What about FINRA and NASD certifications?

An overview and explanation of the FINRA / NASD certifications was created by WSO super-user Frieds to help out those who are curious.

Seeing as there have been a few recent posts about the NASD/FINRA Licensing exams, I thought it would be prudent to discuss them with you guys, since most of you monkeys looking for full-time employment on the street will need to take them in some way, shape or form.

Very simply, the licensing exams are a necessity across the board for almost everything you do on the Sell-Side. If you work for a broker/dealer or for a firm that inventories their own assets you might need a license. If you’re in sales and trading or do equity research, you will need it. If you’re doing any sort of client interaction, you need it. If you’re in banking, you’ll need it.

While you won’t need most of the exams offered, I’m going to cover the basics of what you will and will not need to know about these before you sit down to take them.

The Essentials: FINRA AND YOU!

FINRA, or The Financial INdustry Regulatory Authority, is the governing body behind all of these exams. They are the successor to the NASD (National Association of Securities Dealers) and are one of the biggest SROs on Wall Street. An SRO, for those that don’t know, is a Self-Regulatory Organization. An SRO acts as a regulating body over an industry; however they do not necessarily derive any of their power from the government or any federal body. They make the rules we follow that are not mandated by the SEC. They also enforce government regulation like Blue Sky Laws, or state registration as it is also known as, and the Investment Advisor Act of 1940. In addition to acting like a regulator, they are also in charge of all of these licensing exams that you might need to take if you work on the sell side. Not all people will be required to take sell side exams, but most will be expected to upon full time employment. Everyone from Investment Bankers, S&T Folk, Portfolio Managers, Equity Research to the Wealth Management guys that most of you monkeys talk down on and even the guys in the Back Office are required to take these exams. I am going to stick with the absolute basics and avoid discussing the “Limited Rep” and Management exams that are required if you plan on only hawking one product or are considered to be a principal or a manager for a desk.

IF YOU ARE AN INTERN, YOU WILL NOT BE REQUIRED TO TAKE THESE EXAMS. Look back a sentence and reread that statement. It’s highlighted for a reason. Again, if you’re an intern, you’re not required to have your licenses. There are a few reasons. First, there is cost and nomination. The exam requires the firm to pay for your costs of registration and the costs to take the exam, as well as the need to sponsor you for most of the exams. Simply put, taking an exam is a commitment by your firm in you for at least 2 years of your life. Plus there are the carrying costs for registration. It’s not just a one and done deal or a onetime fee, as your firm pays to carry your registration on their books. Second, there is the simple fact that unless you are employed by the firm, if you’re an intern and you end up not getting invited back, you walk away ahead and the firm is left with being out money because of you. Finally, as an intern, you will not be doing anything that would require you, by law, to need these licenses. You will not be executing trades. You will not be discussing “things” with clients. You will not have any responsibilities that require the use of these licenses.

Now, on to the important stuff.…

The Series 3: Commodities, Futures and Forex

The Series 3 is the exam required for anyone who wants to trade Commodities, Futures and Forex as an “Associated Person”, “Commodity Trading Adviser”, “Commodity Pool Operator”, “Commodities Broker”, “Futures Trader on a Commission Basis”, or a Forex trader under the jurisdiction of the NFA (National Futures Association). Basically, this is the exam required to trade commodities and futures. You don’t need a firm to sponsor you (Meaning you don’t need to be in their employment in order to take this exam) nor do you need any other exam if this is your sole job. The Series 3 covers material that is exempt from Blue Sky regulation, as both commodities and futures do not fall under this particular type of jurisdiction, however you are still bound by CFTC and NFA Guidelines. The exam has 120 questions and has a two and a half hour time limit.

The Series 7: General Representation

The Series 7 was the de rigueur standard of the day up until the introduction of the Investment Banking exam a few years ago, because almost everyone on the sell side had the Series 7 if they were on the sell-side. This exam is the “General Securities Rep” exam, meaning that once you pass it, you are able to sell all types of financial products. Unless you are required to have the Series 79 or work in an area that does not require the Series 7, you will have to take it. If you pass, it serves as your general registration with FINRA and as a General Securities Rep on the federal level. It effectively allows you to actually interact with clients and sell any security except for life insurance, real estate, commodities and futures. It is important to note that you cannot trade with the Series 7 alone, as you need to have your state registrations as well. The state registrations will be discussed in detail a little further on.

In order to take the Series 7, your firm needs to sponsor you. Traditionally, it’s taken within the first three months of employment, as that is the period, as defined by FINRA, of apprenticeship where you are supposed to learn and take your exams. The exam itself is a 6 hour long exam, comprising of two sections, each 3 hours in length and a break of between 30 minutes and an hour between the two halves. The exam has 250 questions. The two largest portions, Municipal Securities and Options, comprise about 100 questions on the exam. Knowing and acing those questions will only get you so far though. The Series 7 also covers basic regulation, analysis, the markets, KYC/Account and Ops related information and a few other topics. You need a score of 70% or higher to pass this exam.

The Series 7 is still the standard prerequisite exam for just about every major FINRA/NASD exam you will take outside of the Series 3. All of the principal exams, with the exception of the Commodities and Futures Principal – it requires the Series 3 – that you might take further down the line will require you to have the Series 7 license.

The Series 6X: You’re my Blue Sky, You’re my RIA

The Series 6X is an exam with 3 different flavors, the Series 63, the Series 65 and the Series 66. The Series 7 serves as a prerequisite for both the Series 63 and the Series 66. The Series 65, I wouldn’t worry about, but will discuss briefly for completion sake.
The Series 63 is the Blue Sky Laws exam. Passing this exam allows you to be registered at the state level per Blue Sky regulation and enables you to sell securities in whichever state you or your firm, as the case may be, choose to register in. The name of the law comes from the following quote:

The name that is given to the law indicates the evil at which it is aimed, that is, to use the language of a cited case, "speculative schemes which have no more basis than so many feet of 'blue sky'"; or, as stated by counsel in another case, "to stop the sale of stock in fly-by-night concerns, visionary oil wells, distant gold mines and other like fraudulent exploitations." Even if the descriptions be regarded as rhetorical, the existence of evil is indicated, and a belief of its detriment; and we shall not pause to do more than state that the prevention of deception is within the competency of government and that the appreciation of the consequences of it is not open for our review.

This quote is attributed to US Supreme Court Justice Joseph McKenna as part of his opinion on Hall vs. Geiger-Jones Co. (242 U.S. 539 [1917]) despite the fact that he was not the first to use this quote.

As to the exam itself, this exam covers state securities regulation, laws and ethics. It has 60 questions and is 75 minutes long. You need a score of 72% or higher to pass.
The Series 65 is the Registered Investment Advisor exam. This exam is required for money managers, investment advisors and anyone that manages funds on a non-commission basis. While this exam is still around, most of you will not be taking this exam, as your firm will require that you have either the 7/63 or 7/66 if you are in a position that requires those exams. The only exception is if you plan to market yourself as a Registered Investment Advisor, but that’s another post for another day.

The Series 66 combines both the Series 63 and the Series 65. It combines the Blue Sky Laws and Registered Investment Advisor exam into a smaller, 100-question test that allows the candidate who passes to both manage money on a discretionary basis and receive their state registration. This covers everything from the Series 63 as well as Investment Strategy, Investment types and an in-depth look at knowing your client. There is no overlap from the Series 7 material that you would find on the other two exams. In general, all three of the 6X exams are known to be trickier, as it tests how well you know the rules you are being tested on and their uses. The Series 66 is two and a half hours long and requires a passing score of 71% or higher.

The Series 79: The Original Bankster

I will admit, I am least familiar with the Series 79, only because I was exempt from needing to take it, but it’s the licensing exam for all of you wannabe Bankers. If you were lucky enough to be grandfathered in, that’s awesome. If you weren’t, I wouldn’t sweat it. The Series 79 covers just about every IBD and ECM/DCM function there is. Basically, this exam covers two key areas:

1. Capital Markets Advisory for Debt or Equity securities
2. Traditional IBD Functions from Advisory Work to Restructuring and everything in between. And yes, your product group under IBD falls under traditional functions. It doesn’t matter whether you’re in FIG, TMT or SSG, you’re still just a sucker who will need to get his Series 79 if you work at a sell-side shop.

This exam, while new, was created as a result of the problems that arose from the latter part of the last decade and is now required if you plan to do IBD. This exam serves as the IBD equivalent of having the Series 7/66 combo. The exam is 175 questions and is five hours long.

The Series 86/87: Learning to Dig Deeper

The Series 86/87 combination is for Equity Research. If you do any sort of ER Work for a sell-side shop, you will need this in some way, shape or form. The Series 7 and 63 are required before you can even be considered to sit for this exam. This has to do with the fact that in order to talk with clients, you need to have the Blue Sky Registration. The exam itself is broken up into two parts, the Series 86, Investment Analysis and Valuation, and the Series 87, Legal Regulation and Best Practices for Equity Research. They cover topics pertinent to exactly what it sounds like in order to make sure that you are at least competent in how you perform your valuations and are more than capable of being able to understand the basic regulatory framework. Seeing as these are a combination exam, you are required to pass the 86 before you can sit for the 87 even though they directly related. The Series 86 has 100 questions and a four hour time limit. The Series 87 has 50 questions with a 90 minute time limit.

Here’s an interesting fact for anyone doing Equity Research. If you have passed your CFA Level 1 and Level 2 exams, you can use that in lieu of taking the Series 86 exam due to the high degree of overlap between the two exams. It’s just something worth noting…

The Series 55: Equity is a Bitch

The Series 55, the last exam we will be discussing, is Equity Trading Desk exam. If you plan to be an equity trader or trade in convertible debt securities on a trading desk, you need to take this exam on top of its prerequisites, the Series 7 and the Series 63. This exam covers a slew of topics including the markets themselves, trading practices for different markets and different types of securities, rules and regulations and electronic trading, all things you need to know if you work on an Equities Trading Desk. The exam is 3 hours long and has 100 questions. You need a 70% or higher to pass.

Some Last Minute Thoughts and Advice

Just so you are aware, the major shops will pay for the exams if you are required to take them. However, there are other shops, particularly some of the shadier ones, which will make you pay for the registration costs. Although I hate my former roommate, I know he had to pay his registration costs out of pocket so this way if he failed, his employer was not the cash for registration. So be careful if you’re going to shop with a less than reputable reputation.

Before you go and ask about prep time and all those other fun questions, let me leave you with a bit of advice. It sucks having to take any of these exams more than once. Overkill, while more time consuming, is better than being under-prepared. I know of firms that have a one and done policy for the Series 7, where passing it must be done on the first attempt or you’re fired. This isn’t necessarily the case for other exams, but I have seen cases where people have failed the Series 66 multiple times and have been given ultimatums where they are gone if they fail it again. Just so you are aware, your firm will pay for study materials for you to use and possibly a class along with it. My advice for all of these exams is to take all of the practice exams until you’re comfortably scoring in the high 80s and you should be able to pass them without much difficulty.

As always Monkeys, fire away with questions if you have them.