Series 3 License: A Career With No Limits

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Several career paths are available to individuals seeking to become an investment professional. The traditional way to become licensed to trade or invest in securities (like stocks and bonds) is to pursue a test known as the Series 7. Administered by the Financial Industry Regulatory Authority (FINRA), the Series 7 is considered one of the most difficult tests you can take to obtain a professional license.

While the Series 7 is important, the license limits professionals to offering only a narrow list of investments to their clients. A second, lesser-known career path, involves taking the National Commodity Futures Examination, otherwise known as the Series 3, which gives anyone in the U.S. the ability to offer alternative investments in commodities and futures securities.

The Series 3 License and Exam

The Series 3 examination is the all-encompassing test that is required by the National Futures Association (NFA) and the Commodities Futures Trading Commission (CFTC) in order to be considered a commodities and futures professional. It consists of two parts: market knowledge and regulatory knowledge.

Key Takeaways

  • Investment professionals can take different paths, such as obtaining a Series 7 or a Series 3 licenses.
  • The lesser-known Series 3 allows financial professionals to deal with alternative investments and futures contracts.
  • The Series 3 can be a path to other careers: managing other brokers, setting up a brokerage firm, and/or managing client funds.
  • Commodity Trading Advisors are designated professionals that are allowed to handle other people’s money.

Stockbrokers can hold both a Series 7 and a Series 3 license simultaneously, but if they don’t, they are required by law to refer a client interested in commodities and futures on to a licensed Series 3 representative.

Because the Series 3 exam is so thorough in covering the needs of people that do use commodity and futures trading, the CFTC gives those that pass wide latitude in what investment vehicles they can offer to their clientèle. This leads many newly licensed Series 3 brokers to be content with passing the test and becoming associated persons (APs), which is an individual that solicits and places orders while working for a brokerage firm or other financial services company. This does not have to be the case. Instead, a newly minted AP can immediately go one of two routes in their commodities career, in the form of either a branch manager or an introducing broker.

In fact, there are several other related exams beyond the Series 3 that can be completed, which will allow varying degrees of professional responsibility:

  • The Series 30 (Branch Manager Exam)
  • The Series 31 (Futures Managed Funds Exam)
  • The Series 32 (Limited Futures Exam)

Career Paths

Branch Manager
In order to become a branch manager, an AP must pass the Series 30 examination. The test consists of 50 questions that measure the understanding of a wide range of NFA and CFTC rules regarding marketing, regulatory issues, and customer requirements. Once completed, the person has the ability to oversee other APs while handling the day-to-day operations of their own commodities branch office.

Taking the Series 30 test to become a branch manager soon after taking the Series 3, gives an advantage because knowing the recently learned regulatory information in the Series 3 makes the branch manager exam easier to pass.

Introducing Broker (IB)
If you are an entrepreneurial type, who is willing to strike out on your own and go beyond managing a branch, you can register with the NFA as an introducing broker. Becoming an IB does not require any additional licensing beyond passing the Series 3. As a branch manager, you will be able to oversee APs in your office, but unlike a branch manager, you assume all of the liability and the rewards of obtaining and working with clients directly.

Not just anyone can set up shop as an introducing broker. The only way you can obtain the IB designation (or any of the other designations listed in this article) is by going through the NFA. The NFA requires a fee, certain capital requirements, and periodic reporting requirements for IBs, Commodity Trading Advisors (CTA), Commodity Pool Operators (CPOs) and Futures Commission Merchants (FCMs).

If you plan to become an IB, you can set up your business in one of two ways:

  • “Guaranteed” IBs
    The majority of APs making the transition from being simply a commodities broker to becoming a brokerage firm typically decide to become “guaranteed” by an FCM. By agreeing to be a guarantor, an FCM not only handles all of the customer funds and trading operations, but it also vouches for the IB, reducing the need for the IB to have any capital requirements, while at the same time putting the IB into an exclusive relationship with the FCM that is guaranteeing it.
  • “Independent” IBs
    The second way to set up an IB is to become independent. Independent IBs still rely on FCMs to handle their trading operations, but instead of having a captive relationship, the IB and their clients can have multiple relationships with as many FCMs as they choose. Over the years, the NFA has instituted various capital requirements that an IB must maintain in order to have the privilege of being independent. The key benefit is that IBs can negotiate the best commission rates possible from the various FCMs because of the forced competition for the IBs’ business. This can increase the IBs’ profits while passing on better savings to their customers.

Managing Clients’ Money

There are also those people that take the Series 3 test who feel that they have a unique insight into how the markets work. They believe that they have the ability to manage their clients’ money and would rather gain a percentage of the profits, instead of just earning a commission on the transactions. Those APs that want to go in this direction can actually apply to become a Commodity Trading Advisors (CTA) or Commodity Pool Operators (CPOs) with the NFA. IBs can also register their firm or set up a sister company to handle these money management services.

Commodity Trading Advisors
By obtaining the CTA designation, an AP has to register with both the CFTC and the NFA. A CTA has the ability to register with the CFTC and not the NFA, but not the other way around. If an AP registers as a CTA only with the CFTC, that person is allowed to give general trading advice, put out newsletters, and make recommendations, but cannot handle clients’ money. This is known in the business as being an “educational” CTA. If you wish to manage client funds actively, then you must register with NFA as a CTA, pay additional fees, and adhere to a strict set of rules and regulations.

The NFA requires that CTAs (who handle clients’ funds) disclose to potential clients the manager’s successful accounts and the unsuccessful accounts.

Another strict rule is that CTAs must maintain segregated accounts for each client that they manage money for. This requires that each account has orders independently executed and trades must be allocated to each client’s account in order to properly attribute gains and losses. In this way, the CTA is much like the commodities equivalent of a registered investment advisor for an individual’s stock and bond portfolio.

In exchange for all of this extra work, CTAs are able to collect a management fee and a performance fee. The management fee is typically 2% of all of the assets under management, and the performance fee can range from 20% to upwards of all of the new money raised. As CTAs build their business, there is no limit to the amount of capital that they can have under management, if they are good managers.

Commodity Pool Operators (CPO)
The CPO is another type of money management professional. CPOs are able to collect the same management and performance fees as CTAs, but instead of having to track each client individually, they are able to aggregate all of the capital under one account and allocate returns according to the percentage that each investor owns.

There are two types of CPOs: public and private. Public CPOs must jump through a lot of hoops with both the CFTC and Securities and Exchange Commission (SEC) to be listed on any of the exchanges and raise money. Private CPOs are able to use SEC Regulation D, which governs private placements, in order to raise funds from accredited investors only.

An AP or an IB may end up creating enough of a client base over the years to fund their CTA or CPO operations without ever having to market or raise too much outside capital. For APs that have been in the business for years, this is simply one of many logical steps to increase their value in the eyes of their clients and to raise their status among their peers. As a CTA or a CPO, you can operate on par with an IB by hiring your own APs to promote and market your services, paying them bonuses as they acquire clients.

Exams for Licensed Brokers

Series 3 is just one way to access the world of commodities for your clients. Stockbrokers that want to narrow their work to helping CTAs and CPOs raise capital can take the Series 31 exam, which has only 45 questions. Once completed, stockbrokers can introduce their clients to the alternative world of futures and commodities investing while still fulfilling their fiduciary responsibility.

Those stockbrokers or commodities brokers that are licensed in the United Kingdom can enter the United States structure of futures by simply taking the Series 32. Once the Series 32 is completed, those individuals can then be an IB, CTA, CPO, or FCM.

The Bottom Line

Becoming a commodities or futures broker does not have to end with passing the Series 3. That is just a gateway to managing other brokers, setting up your own brokerage firm, and/or managing client funds. This is a career where the sky is the limit. A commodities broker can transition from making a small percentage of the commission charged for every transaction all the way to running their own money management firm, which could generate millions in income for themselves and their clients.