject to SEC regulations

<$100M of assets as RIA, only have to register with the state


SIPC (Securities Investor Protection Act) of 1970

Insures customer accounts at broker-dealers against failure of their business

Coverage is $500,000 of equity, inclusive of maximum cash coverage of $250,000

Per customer name (includes all accounts you have)

A free credit balance is un-invested cash

If you have more than 500k, you become a general creditor of the failed company

What is the valuation date in a SIPC liquidation? – the date the court is petitioned to appoint a trustee in bankruptcy

Federal Telephone Consumer Protection Act (Cold Calling)

Original rule: cannot solicit before 8am or after 9pm in the time zone of the recipient of the call

Must maintain a do not call list – firm by firm if the customer says do not call me

Can’t call people who were referred to your firm if they were on the list

Federal do not call list (established later): if a customer goes on the federal do not call list, you cannot call to solicit unless they are a friend or family member, they invite you to call them, there is an established business relationship

State Blue Sky Laws (State Registration)


  1. Registration of new issues in the state
  2. Registration of:
    1. Broker Dealers, and their agents
      1. Series 63 exam
        1. Commission based products only
      2. Investment Advisors, and their representative
        1. Series 65 exam
          1. Fixed fee accounts (Wraps, NMFBA
        2. If you are physically located in the state, or if you solicit in the state, then you must register in the state (for both above)
        3. Series 66 exam, combo of the 63 and 65

FINRA Rules – Registered Rep

As a registered rep

  1. Test content is confidential
    1. If you fail, you have to wait 30 days to retake it
    2. After 3 fails, next is 6-month intervals
    3. If FINRA rep divulges test content to someone about to take it
      1. Both are subject to disciplinary action
    4. Outside of mandatory arbitration (sexual harassment, discrimination, whistleblower)
    5. Continuing Education:
      1. Annual training called “Firm Element CE” YEARLY
        1. Can’t train on selling skills, all else is good
      2. On second anniversary of registration, and every 3 years thereafter:
        1. Must do Regulatory Element CE = FINRA
          1. If you don’t do it within 120 day window, you are suspended with NO PAY
        2. Full-Time Employment Obligation
          1. If you wish to take outside work, you must notify your firm in writing
          2. Must get approval of your firm
          3. Must amend your U4 – into brokercheck
        3. Gift Limit
          1. $100 per person per year, give or get, related to your work
            1. Business entertainment doesn’t count if w/client
            2. Doesn’t apply if there is an overriding personal relationship
          2. Reportable events
            1. Must notify FINRA promptly if:
              1. Are suspended or expelled by another regulator
              2. If you are sued under one of the securities acts
  • Subject of a really bad customer complaint (felony)
  1. If subject of a customer complaint that is settled for more than $15,000
  2. Arrested or indicted, other than minor traffic infractions
  3. Disciplined by the firm in the amount of $2,500 or more

MSRB Rules

  1. Political Contributions Rule (state campaigns only)
    1. If you are a MFP (municipal finance professional)
      1. Max amount you can give to an elected official campaign in which you are entitled to vote is $250
      2. If you give more than $250, or give any amount to a campaign where you are not entitled to vote, then your firm is banned for 2-years doing negotiated underwritings for the issuer

Communication Rules

  1. Correspondence (sending an email to clients telling them it is a good time to buy X stock)
    1. Up to 25 existing or prospective retail clients
      1. Can recommend
    2. Subject to post-use review and approval
      1. No filing with FINRA

Retail Communication

  • More than 25 existing or prospective retail clients (sending a recommendation such as above, but to more than 25 people)
  • “prior approval by principal”
  • Possible filing with FINRA subsets:
    • Advertising: general public
      • NO recommendations
    • Sales literature: specific audience
      • CAN recommend
      • Password protected website??
    • If options: pre-file with CBOE

Institutional Communication

  • To a broker-dealer bank, pension fund, investment companies, advisors, >$50M assets
  • “Post use review and approval”
  • CAN recommend
  • No filing with FINRA


Research Reports

Disclose if:

  • Firm or officers own stock or options in the company the report is on
  • If the firm was an underwriter in the past 12 months
  • If the firm intends to seek underwriting business within the next 3 months
  • Approved by Supervisory Analyst
  • Analyst certification on report
    • Must be honest, true, unconflicted opinion
    • Reg AC
  • If rep gives a talk to 15 or more individuals and allows them to form their own buy/sell opinions, then rep comes under this rule
  • Scripted speech is sales literature, unscripted is public forum which is fine