The Four Functions at a Glance
| Function | Weight | ~Questions | Study Priority |
|---|---|---|---|
| F1: Seeks Business for the Broker-Dealer | 7% | 9 | Low (score padding) |
| F2: Opens Accounts After Evaluating Customer Profiles | 9% | 11 | Medium |
| F3: Provides Investment Information & Recommendations | 73% | 91 | Critical — start here |
| F4: Obtains and Verifies Purchase and Sales Instructions | 11% | 14 | Medium |
Function 1: Seeks Business (7% — ~9 Questions)
Communications with the Public: Retail vs. institutional vs. correspondence categories, principal approval requirements, FINRA Rule 2210, social media rules, product-specific advertising restrictions.
New Issues and Underwriting: Cooling-off period rules (what you can and cannot do), firm commitment vs. best efforts, eastern vs. western accounts, Reg D private placements (Rule 506b/c), Rule 144 (restricted vs. control stock, 6-month holding period), accredited investor thresholds ($1M net worth or $200K/$300K income).
Function 2: Opening Accounts (9% — ~11 Questions)
Account Types: Individual, joint (JTWROS vs. TIC), corporate, trust, fiduciary, custodial (UGMA/UTMA), DVP/RVP, pattern day trading requirements.
KYC and AML: Customer identification program, CTR (cash >$10,000, 15-day filing), SAR (suspicious activity, 30-day filing, never tip off the customer), three stages of money laundering, beneficial ownership rules, Reg S-P privacy requirements.
Suitability and Reg BI: Four Reg BI obligations (Disclosure, Care, Conflict of Interest, Compliance), Form CRS requirements, best interest standard vs. suitability, three suitability prongs (reasonable-basis, customer-specific, quantitative).
Retirement Accounts: Traditional vs. Roth IRA ($7,000/$8,000 contribution limits), RMD age 73 (SECURE 2.0), 10% early withdrawal penalty exceptions, direct transfer vs. 60-day rollover (once per 12-month period), mandatory 20% withholding on employer plan indirect rollovers, SEP-IRA, SIMPLE 2-year rule, 401(k)/403(b)/457.
Function 3: Investment Products & Recommendations (73% — ~91 Questions)
This is the exam. Every product area below is tested deeply and numerically.
Equity Securities (~10%): Common stock rights (voting, dividends, preemptive rights), preferred stock types (cumulative, participating, convertible, callable), rights and warrants, ADRs, stock splits and reverse splits, liquidation priority.
Corporate Bonds (~8%): Secured vs. unsecured types (mortgage bonds, debentures, subordinated debentures, equipment trust certificates), convertible bond parity calculations (conversion ratio, parity price of bond and stock), zero-coupon OID tax, call provisions and YTC, income bonds (interest not guaranteed, no default on missed payment).
Debt Fundamentals (~10%): Current yield formula (coupon ÷ price), yield hierarchy (Nominal < Current < YTM for discount bonds), duration and price sensitivity (% price change ≈ duration × rate change), convexity, money market instruments (T-bills, commercial paper, BAs, repos), structured notes.
Treasuries & Agencies (~7%): T-bill/note/bond maturity grid, TIPS (principal adjusts with CPI, phantom income tax), STRIPS (OID treatment), Dutch auction mechanics, state/local tax exemption for Treasuries. GNMA (full faith and credit) vs. FNMA/FHLMC (GSEs, implied guarantee only), agency tax treatment (fully taxable at all levels).
Municipal Securities (~15%): GO bonds (backed by taxing power, voter approval required) vs. revenue bonds (project revenues only, no voter approval, conduit authority), TEY formula (muni yield ÷ (1 − tax rate)), flow of funds waterfall (O&M → debt service → reserve → renewal → surplus), MSRB structure (writes rules, no enforcement authority), FINRA enforces for BDs, serial vs. term bonds, official statement, legal opinion. Munis in IRAs are unsuitable.
CMOs & Asset-Backed (~5%): CMO tranche types (sequential-pay, PAC, companion, Z-tranche), prepayment vs. extension risk, PAC protection within PSA band, IO/PO strips behavior when rates rise/fall.
Packaged Products (~10%): NAV/POP formula (POP = NAV ÷ (1 − load%)), maximum sales charge 8.5%, share classes (A/B/C tradeoffs), breakpoints and rights of accumulation, variable annuity accumulation units vs. annuity units, assumed interest rate, 1035 exchange, ETF creation/redemption vs. mutual fund forward pricing.
DPPs, REITs, Hedge Funds (~7%): LP at-risk rules, passive activity loss limitations (PAL), oil & gas IDCs (100% deductible year 1), REIT 90% distribution requirement, REIT dividends as ordinary income (not qualified), hedge fund lock-up periods, qualified purchaser vs. accredited investor.
Options (~15–20%): All four basic positions (max gain/loss/breakeven), covered calls (effective cost basis, capped upside), protective puts (floor the downside), bull/bear call/put spreads (all four: construction, net debit/credit, breakeven, max gain, max loss), long and short straddles (both breakevens), index options (cash-settled, European-style), LEAPS. This requires calculation fluency from first principles.
Suitability & Portfolio Analysis (~8%): Investment objectives and risk tolerance matching, beta and weighted portfolio beta, alpha and CAPM (Rf + β × (Rm − Rf)), dollar-cost averaging average cost calculation, systematic vs. unsystematic risk, diversification.
Tax Treatment (~6%): LTCG (held >12 months, 0/15/20% rates), capital loss netting (short + long, $3,000 ordinary income deduction), wash sale rule (61-day window: 30 days before or after sale), adjusted cost basis after wash sale, qualified dividends (15% rate, 61-day holding requirement), FIFO default cost basis, specific identification.
Confirmations, Settlement, Order Types (~7%): Trade confirmation required content and timing, account statements (quarterly minimum), settlement dates (equities T+1, bonds T+2, Treasuries T+1), ex-dividend date (1 business day before record date), limit/stop/stop-limit order mechanics, GTC dividend adjustment, short sale Reg SHO locate requirement.
Function 4: Processing Transactions (11% — ~14 Questions)
Margin Accounts: Reg T 50% initial, FINRA long maintenance 25%, FINRA short maintenance 30%, full T-account calculations (equity, debit/credit balance), maintenance call amount, minimum CMV formula (debit ÷ 0.75), SMA and 2x buying power, PDT ($25,000 minimum, 4:1 intraday), restricted account 50% retention rule.
Trade Processing: NSCC netting, DTC book-entry, TRACE reporting for corporate bonds, EMMA for munis, mutual fund 7-day redemption rule.
Prohibited Practices & Compliance: Insider trading penalties (treble damages, 20 years/$5M criminal), SIPC coverage ($500,000 per customer, $250,000 cash sublimit), FINRA arbitration (6-year statute of limitations, 1 arbitrator for ≤$100K, 3 for >$100K), guarantees always prohibited.
Study Strategy
Weeks 1–2: Equity securities + all debt products (corporate bonds, Treasuries, agencies, munis). Build the product foundation.
Weeks 3–4: Packaged products, DPPs, REITs, hedge funds, retirement accounts.
Weeks 5–6: Options — take your time. Work through calculations daily until automatic.
Week 7: Margin, order types, suitability, Reg BI, prohibited practices, tax treatment.
Week 8+: Practice exams — 3–4 full-length timed. Don’t schedule until 80%+.
The free Series 7 course covers all 30 sub-topics with worked calculation examples, Exam Essentials summaries, and concept checks on every chapter.