FINRA Series 7 Course Notes

This section covers Function 1: Seeks Business for the Broker-Dealer from Customers and Potential Customers. It covers correctly classifying communications based on the number of recipients and their investor type. It covers ensuring broker-dealer communications are fair and balanced, avoiding misleading or incomplete information. It covers the broker-dealer's responsibility to communicate product-specific information, including disclosures and risk presentations, to customers and potential customers, aligning with regulatory standards Across the section, identify the trigger fact before applying the specific rule or procedure tested.

• Retail vs. Correspondence: The key difference is the recipient threshold – more than 25 retail investors triggers Retail classification

• Carefully analyze the recipient count and the timeframe

This section covers Function 2: Opens Accounts After Obtaining and Evaluating Customers’ Financial Profile and Investment Objectives. It covers selecting the appropriate account registration based on the customer’s needs and the legal framework governing ownership. It covers understanding the distinctions between common brokerage account types – cash, margin, fee-based, and those utilized by pattern day traders – and the factors that determine their appropriate selection. It covers the firm’s responsibility to collect and maintain accurate customer account information, including required signatures and trusted contact details, as mandated by regulatory rules. Across the section, identify the trigger fact before applying the specific rule or procedure tested.

• Do not choose “Tenants in common” without checking the full fact pattern. Tenants in common do not provide direct passing of interests; interests pass through estates

• Focus on the customer’s stated objectives and the legal implications of each account type

This section covers Function 3: Provides Customers with Information About Investments, Makes Recommendations, Transfers Assets and Maintains Appropriate Records. It covers mitigating risk through diversification, recognizing that a concentrated portfolio, regardless of overall asset allocation, can expose clients to significant issuer-specific or nonsystematic risk. It covers maintaining a portfolio’s intended risk profile through strategic asset allocation and periodic rebalancing. It covers differentiating between systematic and nonsystematic risk, understanding their impact on investments, and how diversification strategies address them. Across the section, identify the trigger fact before applying the specific rule or procedure tested.

• Concentration vs. Systematic Risk: Concentration risk is issuer-specific; systematic risk is market-wide and cannot be eliminated through diversification

• Focus on the client’s needs: Always prioritize the client’s objectives, risk tolerance, and time horizon when considering diversification

This section covers Function 4: Obtains and Verifies Customers’ Purchase and Sales Instructions and Agreements; Processes, Completes and Confirms Transactions. It covers understanding the distinction between firm and subject quotations. It covers the critical process of obtaining and verifying customer order instructions and agreements, ensuring accurate transaction processing and timely confirmation. It covers the selection of appropriate order types – market and limit – based on a client’s stated goals and risk tolerance. Across the section, identify the trigger fact before applying the specific rule or procedure tested.

• A firm quotation is a binding offer, whereas a subject quotation is merely an indication of availability

• Carefully analyze the wording of the quotation to determine if it represents a commitment to trade or simply an indication of availability