🕵️ Insider Trading, SOX, and Regulation NMS – Series 7 Exam Essentials

The Series 7 exam evaluates a candidate’s understanding of securities regulations, trading rules, and ethical standards. Three key areas tested are Insider Trading, the Sarbanes-Oxley Act (SOX), and Regulation NMS (National Market System). These rules are critical to maintaining market integrity, preventing abuse, and ensuring fair competition.

Here’s what you need to know for the exam.

⚖️ Insider Trading – Rule 10b5-1 & 10b5-2

🔐 What Is Insider Trading?

Insider trading involves buying or selling securities based on material, nonpublic information (MNPI). It is prohibited under the Securities Exchange Act of 1934.

🚫 Key Concepts:

• Material Information: Would impact a reasonable investor’s decision
• Nonpublic Information: Not yet released to the public
• Tippers and Tippees: Both the source and recipient of inside info can be liable
• Rule 10b5-1: Defines illegal insider trading based on intent and information access
• Rule 10b5-2: Clarifies liability in relationships of trust/confidence (e.g., spouses, lawyers)

📚 Exam Tip:

Expect scenario-based questions asking whether a trade violated insider trading rules—focus on access to information, intent, and timing.

🧾 Sarbanes-Oxley Act (SOX) of 2002

🏛️ Purpose:

Passed in response to corporate scandals (e.g., Enron, WorldCom), SOX strengthened corporate governance, accounting transparency, and executive accountability.

🧠 Key Provisions to Know:

• CEO/CFO Certification: Executives must personally certify financial statements
• Internal Controls: Firms must maintain robust internal audit systems
• Audit Committee Independence: Public companies must have independent audit boards
• Document Retention: Criminal penalties for altering or destroying records
• Whistleblower Protection: Legal safeguards for employees reporting fraud

📚 Exam Tip:

SOX applies to public companies, not broker-dealers directly—but it’s fair game for regulatory ethics and reporting questions on the Series 7.

💻 Regulation NMS (National Market System)

📈 Purpose:

Created by the SEC in 2005, Reg NMS promotes fairness and competition in the trading of equity securities on U.S. exchanges.

🧠 Core Components:

1. Order Protection Rule (Rule 611)

• Requires trading centers to route orders to the exchange with the best price, preventing “trade-throughs” (executing at an inferior price).

2. Access Rule (Rule 610)

• Ensures fair and non-discriminatory access to quotations
• Caps access fees on quotes at $0.003 per share

3. Sub-Penny Rule (Rule 612)

• Prohibits quotes in increments smaller than $0.01 for stocks priced over $1
• Ensures orderly, meaningful price quoting

📚 Exam Tip:

Reg NMS applies primarily to exchange-listed equities and affects how orders are routed and executed. Watch for questions on trade execution fairness and price priority.

🧠 Summary Chart

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