So, you've decided to sell investments. Whether you want to be a registered representative (RR) or an investment advisor, the first step in either process is obtaining the proper securities license. The license needed is determined by several factors, such as the type of investments to be sold, method of compensation and the scope of services that will be provided. In this article, we'll examine the different types of licensing and show you how to determine which license is right for you.
FINRA Licensing Breakdown
The Financial Industry Regulatory Authority (FINRA) oversees all securities licensing procedures and requirements. This self-regulatory organization administers many of the exams that must be passed to become a licensed financial professional. It also performs all relevant disciplinary and record-keeping functions.
The Basics of Financial Securities Licenses
FINRA offers several different types of licenses needed by both representatives and supervisors. Each license corresponds to a specific type of business or investment. While there are several licenses geared toward specific types of securities, there are three general licenses that the majority of representatives and advisors usually obtain:
The Series 6 license is known as the limited-investment securities license. It allows its holders to sell "packaged" investment products such as mutual funds, variable annuities, and unit investment trusts (UITs). The Series 6 exam is 135 minutes long, and covers basic information regarding packaged investments, securities regulations, and ethics.
This license is also required for insurance agents that sell variable products of any kind, because securities constitute the underlying investments within those products. Principals who supervise representatives holding a Series 6 license must obtain the Series 26 license in addition to having already obtained the Series 6.
The Series 7 license is known as the general securities representative (GS) license. It authorizes licensees to sell virtually any type of individual security. This includes common and preferred stocks; call and put options; bonds and other individual fixed income investments; as well as all forms of packaged products (except for those that also require a life insurance license to sell). The only major types of securities or investments that Series 7 licensees are not authorized to sell are commodities futures, real estate and life insurance.
The Series 7 exam is by far the longest and most difficult of all the securities exams. It lasts for 225 minutes and covers all aspects of stock and bond quotes and trading; put and call options; spreads and straddles; ethics; margin, and other account holder requirements; and other pertinent regulations.
Those who carry this license are officially listed as "registered representatives" by FINRA, but they are generally referred to as stockbrokers. Many insurance agents and other types of financial planners and advisors also carry the Series 7 license to facilitate certain types of transactions inherent in their businesses. Principals of general representatives must also obtain the Series 24 license.
The Series 3 license authorizes representatives to sell commodity futures contracts, which are generally considered the riskiest publicly traded investments available. Representatives that carry the Series 3 license tend to specialize in commodities and often do little or no other business of any type.
The Series 3 exam is approximately 150 minutes long and covers all forms of commodities transactions, options, hedging, margin requirements and other regulations. An offshoot of this license is the Series 31 license, which allows representatives to sell managed futures (pooled groups of commodities futures similar to mutual funds).
NASAA Licensing Breakdown
Not all securities licenses are administered by FINRA. The North American Securities Administrators Association (NASAA) oversees the licensing requirements of three key licenses:
The Series 63 license, known as the Uniform Securities Agent license, is required by each state and authorizes licensees to transact business within the state. All Series 6 and Series 7 licensees must carry this license as well. The provisions of the Uniform Securities Act are tested on the 75-minute exam.
While this test is much shorter and covers less material than the FINRA exams, it is known for asking "trick" questions that force the candidate to definitively know the difference between which transactions and situations are permitted and which are required by the rules. This test also contains some experimental questions that the NASAA uses to gauge future relevance.
The Series 65 license is required by anyone intending to provide any kind of financial advice or service on a non-commission basis. Financial planners and advisors that provide investment advice for an hourly fee fall into this category, as do stockbrokers or other registered representatives that deal with managed-money accounts.
The exam for this license is a 180-minute exam that covers the rules and regulations pertaining to registered investment advisors, as well as various investment vehicles and disciplines, economics, ethics, and analysis. Much of the material is covered on the Series 7 exam as well, as many of the advisors who sit for this exam are not, and may never become, Series 7 licensed and therefore need exposure to the investment material covered therein.
This Series 66 is the newest exam offered by NASAA. In essence, it combines the Series 63 and 65 exams into one 150-minute exam. This test contains no investment material, as the Series 66 license is only available to candidates that are already Series 7 licensed.
Making the Grade
Most securities exams administered by both FINRA and the NASAA have a passing score of 70%, except for the Series 7, 63, and 65, which have passing scores of 72%, and Series 66, which has a passing score of 73%. All tests are now given via computer at approved proctor testing sites.
Broker-Dealer Sponsorship vs. RIA Requirements
Once all relevant securities tests have been taken and a passing grade received, licensees must register their securities licenses with an approved broker-dealer, who will hold their licenses and oversee their business (in return for a portion of the commission income). Generally, those who intend to hold themselves out to the public as Registered Investment Advisors (RIAs) must register with the state they do business in if their assets under management are less than $25 million. The location of the RIA's principal office, as well as the amount of assets under management, determine whether the RIA must register with the SEC. Registered Investment Advisors do not need to associate themselves with a broker-dealer.
The Bottom Line
The majority of financial and investment companies that hire or train new advisors will have a mandatory licensing program included in the training package. The company will, in most cases, mandate which licenses must be obtained to sell the company's products and services. Those that decide to go into business for themselves still need to meet the licensing requirements of their chosen profession; the only real freedom of choice comes in which profession is chosen.