Exams and registrations mean revenue for the Financial Industry Regulatory Authority (FINRA), so it should be no particular surprise that there are quite a lot of them out there. Some, like the Series 7 and Series 63 are well-known, traditional exams that a large majority of people who work in the investment industry will have had to take at some point in their career. Some, like the Series 15, are pretty esoteric (Foreign Currency Options) and will only be relevant to a small subset of the investment professional community.
The Series 86/87 exams live in a middle ground between those extremes. As these exams are required for anybody wishing to work as a sell-side research analyst, they really are not esoteric. By the same token, relatively few people will have an opportunity to become a research analyst and need to take these exams.
What They Are For
The Series 86 and 87 exams are required by FINRA to work as a sell-side research analyst for a registered broker-dealer in the United States. While a cynic could certainly say that the creation of these exams is a byproduct of FINRA trying to grow its power base and revenue, the reality is that the embarrassments of the dot-com era highlighted serious deficiencies when it came to the practice of sell-side research and the handling of ethical conflicts. As such, the two exams essentially demonstrate that an analyst who has passed them has the basic professional competence to perform the job and an awareness of the rules and regulations that pertain to disclosure, conflicts of interest and ethical conduct.
Not all would-be analysts have to take the Series 86 exam. Those who have passed the Level 1 and Level 2 CFA exams or the Level 1 and Level 2 Chartered Market Technician exams can request an exemption from the Series 86 exam. In order to qualify, the candidate has to have passed those exams within the two years prior to the Series 86 or have worked continuously as an analyst since passing Level 2.
These Exams Are NOT for Everybody!
It's important to note that these exams are not intended for the general public. This test is only intended for those hired to work as research analysts (whether it's junior analyst, senior analyst, etc.,) and not for brokers, interns or those not currently employed.
As previously mentioned, you have to take the Series 7 before the Series 86/87 exams, and that requires a registered firm to sponsor you. It's also worth noting that the exams cost about $275, and that excludes the cost of fingerprinting, registration and so on. While it may be theoretically possible for an individual to go through all of those steps and sit for the Series 86/87 exams, there would be no point in doing so – a prospective employer would likely see such a person as disturbingly obsessed or out of touch with how the business works.
What to Expect
The Series 86 exam features 100 multiple-choice questions that must be answered in four hours. Ninety questions cover various topics pertaining to analysis, modeling and valuation, while 10 questions apply to information and data collection.
It takes a score of 73 to pass, and various study guide publishers estimate that the exam requires 40 to 45 hours of prep/study time. While that estimate may be accurate for would-be analysts with little finance/financial industry experience, those who've sat for the CFA exams or graduated from an MBA (or perhaps undergrad finance) program may find that estimate to be on the high side.
The Series 87 exam has 50 multiple-choice questions that cover NYSE/NASD rules, the Securities Act of 1933 and the Securities Exchange Act of 1934. The exam also covers the rules and regulations that pertain to the preparation of research reports and the dissemination of information within and outside the firm. It takes a 74 to pass and test-takers get 90 minutes. It takes an estimated 15 to 20 hours to prepare for the Series 87.
The Bottom Line
For the vast majority of would-be sell-side research analysts, the Series 86/87 exams will be little more than an irritating regulatory requirement as part of a broader onboarding process. Few of those who sit for these exams will learn anything new from the Series 86. In contrast, the information required for the Series 87 will be invaluable in staying clear of ethical or regulatory issues and/or staying on the good side of diligent compliance officers.
All told, the Series 86/87 exams were not established to be formidable gatekeepers to the sell-side research industry. Instead, they are designed to confirm that the would-be analyst has a minimal underpinning of analytical and financial knowledge and an awareness of the rules and regulations that govern the job. Though these tests are not particularly difficult or comprehensive, passing them is mandatory to work as a sell-side analyst and it is well worth putting in the effort to make sure that sitting for them is a one-time event.