FINRA Series 7 / SIE Exams Series 7: Securities Regulation, Underwriting, and Professional Conduct Syllabus

What is a tombstone advertisement and what may it contain?

A limited advertisement permitted during the registration/cooling-off period. It may state only basic facts: issuer name, type/amount of security, price, and underwriters — it is not an offer to sell.

What is a red herring (preliminary prospectus)?

A preliminary prospectus used during the cooling-off period to solicit indications of interest. It omits the final public offering price and effective date and carries a red-ink disclaimer; it is not an offer to sell.

What are the three time periods of the registration process under the Act of 1933?

Pre-registration (pre-filing) period — no offers; Cooling-off period (min 20 days) — indications of interest only, red herring; Post-effective period — sales and final prospectus delivery permitted.

What is the minimum statutory cooling-off period for a registration statement?

20 days (it is often longer in practice while the SEC reviews and issues deficiency letters).

What SEC form is used by domestic companies for annual reports, and when is it due?

Form 10-K, filed annually; due within 60 to 90 days of fiscal year-end depending on filer size (large accelerated filers: 60 days).

What is Form 10-Q and Form 8-K?

Form 10-Q is the quarterly (unaudited) financial report (filed 3 times per year). Form 8-K reports material corporate events within 4 business days of the event.

Under the Securities Exchange Act, who must file reports of beneficial ownership (Forms 3, 4, 5)?

Insiders — officers, directors, and beneficial owners of more than 10% of a registered equity class. Form 4 (changes) is due within 2 business days of the transaction.

What is a Schedule 13D and its filing deadline?

Filed by anyone acquiring more than 5% beneficial ownership of a registered equity security; due within 5 business days (recent rule) of crossing the 5% threshold.

What does a firm-commitment underwriting mean?

The underwriters purchase the entire issue from the issuer and resell it to the public, assuming the full financial risk of any unsold shares.

What is a best-efforts underwriting?

The underwriter acts as agent and sells only what it can, with no obligation to buy unsold shares; the issuer bears the risk of unsold securities.

Distinguish 'all-or-none' (AON) from 'mini-max' best-efforts offerings.

AON: the entire issue must be sold or the offering is canceled and money returned. Mini-max: a minimum must be sold before any closing, up to a maximum amount.

In a syndicate, what is the difference between a Western (divided) and an Eastern (undivided) account?

Western: each member is liable only for its own allotment. Eastern: each member is liable for its proportionate share of any unsold securities regardless of its own sales.

What is the underwriting spread, and how is it divided?

The spread is the difference between the public offering price and the proceeds to the issuer. It is divided into the manager's fee, the underwriting (syndicate) fee, and the selling concession.

What is a syndicate (selling group) member's selling concession?

The portion of the spread paid to the firm that actually sells the security to the public — it is the largest component of the spread.

What does Rule 5130 (the 'new issue' rule) prohibit?

Prohibits FINRA member firms from selling shares of an equity IPO (a 'new issue') to restricted persons, such as member firms, their associated persons, and certain immediate family members.

Under the FINRA new-issue rules, who is generally a 'restricted person'?

Broker-dealers, their associated persons, finders and fiduciaries to the offering, portfolio managers, and immediate family of associated persons — they may not buy at the IPO public offering price.

What is the MSRB and who does it regulate vs. not regulate?

The Municipal Securities Rulemaking Board writes rules for municipal securities dealers and brokers. It has NO enforcement authority and does NOT regulate issuers (issuers are exempt).

What is a competitive bid vs. a negotiated municipal underwriting?

Competitive bid: the issuer awards the issue to the syndicate submitting the lowest interest cost (typically GO bonds). Negotiated: the issuer selects an underwriter and negotiates terms directly (typically revenue bonds).

In a competitive municipal bid, what are NIC and TIC?

Net Interest Cost (NIC) is total interest minus premium (or plus discount), ignoring time value of money. True Interest Cost (TIC) accounts for the time value of money (present value); the winning bid is the lowest cost basis specified.

What is the Bond Buyer's 'Official Notice of Sale'?

The notice published by a municipal issuer soliciting competitive bids from underwriters; it states the terms, dates, bidding restrictions, and basis of award (NIC or TIC).

What is a municipal Official Statement?

The disclosure document for a municipal offering, analogous to a prospectus, providing financial and legal information about the issuer and the bond issue; munis are exempt so it is not technically required by the Act of 1933 but is provided under MSRB rules.

Under MSRB Rule G-37, what is the political contribution limit before triggering a ban?

An MFP (municipal finance professional) may contribute up to $250 per election to an official for whom they can vote; exceeding it triggers a 2-year ban on negotiated municipal business with that issuer.

What is a bona fide quote vs. a nominal (subject) quote in municipals?

A bona fide quote is a firm price at which the dealer is ready to trade. A nominal quote is given for informational purposes only and is not a firm offer to trade.

Under FINRA Rule 2210, what are the three categories of communications with the public?

Retail communications (to more than 25 retail investors in 30 days), Correspondence (to 25 or fewer retail investors in 30 days), and Institutional communications (to institutional investors only).

What is the principal-approval requirement for retail communications under Rule 2210?

Retail communications generally require principal approval before first use. Correspondence and institutional communications require supervision/review but not necessarily prior principal approval of each piece.

When must certain retail communications be filed with FINRA's Advertising Regulation Department?

Generally within 10 business days of first use (or 10 days before first use for new member firms in their first year, and pre-filing for certain products like registered investment company communications with rankings).

What are the markup/markdown disclosure requirements under FINRA's 5% policy?

The 5% policy is a guideline (not a rule) for fair markups, markups, and commissions. It is not a fixed ceiling — fairness depends on factors like security type, price, availability, and amount of money involved.

How is a markup calculated and on what price is it based?

Markup = (price to customer − prevailing market price) ÷ prevailing market price. For a dealer (principal) transaction it is based on the current inter-dealer market price, not the dealer's own cost.

What is the FINRA Code of Procedure used for?

It handles disciplinary actions for rule violations by members and associated persons; complaints are brought by FINRA's Department of Enforcement and heard by a Hearing Panel (alleged violations of rules).

What is the FINRA Code of Arbitration and is its decision binding?

It resolves monetary disputes (member vs. member, member vs. associated person, and customer vs. member when agreed). Arbitration decisions are final and binding with no right of appeal. The eligibility/time limit for filing a claim is generally 6 years from the event.