Series 7 - General Securities Representative ExamThe Series 7 exam - the General Securities Representative Qualification Examination (GS) - assesses the competency of an entry-level registered representative to perform their job as a general securities representative.The exam measures the degree to which each candidate possesses the knowledge needed to perform the critical functions of a general securities representative, including sales of corporate securities, municipal securities, investment company securities, variable annuities, direct participation programs, options and government securities.Candidates must pass the Securities Industry Essentials (SIE) exam and the Series 7 exam to obtain the General Securities Representative registration. For more information about the SIE and Series 7 exams, refer to FINRA Rule 1210 and FINRA Rule 1220(b)(2).
SERIES 7 AT A GLANCENUMBER OF ITEMS 125FORMAT Multiple choiceDURATION 3 hours and 45 minutesPASSING SCORE 72COREQUISITE(S) SIECOST $300EFFECTIVE DATE 09/1974 - present
at Page 2 of the 11Cir OpinionHeslin Gallagher was offered a dream job as an investment counselor. But first she needed to pass certain qualifications examinations, including the "Series 7 exam." The Series 7 exam is administered by the Financial Industry Regulatory Authority, Inc. ("FINRA"), and is one of the requirements for becoming a securities broker. Gallagher took and failed the Series 7 exam three times. As a result, she lost her job.Frustrated and heartbroken by the results, Gallagher "set out to do a little research" and came to believe that FINRA was engaging in an "exam-churning scheme" by using deceptive algorithms in its exam software to unfairly rig the Series 7 exam. FINRA's goal, according to Gallagher, was not to ensure a minimum level of qualifications for the securities industry, but instead to ensure a minimum level of revenue for FINRA by increasing the number of candidates who will have to retake (and therefore pay to retake) the exams. She sued FINRA pro se in federal court in August 2021, asserting that the alleged exam-churning scheme violated § 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and 17 C.F.R. § 240.10b-5.
[G]allagher's allegations against FINRA relate to the design, administration, and scoring of the Series 7 exam. According to the complaint, FINRA's exam software uses algorithms -- essentially a complex set of instructions and calculations for a computer -- to "detect the areas in which a candidate is strong and the areas in which a candidate is weak" and adjust the remaining questions mid-exam, and it includes 10 unidentified "pretest" questions in the 135-question test, which purportedly do not contribute to a candidate's score.2 The complaint also alleges that FINRA views its exams as having "tremendous economic value" to its "business" and that it seeks to protect the confidentiality of its exams. The complaint then asserts that FINRA uses algorithms and unscored questions purely for the purpose of financial enrichment, by increasing the number of exam failures and generating more business for itself. In Gallagher's view, these aspects of the Series 7 exam are not for legitimate regulatory purposes and so are not shielded by immunity.= = = = =Footnote 2: The complaint's allegations also covered the rules surrounding the test-taking environment, such as the refusal to credit time for bathroom breaks, but Gallagher does not raise those allegations in her briefing on appeal.
The Exchange Act delegates substantial regulatory authority over the markets to private, "self-regulatory organizations" ("SROs"). Weissman, 500 F.3d at 196. And it requires any person who wishes to conduct securities-related business to be associated with a registered securities association and to comply with that association's rules. 15 U.S.C. § 78o(a)(1), (b)(1); Turbeville v. Fin. Indus. Regulatory Auth., 874 F.3d 1268, 1270 (11th Cir. 2017). As the nation's only registered national securities association since 19391, FINRA, a private, not-for-profit corporation and SRO, "oversees and regulates securities firms who join its membership, individuals who work for those firms, and individuals associated with those firms." Turbeville, 874 F.3d at 1270-71 & n.2.
SROs like FINRA "have dual status as both quasi-regulators and private businesses." Weissman, 500 F.3d at 1296. "Because they perform a variety of vital governmental functions, but lack the sovereign immunity that governmental agencies enjoy, SROs are protected by absolute immunity when they perform their statutorily delegated adjudicatory, regulatory, and prosecutorial functions." Id. In other words, "entities that enjoy absolute immunity when performing governmental functions cannot claim that immunity when they perform non-governmental functions." Id. "Only when an SRO is acting under the aegis of the Exchange Act's delegated authority does it enjoy [the] privilege" of immunity. Id. at 1297 (quotation marks omitted).To determine whether an SRO's conduct is quasi-governmental, and thus whether absolute immunity applies, "we look to the objective nature and function of the activity for which the SRO seeks to claim immunity." Id. The test does not turn on "an SRO's subjective intent or motivation," but rather the "function being performed." Id.
The regulatory duties delegated to SROs like FINRA include developing and administering qualifications examinations. Congress mandated that any person trading in securities meet "standards of training, experience, competence, and such other qualification as the [U.S. Securities and Exchange Commission ("SEC")] finds necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78o(b)(7). To that end, the SEC is authorized to administer qualifications tests covering "questions related to bookkeeping, accounting, internal control over cash and securities, supervision of employees, maintenance of records, and other appropriate matter." Id. § 78o(b)(7)(B). That examination authority has been broadly delegated to SROs, which must ensure their members are "registered or approved in accordance with the standards of training, experience, competence, and other qualification standards . . . established by the rules" of the SRO. 17 C.F.R. § 240.15b7-1. "The delegation involves close oversight," since "the SEC approves all rule changes by an SRO" and "may also amend an SRO's rules itself." In re Series 7 Broker Qualification Exam Scoring Litigation, 548 F.3d 110, 112 (D.C. Cir. 2008).In short, FINRA develops, administers, and scores the Series 7 exam under its delegated authority. See In re Series 7, 548 F.3d at 112; 17 C.F.R. § 240.15b7-1. Its obligations in that regard "arise only because of regulations under the Exchange Act." In re Series 7, 548 F.3d at 115. And those functions would "otherwise be performed by a government agency," namely, the SEC. Weissman, 500 F.3d at 1297; see 15 U.S.C. § 78o(b)(7)(B). Thus, FINRA's design and administration of the Series 7 exam, including its use of unscored questions and algorithms, arise out of, and directly relate to, its performance of a regulatory duty, for which it enjoys quasi-governmental immunity. Weissman, 500 F.3d at 1296-97.That FINRA also operates as a business and earns money from the Series 7 exam, which it treats as confidential, proprietary information, does not change the nature and function of the activity being performed. See id. Gallagher attributes either profit-seeking or more "nefarious" motivations to FINRA's use of algorithms and unscored questions in its exam software. But the test for immunity does not turn on FINRA's "subjective intent or motivation." Id. at 1297.
And in any event, Gallagher's complaint fails to plausibly establish that FINRA's use of algorithms and unscored questions for the Series 7 exam has no legitimate regulatory purpose. Gallagher infers from her experience and research that "the algorithms served no regulatory purpose whatsoever." We assume without deciding immunity would not apply if that were true. But her factual allegations fail to give rise to more than a "sheer possibility" that FINRA's use of algorithms is entirely divorced from its legitimate regulatory duties, which is not enough to state a plausible claim. See Iqbal, 556 U.S. at 678. At best, Gallagher's allegations suggest that FINRA could employ algorithms for purely profit-seeking purposes or with the intent to "generate a particular 'class' of deliberately failed persons." But she offers no reason to believe that FINRA has actually used algorithms in this way. In fact, she admits that the "function of the algorithms" is hidden and "the extent of the harm is unknown." Accordingly, Gallagher's allegations do not plausibly connect FINRA's use of algorithms and unscored questions in the Series 7 exam to a nefarious or non-regulatory purpose.
Finally, we must make clear that, contrary to Gallagher's suggestions, our decision to affirm the dismissal of Gallagher's complaint is no slight on her intelligence or character. On the contrary, Gallagher has represented herself quite ably in unfamiliar terrain, making relevant and well-presented arguments. And while her difficult experience is no doubt frustrating for her, we cannot say that her complaint states a plausible claim that could pierce FINRA's quasi-governmental immunity for the performance of its delegated regulatory duties, or that she could state such a claim if granted leave to amend.
[T]he Seventh Circuit has suggested as much in strong dicta:
The fact that the NASD is subject to 'extensive and detailed' governmental regulation does not necessarily convert that organization's actions into those of the state. Indeed, although we have not expressly ruled on the question of whether the NASD is a state actor, we have previously expressed doubt about 'the proposition that the comprehensive regulation of securities exchanges by the federal government would turn those exchanges into governmental actors.' In addition, several of our Sister Circuits have reached the conclusion that the NASD is not a state actor.
Otto v. SEC, 253 F.3d 960, 965 (7th Cir. 2001) (citations omitted). The Seventh Circuit thus likely would agree with what appears to be the unanimous opinion of the other circuits that FINRA is not a state actor. See, e.g., Santos-Buch v. FINRA, 591 F. App'x 32, 34 (2d Cir. 2015) ("FINRA is not a state actor that can be held to constitutional standards."). Because FINRA is not a state actor, Legaspy is unlikely to succeed on its claim that FINRA has violated the Fifth Amendment.
Much of Beyn's reply brief is dedicated to arguing that, despite abundant case law to the contrary, FINRA is a state actor and, accordingly, constitutional protections apply in FINRA disciplinary proceedings. (Reply Br. at 9-10, 15-19.) The Commission has held repeatedly, however, that FINRA is not a state actor. See, e.g., Timothy P. Pedregon, Exchange Act Release No. 61791, 2010 SEC LEXIS 1164, at* 19 n.19 (Mar. 26, 2010) (explaining that "[i]t is well established that the requirements of constitutional due process do not apply to FINRA because FINRA is not a state actor."); Mark H Love, 57 S.E.C. 315,322 n.13 (2004) (stating that the Commission has "held that [FINRA's predecessor] NASD proceedings are not state actions and thus not subject to constitutional requirements"); William J. Gallagher, 56 S.E.C. 163, 16a n. l 0 (2003) (noting that "many courts and this Commission have determined that self-regulatory organizations such as the NASD are not subject to. . . constitutional limitations applicable to government agencies"). Federal courts have also held that FINRA is not a state actor. See, e.g., D.L. Cromwell Invs., Inc. v. NASD Regulation, Inc., 279 F.3d 155, 162 (2d Cir. 2002) (explaining that "[i]t has been found, repeatedly, that the NASD itself is not a government functionary"); First Jersey Sec., Inc. v. Bergen, 605 F.2d 690, 699 n.5 (3d Cir. 1979) (concluding that NASD is not a state agency).