Perhaps “conquered” is too strong a term, I could have just said “passed” or “completed” but it’s not as dramatic!
The Series 7 exam, or the General Securities Representative Qualification Examination (GS) as it is officially known, is administered by FINRA, the Financial Industry Regulatory Authority. What a mouthful! FINRA is an SRO, another wonderful acronym that stands for Self Regulatory Organization, whose mission is to protect investors and market integrity “through effective and efficient regulation of the securities industry”, if you like that sort of thing.
The Series 7 is an exam that all traders (or stockbrokers) must pass in order to ply their trade on Wall Street. In some cases, a new trading desk hire will have a contractual obligation to pass the Series 7 or else face the chopping block.
And it’s no laughing matter, some people go to extraordinary lengths to get over the hump. Take for instance the heartwarming story of Justin Witt, a former Merrill Lynch trainee. Mr. Witt wrote the Series 7 in 2011 and unfortunately did not get a passing grade. However, there was an issue with the way he communicated this information to his employer, namely the fact that he lied and tried to convince his employer that he actually passed! Charming guy really. He was fired from his position at Merrill and, if that wasn’t enough, barred from associating with any FINRA firm.
It’s also interesting to note that, according to the Wall Street Journal, the more times a broker fails, the higher the incidence of disciplinary or criminal charges against that person. When analyzing Series 63 test results, an exam that concerns state-level regulation, the WSJ found that “[t]hose who failed the test more than twice, for example, were 77% more likely to report a felony or financial-related misdemeanor than brokers who passed the exam on the first try, and about 55% more likely to have been terminated”. Fascinating stuff! The article continues to mention a particular Morgan Stanley employee who failed the Series 63 a mind-boggling 11 times before eventually passing! You have to admire his perseverance!
My story begins when I was hired to work in the compliance department for a FINRA regulated Broker Dealer. The Series 7 was the first FINRA exam that I was to write, the Series 63 and 24 exams were to follow (in that order). The problem was that I had no formal training in finance prior to taking this big leap into the financial markets. The best I could boast was having read books about Wall Street, particularly those penned by Michael Lewis. Then again, Lewis was an Art History major at Princeton before cutting his teeth at Salomon Brothers so, I thought, hope springs eternal!
The Series 7 is a mammoth of an exam, it boasts 250 multiple choice questions, with an additional 10 test questions that are not scored and lasts 360 minutes or 6 hours, if my math is correct. The passing score is 72%, considerably higher than the usual 60% college standard.
The challenge in passing the Series 7 is more a problem of scope than it is of sheer difficulty. Those who accept this challenge must immerse themselves in a wide range of financial topics, such as corporate stocks and bonds, municipal securities, options and investment company products, to name but a few.
To begin your preparation, you will need to select a third party training provider - mine was the Securities Training Corporation (STC) but there are many others to choose from including Kaplan & Wiley. Generally there will be a theoretical component as well as practice exams. There were 24 chapters of material in the STC binder that I had the pleasure of digesting and 12 online practice exams, if memory serves me correctly.
Beyond the STC material that was my bread and butter, I did use two Kaplan exams to give me a different “look” as it were at Series 7 practice questions. Believe it or not, I even resorted to buying a “Series 7 for Dummies” book (hangs head in shame) in my quest to be as prepared as I could for my exam! There’s no shame in that but I would recommend that you choose one highly rated training method and stick to it because if you dabble around as I did, you will most likely just confuse yourself needlessly.
I went to great lengths to find the time to cram. I would wake up early in the morning, sometimes as early as 4am. I was following a similar routine when I was preparing for the Québec Bar exam. Personally, I am a morning person and feel very productive when I wake up early.
During lunchtime, I would park myself next to the frigid indoor skating rink in the lobby of the building where I worked to study while I ate; I never tried studying on skates if that’s what you’re thinking. I would also study on the train, commuting to and from work. This way I would maximize the amount of time that I could devote to studying, considering that I was working full-time in an industry that I was just getting acquainted with.
Once you get past the theory, the most important activity to prepare yourself for writing the exam is to take the practice tests. Over and over again if need be. Don’t be discouraged if you fail miserably the first 5 or 10 times. Get back on the canvas and try, try again. You will learn from your mistakes and eventually answering the questions will be like second nature.
Many people are afraid of the options questions that dominate the exam. I didn’t even know what an option was before starting my preparation, or at least I had a very vague notion. A spread is something that you eat and a combination is something that Jean Pascal throws. Right? In the end, options come down to math and practice. Remember: when you’re long the LOWER strike price in a spread, you are always bullish!
But instead of going over my entire training plan in this blog post, here is a laundry list of things you should know prior to writing the exam, in no particular order:
1. The prospectus delivery requirement for a listed IPO is 25 days.
2. Buy limit, sell-stop & sell-stop limit orders are always entered below the market and are reduced when a dividend is declared.
3. Interest on corporate and municipal bonds accrues on the basis of a 360-day year; Treasury securities use 365 days.
4. Municipal general obligation (GO) bonds require voter approval while revenue bonds require feasibility studies.
5. A bond selling at a discount will always be priced to maturity.
6. A straddle is defined as buying a put and a call, or selling a put and a call, with the same exercise price and expiration.
7. For a Roth IRA (as opposed to a traditional IRA) there is no withdrawal requirement prior to reaching the age of 70.5 and withdrawals are tax free.
8. A fixed annuity is not a security, while a variable annuity is.
9. Corporate bonds, securities and munis settle T+2 while US treasuries and options settle T+1.
10. For a long margin account, how far can market decline and still be at minimum level? Answer: 4/3 x Debit Balance.
11. Shorting against the box: for example, if you own 100 shares of ABC and you tell your broker to sell short 100 shares of ABC, you have shorted against the box.
12. The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank; when the Fed increases it, the money supply decreases and interest rates go up.
The exam itself is pretty long and gruelling, two segments of three hours with a break in between. I wrote my exam at a Prometric office in Montreal. Writing a FINRA exam is no laughing matter, at least at Prometric. You are subjected to a metal detector and have to roll up your sleeves and pull out your pockets to ensure that you are not bringing in any reading material, or tic-tacs for that matter.
The first leg of the exam went relatively well and I reviewed all my questions before going for my one sanctioned break. By the second leg, I was already mentally exhausted and hungry - I was too nervous to eat more than a couple of Dad’s cookies during the break. Towards the end of the exam, I was starting to stare blankly at the screen and visions of Big Macs were beginning to appear. Seriously though, don’t be like me, take a proper break and have a proper meal.
When you answer the questions remember this one golden rule: you should actually READ the question. The ENTIRE question! I am prone to reading questions too quickly and missing a comma or a key operative word. Beware the trick questions as well. Generally, trust your instincts - your first instinct is usually your best and most likely the correct answer. These are all old clichés but they are valid nonetheless. Also, take the time to review the questions, you won’t win an award for finishing before everyone else.
Your exam is graded on the spot, electronically of course, which is wonderful but also horrifying at the same time. When I pressed the submit button, I could feel my heart pounding in my chest, as the palms of my hands went ice cold. I could not believe my eyes when I saw the word PASS flashing on the screen (OK it wasn’t really flashing). Not to mention my score of 81% which is much higher than I would have ever imagined.
The moral of this story is that if I did it, you can too! The Series 7 is a big but doable exam.
