A new FINRA proposal to change the exams registered reps need to take could be a boon for younger brokers looking to enter the profession.
Traditional broker training programs are notorious for their low success rates; only a fraction of those who begin the programs complete them. But FINRA has proposed a new exam structure, where potential registrants would take a general knowledge exam, similar to the Series 7, without the need for a firm agreeing to sponsor them.
The new exam, if passed, would be valid for up to four years, giving individuals time to find a job. Once they join a firm, they'd be required to take a more specialized exam correlated to their particular role, such as Investment Company and Variable Contracts Products Representative, General Securities Representative, Equity Trader, or Investment Banking Representative. In the event of a job change, they would not have to retake the general exam, just the specialized test associated with that position. Those exams would still expire after two years.
“FINRA believes that expanding who is eligible to take an examination will enable prospective securities industry professionals to demonstrate to prospective employers a basic level of knowledge prior to a job application,” FINRA states in its proposal. “In addition, FINRA believes this approach would allow for more flexibility and career mobility within the securities industry.”
The regulator is currently reviewing comments and plans to roll out the general knowledge exam in the fourth quarter of 2016.
The general exam, which FINRA calls the Securities Industry Essentials Examination (SIE), would cover basic product knowledge, structure and functioning of the securities industry markets, regulatory agencies and their functions, and regulated and prohibited practices.
“Today, there are a large number of examinations, considerable content overlap across the representative-level examinations and requirements for individuals in various segments of the industry to pass multiple examinations,” the proposal states. “The proposed format would eliminate duplicative testing of general securities knowledge on examinations.”
John Rahal, general partner responsible for financial advisor talent acquisition at Edward Jones, said the new structure will increase the candidate pool of people interested in financial services.
“[The test] gives you the ability to say, ‘I’m really interested in this,’ or not, and the second benefit is that firms like Edward Jones or Morgan or Wells or Merrill get a candidate that’s already pretty much self-identified that they would like to pursue an opportunity in this profession,” Rahal said. “So hopefully the success rate of financial advisors in this industry would increase.”
Most national firms give registrants a finite number of times to pass the Series 7, Rahal said. Edward Jones typically allows trainees to take it twice, depending on their score the first time.
In 2014, FINRA administered 210,000 exams, 43,000 of which were for the Series 7. But the regulator would not provide figures for previous years. Rahal believes it has been on the decline over the last 10 years.
In their comments, industry advocacy groups SIFMA and the Financial Services Institute were largely supportive of the changes, with SIFMA saying the new process would make exams less onerous, less costly and more efficient.
“Through this concept, they’d be making it a lot easier for people to enter the profession, and this is a time when recruiting the next generation of advisors is really a major initiative for the industry,” said Robin Traxler, FSI’s vice president of regulatory affairs and associate general counsel. “It probably is going to assist them in choosing a firm that’s right for them, rather than just working with the firm that recruited them. They can take this exam and then really work to find a firm that is a good fit for them.”
But SIFMA believes the exams should be valid for five years, arguing that the content covered in them doesn’t change much.
Opposition From Firms
The draft outline for the SIE indicates that it would test details of rules, governing things like net capital, margin, order and quote display. SIFMA and FSI argue that such concepts would be better suited to the specialized exams.
“The people taking those specialized exams are actually working in those areas and really need that expertise,” Traxler said.
Yet some firms opposed the plan. N.I.S. Financial Services, which offers mutual funds, said the changes would limit the number of reps coming into the industry, and simply “protect entrenched interests of firms.”
PFS Investments said the new structure could create a barrier to entry for people coming into the industry if the transition is not managed right. In particular, FINRA should consider lower examination fees, same-day testing for the SIE and other exams, shorter waiting periods between attempts to take a test, pass rate information, a reduction in test questions and a delayed implementation of the changes until 2017.
Lisa Roth, president at Monahan & Roth, doesn’t believe individuals should be able to take the exam without working for a member firm. “The Rules of Conduct do not address restrictions on how an individual might hold him or herself out to the public after passing the examination,” she wrote.
FSI expressed a similar concern, arguing that bad actors could use the SIE as a way to defraud investors. The group recommends creating a surveillance program to combat this.
At the same time, the new exam structure could improve investor education. Brian Marks, principal and senior managing director at Knopman Marks Financial Training, said investors will want to take the general knowledge exam to become more educated about the products they’re purchasing.
“This is one way that an investor can potentially view the exam as a way to understand a little bit more about what their brokers are doing and about the products that they own in their portfolios,” Marks said. “I think you’re going to see that this leads to more knowledgeable investor base.”
