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Series 31 Exam – Futures Managed Funds Examination

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Overview of Series 31 Exam for Managed Futures Industry

In general persons who are selling futures related products are going to be required to have a Series 3 exam license.  However, some broker-dealer representatives may be able to take the Series 31 exam instead of the Series 3 exam if their activities are limited to selling interests in commodity pools and other similar activities.  This exam is required by the NFA for all individuals who want to sell futures funds, or those who want to receive trailing commissions on commodity pools or managed accounts guided by CTAs.

Series 31 Exam Basics

The following are some of the important items related to the exam:

  • Prerequisites – person taking the exam must (1) be registered with FINRA as a General Securities Representative and (2) limit their futures activities on behalf of their sponsor to soliciting funds, securities or property for participation in a commodity pool, soliciting discretionary accounts to be managed by CTAs or supervising persons who perform these same limited activities.
  • Time Limit – 60 minutes
  • Questions – 45 multiple choice questions.
  • Passing grade – 70%
  • Cost – $70
  • Who – exam is required for those individuals who intend to sell managed futures.
  • Exam topics –
    • Exchange Rules and Regulations
    • CPO and CTA Rules and Regulations
    • Advertising and Disclosure (including NFA Compliance Rule 2-29)
    • Customer Accounts
    • Discretionary Rules
    • Market Terminology.
    • For more information on the exam topics, please see the NFA Study Outline – Series 31.

Other Items

Signing up

A person can take the exam at most Pearson VUE or Prometric testing centers.  You can register for the exam by submitting a Form U-10 through the IARD system.  Please note that, effective September 15, 2010, FINRA requires individuals to use either their CRD number or FINRA ID number in order to schedule an exam and no longer accepts social security numbers.  For more information, please see the NFA Guide to Sign up for Futures Exams.

Studying for the Series 31 Exam

Like the other FINRA and NFA exams, you should use a study guide and practice exams to prepare.  The Series 31 does not have as many materials available as some of the more popular exams (Series 7, 65, 3, etc) but there are some materials which can be found through a simple Google search.   [Note: we have not reviewed any Series 31 exam study guide so we cannot make any recommendations on any materials.]  As with other exams, we recommend taking at least two to three practice exams prior to taking the actual test; persons not familiar with the managed futures industry might want to take more.

The actual exam

The exam is computer-based and will initially instruct you on how to properly answer and mark the following questions.  Note that the beginning of the exam will most likely include the easiest questions, and then the questions will proceed to get harder as you reach the middle.  Always attempt to make the most educated guess on questions that you do not understand.

The exam is fairly short so you should not need to take a break in the middle of the exam.  You should remember that there is always have the option of marking the question for review so you should not spend an extended period of time  on any one question. After you have completed the questions, you will

have the option of changing any of your answers.  After completely answering everything, you will receive your score immediately.

If you don’t pass

A number of individuals who take the exam do not pass.  If this is the case, you will need to wait 30 days before re-taking the exam.  If you do not pass the exam the second time, you will need to wait another 6o days before taking the exam.  If you do not pass either the third or fourth attempt, you will need to wait at least 180 days before taking the exam again.  There is no limit on the number of times allowed for taking a test.

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Cole-Frieman & Mallon LLP provides legal advice to the managed futures industry.  Bart Mallon can be reached directly at 415-868-5345.

Series 66 Exam

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This exam is required by certain states for an individual who wants to register as an investment adviser representative and securities agent.  Passing the Series 66 would be equivalent to passing both the Series 63 and Series 65 exams.  Additionally, individuals are required to pass the Series 7 exam as a prerequisite for taking the Series 66.  This post will provide an overview on the Series 66 exam and some thoughts on both taking and passing the exam.

The Series 66 Basics

What: The exam has a time limit of two hours and 30 minutes and a total of 110 questions, 10 of which are “pretest” questions and do not count in your final score.  The exam covers the following topics: Economic Factors and Business Information; Investment Vehicle Characteristics; Client Investment Recommendations and Strategies; and Laws, Regulations, and Guidelines, including Prohibition on Unethical Business Practices.  You must earn at least 75% to pass the exam.

Where: You can take the exam at most Pearson VUE or Prometric testing centers.

When: You should probably sign up for the exam at least a week prior to taking it, and you can choose the time and date on either the Pearson or Prometric website when you register.

Why: The exam is required for those individuals who want to become both securities agents (generally brokers) and investment adviser representatives.

How to sign up

You can register for the exam by submitting a Form U-4 or Form U-10 through the IARD system online.  Please not that, effective September 15, 2010, FINRA requires individuals to use either their CRD number or FINRA ID number in order to schedule an exam and no longer accepts social security numbers.  If you have any questions regarding registering for an exam, be sure to ask your law firm, compliance consultant, or feel free to contact us.

The cost to take the exam is $128.

How to study for the exam

It is recommended that you obtain a study guide and thoroughly read the entire guide.  NASAA (North American Securities Administration Association) provides a study guide available for download on their website.  Also, Kaplan provides a useful study guide that presents the study material in a simple and easy-to-understand way, and their practice questions are very similar to questions you are likely to see on the actual exam.

Take at least two to three practice exams prior to taking the test, possibly more.  Use memory refreshers such as note cards or other review materials.  Do not cram the morning of the test, as this will probably only make you more anxious.  In fact, it is recommended that you take the exam in the morning after a full night’s rest.

Day of exam

Arrive at the testing center at least 45 minutes prior to taking the exam to allow yourself time to review some of your notes beforehand.  The proctor will require you take off your jackets and place your belongings, including your study material, in a provided locker.  Be sure to have woken up early enough to eat breakfast beforehand and be fully alert during the test.

The exam

The exam is computer-based and will initially instruct you on how to properly answer and mark the following questions.  Note that the beginning of the exam will most likely include the easiest questions, and then the questions will get harder as you reach the middle.  Always attempt to make the most educated guess on questions you do not understand.

The length of the exam might require you to pause and use the restroom or take a break.  Allow yourself time to step away from the computer for a moment, take a drink, and gather your thoughts.  When you encounter difficult questions, you always have the option of marking the question for review.  Never spend an extended period of time on a question, as you will just waste time on answering other questions you might know better.

After you have completed the questions, you will have the option of changing any of your answers.  After completely answering everything, you will receive your score immediately.

If you don’t pass

A number of managers who take the exam do not pass or only come close to passing.  If this is the case, you will need to wait another 30 days before re-taking the exam.  If you do not pass the exam the second time, you will need to wait another 60 days before taking the exam.  If you do not pass either the third or fourth attempt, you will need to wait at least 180 days before taking the exam again.  There is no limit on the number of times allowed for taking a test.

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Other related hedge fund law articles:

Bart Mallon, Esq. runs the Hedge Fund Law Blog and provides hedge fund start up and legal services through Cole-Frieman & Mallon LLP. He can be reached directly at 415-868-5345.

Series 79 Questions and Answers | Investment Banking Exam

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Q&A For New FINRA Exam License

We have fielded a number of questions regarding the new Series 79 exam for investment banking professionals.  We are creating this question and answer page as a service to our readers.  We will attempt to answer questions as best as possible and our understanding the 79 exam license and the way it will be utilized in practice will develop over time so we expect this resource to become more valuable over time.  Please help us to make this a valuable resource by adding your questions, responses or comments below.

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Question: While the series 79 makes sense in allowing investment bankers to focus on more pertinent test questions,  do the principal requirements for a boutique (i.e. 3 person) investment banking shop remain the same.  In other words,  is a small shop doing only investment banking still required to  be a BD with series 24 and series 27 registered principals which are tested extensively on managing a full Reg Rep not a Ltd Rep as in series 79?  Thanks!

Answer: I believe you are asking whether a small BD, which is only engages in investment banking activities, needs to continue to have a General Securities Profession (Series 24) and a Financial and Operations Principal (Series 27) – if so, then yes.  Additionally, such a firm will need to make sure that the Series 24 licensed principal also has a Series 79 license.  Generally all Series 24s will have the Series 7 as well so the Series 24 principal will need to opt-in to the Series 79 license prior by May 3, 2010.

To opt-in, a Series 7 licensed representative or principal will need to amend their Form U4 to request the Investment Banking representation.  The opt-in period will not begin until November 2, 2009 and will run until May 3, 2010.  After May 3, 2010, if a Series 7 licensed individual has not opted-in to the Series 79, then the individual will need to take the exam in prior to participating in investment banking activities.  The Form U4 will be amended to include this new registration category.

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Question: I have been a business brokers in [state] under the Real Estate license. Will I be required [to have] a Series 79 license in order to continue my [business] broker practice whereby assets are sold through every transaction?  Thanks.

Answer: This question is basically asking whether a business broker will need to be registered as a broker-dealer if the broker is only advising on the sale of assets (and not the securities of a company).  This question is fact specific and the answer will depend on the specific facts of the situation and the various state laws which may be implicated.  You should discuss this issue with an attorney.

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Please contact us if you have any questions or would like to start a hedge fund. Other related hedge fund law articles include:

Bart Mallon, Esq. runs hedge fund law blog and has written most all of the articles which appear on this website.  Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund.  If you are a hedge fund manager who is looking to start a hedge fund, or if you have questions about the Series 79 or investment banking activities, please call Mr. Mallon directly at 415-296-8510.

Series 3 Exam | Commodities & Futures Exam Topics

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Hedge Fund Managers and the Series 3 Exam

Those managers who engage in commodities and futures trading (and who don’t qualify for an exemptions) will need to register as commodity pool operators with the CFTC and become members of the NFA.  In order to do this all owners and “associated persons” of the manager/CPO will need to take and pass the Series 3 exam.  This article provides a brief overview of the Series 3 exam for hedge fund managers.

Commodities and Futures Contracts License

The NFA requires an individual to successfully complete the Series 3 in order to become qualified to sell commodities or futures contracts.  The exam is designed for anyone who is going to act as an Associated Person, Commodity Trading Advisor, Commodity Pool Operator, Introducing Broker, or Futures Commission Merchant.  [Note: under the forex registration rules, those managers who trade in the spot forex markets will soon also need to take the Series 3 and a new exam called the Series 34 exam.]  The Series 3 is also a prerequisite to the Series 30 Futures Branch Manager exam.

The Series 3 exam is required of individuals who conduct business with the public on the U.S. futures exchanges and:

  • offer or solicit business in futures or options on futures at a futures commission merchant (FCM) or introducing broker (IB) or who supervise any such person.
  • are associated with a commodity trading advisor (CTA) who solicits discretionary accounts or who supervises persons so engaged.
  • are associated with a commodity pool operator (CPO) who solicits funds for participation in a commodity pool or who supervises such persons.

Registration Process

The NFA Series 3 Exam is administered by FINRA. There is a two-step process that a candidate must complete to be able to take the Series 3 Exam.

Step 1 – The individual must apply with FINRA to take the exam by completing and submitting an application form and payment, or by submitting the application online. The testing application form can be downloaded from the FINRA’s web site. Effective January 2, 2009, the fee for an individual to take the Series 3 National Commodity Futures Examination will be $105.

Step 2 – Once the U10 registration has been approved and processed by FINRA, a Notice of Enrollment will be emailed to the candidate. FINRA will assign a 120-day window during which the exam can be scheduled and taken. The candidate may then contact their local test center to schedule an appointment to sit for the exam. Due to the many sessions administered at testing centers, the candidate should schedule test-taking as far in advance as possible to secure an appointment on the desired date.

Testing Locations

The exam is delivered via a computer system specifically designed for the administration and delivery of computer-based testing and training. Exams are given at conveniently located test centers worldwide and an appointment to take your exam can be scheduled online or by calling your local center. For a list of test centers in your area (U.S. and International) click here.

Series 3 Exam Overview

The Series 3 Exam for commodity futures brokers is divided into two parts – futures trading theory and market regulations. Each part must be passed with a score of at least 70 percent. There are 120 total multiple choice and true/false questions, and exam takers are provided 2 hours and 30 minutes to complete the exam. The Series 3 Exam also contains 5 additional experimental questions that do not count towards the exam taker’s score, and additional time is built into the exam to accommodate for these questions.

The Series 3 exam is divided into ten topics and is graded in two main parts: Market Knowledge and Rules/Regulations. The Market Knowledge part covers the first nine of the following topics, and  consists of 85 questions. The Rules/Regulations part covers category ten, and consists of 35 questions. You must achieve a 70% on each part in order to pass the exam.

Part 1: Market Knowledge – The first part of the Series 3 exam covers the basics of the futures markets. Exam takers will need to understand futures contracts, hedging, speculating, futures terminology, futures options, margin requirements, types of orders, basic fundamental analysis, basic technical analysis and spread trading.

Part 2: Rules/Regulations – The second part of the Series 3 exam consists of market regulations. Exam takers must familiarize themselves with relevant NASD rules and regulations for this part of the exam.

Exam Topics

  1. Futures Trading Theory
  2. Margins, Limits, Settlements
  3. Orders, Accounts, Analysis
  4. Basic Hedging
  5. Financial Hedging
  6. Spreads
  7. General Speculation
  8. Financial Speculation
  9. Options
  10. Regulations

Useful Terms to Know for the Series 3 Exam

Exam takers are expected to be familiar with the following terms and definitions prior to taking the Series 3 exam. The definitions presented below have been extracted from  Investopedia.

Bucketing: A situation where, in an attempt to make a short-term profit, a broker confirms an order to a client without actually executing it. A brokerage which engages in unscrupulous activities, such as bucketing, is often referred to as a bucket shop.

Delta: The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. Sometimes referred to as the “hedge ratio”.

Double Top: A term used in technical analysis to describe the rise of a stock, a drop, another rise to the same level as the original rise, and finally another drop.

First Notice Day: The first day that a notice of intent to deliver a commodity can be made by a clearinghouse to a buyer in fulfillment of a given month’s futures contract.

Intrinsic Value: 1. The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Value investors use a variety of analytical techniques in order to estimate the intrinsic value of securities in hopes of finding investments where the true value of the investment exceeds its current market value. 2. For call options, this is the difference between the underlying stock’s price and the strike price. For put options, it is the difference between the strike price and the underlying stock’s price. In the case of both puts and calls, if the respective difference value is negative, the intrinsic value is given as zero.

Inverted Market: In the context of options and futures, this is when the current (or short-term) contract prices are higher than the long-term contracts.

Long Hedge: A transaction that commodities investors undertake to hedge against possible increases in the prices of the actuals underlying the futures contracts.

Offset: 1. To liquidate a futures position by entering an equivalent, but opposite, transaction which eliminates the delivery obligation.2. To reduce an investor’s net position in an investment to zero, so that no further gains or losses will be experienced from that position.

Scalpers: A person trading in the equities or options and futures market who holds a position for a very short period of time, attempting to make money off of the bid-ask spread.

Straddle: An options strategy with which the investor holds a position in both a call and put with the same strike price and expiration date.

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Please contact us if you have any questions or would like information on how to start a hedge fund.  Other related hedge fund law articles include: