Fuel routing. This can't be correct!

[mkcharlie]

Facts: Recently acquired '40 Ford w/ electric and mechanical fuel pumps with too much pressure to the carb. Notice in the pic attached the flow of fuel. Just follow the magenta lines with arrows from position marked "Fuel Tank" to the "Carb". Notice that the fuel comes from tank thru in-line filter into the mech. pump then out to the "out" connection of the regulator, then out the "in" port to the carb. (Dizzy yet?) With the ignition "on", turning the fuel pump toggle switch "on" without starting the car, the pressure gauge reads 4 lbs steady. When I start the car, the gauge reads 5-7 lbs.
Methinks this is routed wrong as the gauge is measuring the pressure before the regulator. I've also included a close up of the regulator (Holley) to show the markings.
Two questions: One, am I right and would a simple fuel flow re-route thru the regulator solve my problems?
Two, If, I wish to only use the electric pump, what else do I need to consider besides a block off plate for the old mechanical FP? Thanks