License

What Is a License?

A license is a formal authorization granted by a governing authority, permitting an individual or entity to engage in a specific activity, practice a particular profession, or use certain property that would otherwise be restricted or illegal. Within the realm of finance, licenses are a critical component of the regulatory framework, ensuring that professionals and institutions adhere to established professional standards and operate within legal boundaries. The primary purpose of a license is to protect the public interest by establishing minimum qualifications, promoting ethical conduct, and safeguarding consumers from incompetent or fraudulent practices. A license signifies that the holder has met specific educational, experiential, and examination requirements set by the issuing body.

History and Origin

The concept of a license dates back to medieval times, when guilds were established to regulate trades and professions, granting privileges to members to exclusively practice their crafts. These early forms of licensure were often used to control professions and generate revenue for local governments.³³ In the United States, professional licensure began to emerge more formally in the 18th and 19th centuries, regulating professions such as medicine and law.³²

The proliferation of occupational licensing significantly accelerated in the 20th century, particularly after the 1950s. While less than 5% of the U.S. workforce was covered by state licensing laws in the early 1950s, this figure grew dramatically to around 20% by 2000, and by 2006, approximately 29% of workers reported needing a license for their jobs, including federal and local requirements.³¹ This expansion was partly driven by the shift from a manufacturing-based economy to a service economy and the efforts of professional associations to lobby for regulatory requirements.³⁰ Historically, licensing has been more prevalent and adopted earlier for occupations that pose a greater risk of harm to consumers.²⁸, ²⁹

Key Takeaways

• A license is a mandatory government-issued authorization required to practice certain professions or engage in specific activities.
• It serves as a form of consumer protection by ensuring a baseline of competence and ethical behavior.
• In finance, licenses are essential for roles like financial advisors and broker-dealers.
• Obtaining a license typically involves meeting educational, experience, and examination requirements.
• While beneficial for public safety, licenses can also act as barriers to entry into professions.

Interpreting the License

A license is generally interpreted as an official endorsement of an individual's or entity's competence and adherence to prescribed standards within a regulated field. For consumers, the presence of a license can indicate that a professional has met minimum qualifications and is subject to regulatory oversight, fostering trust. For licensed professionals, holding a license signifies legal authority to practice and often implies a level of credibility and expertise within their domain. Regulatory bodies, such as the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC), establish the criteria for various licenses to ensure that those operating in the financial markets maintain high ethical standards and possess the necessary knowledge for their roles.

Hypothetical Example

Consider Sarah, who aspires to become a financial advisor. To legally provide investment advice and sell certain investment products in the United States, she must obtain specific licenses. Sarah first studies for and passes the Securities Industry Essentials (SIE) exam. Following this foundational exam, she secures sponsorship from a FINRA-member firm, a requirement for taking the Series 7 exam, known as the General Securities Representative Qualification Examination. Upon passing the Series 7, she gains the license to sell a wide range of securities. To offer comprehensive financial planning and provide investment advice for a fee, Sarah also obtains the Series 66 license, which covers state-specific securities laws and investment advisory regulations. By securing these licenses, Sarah demonstrates her compliance with regulatory requirements and her readiness to advise clients legally and competently.

Practical Applications

Licenses are fundamental across numerous sectors, playing a crucial role in regulating industries and ensuring public safety and trust. In the financial industry, individuals and firms involved in buying or selling securities for others, facilitating securities transactions, or providing investment advice are generally required to register as broker-dealers with the SEC and become members of a self-regulatory organization like FINRA.²⁵, ²⁶, ²⁷ For instance, professionals who advise clients on securities or sell certain financial products must hold specific FINRA licenses, such as the Series 7 or Series 65, which dictate the types of activities they can legally perform.²², ²³, ²⁴ These licensing requirements ensure that financial professionals have the foundational knowledge of securities products, industry terminology, and regulatory practices.²¹

Beyond finance, licenses are prevalent in many other regulated fields. For example, the Federal Communications Commission (FCC) issues licenses for broadcast stations to use specific portions of the radio frequency spectrum. This process ensures orderly use of public airwaves, preventing interference and promoting the public interest.¹⁹, ²⁰ Obtaining a broadcast license involves detailed applications, engineering studies, and often a competitive auction process for frequencies.¹⁷, ¹⁸ This diverse application of licensing highlights its role in controlling access to regulated activities and resources.

Limitations and Criticisms

While licenses are intended to protect consumers and maintain high standards, they are not without limitations and criticisms. One significant concern is that licensing requirements can act as barriers to entry, potentially limiting market competition and reducing labor supply within licensed occupations. Studies suggest that occupational licensing can reduce equilibrium labor supply by an average of 17%–27%, and it has been linked to higher prices for consumers. F¹³, ¹⁴, ¹⁵, ¹⁶or example, stricter licensing laws have been found to lead to higher prices for consumers in numerous studies.

¹²Additionally, the varying licensing requirements across states for the same occupation can hinder worker mobility, making it difficult for individuals to practice their profession if they move. T¹⁰, ¹¹his lack of reciprocity can create economic inefficiencies. Critics also argue that while licenses are promoted to improve service quality, there is often little conclusive evidence that they significantly enhance the overall quality of services provided to customers by members of the regulated occupation. F⁹urthermore, the costs associated with obtaining and maintaining a license, including education, training, and fees, can disproportionately impact certain demographic groups, such as foreign-born workers.

⁸## License vs. Certification

The terms "license" and "certification" are often used interchangeably, but they represent distinct concepts in professional regulation and professional development.

While a license grants legal permission to operate, a certification signifies that an individual has met a set of standards established by a non-governmental professional body, often indicating a higher level of specialized skill or knowledge within a field. For example, a financial advisor must hold a license to sell securities, but they might also pursue a voluntary Certified Financial Planner (CFP) certification to demonstrate comprehensive financial planning expertise.

FAQs

Q: Who issues licenses in the financial industry?

A: In the United States, licenses for financial professionals are primarily issued by the Financial Industry Regulatory Authority (FINRA) and state securities regulators, often under the oversight of the Securities and Exchange Commission (SEC).

⁵, ⁶, ⁷### Q: What is the difference between a Series 7 and a Series 65 license?
A: The Series 7 license allows an individual to sell a wide range of securities as a general securities representative, typically requiring sponsorship from a FINRA member firm. The Series 65 license permits individuals to act as investment advisor representatives and provide financial advice for a fee, often without requiring employer sponsorship. D³, ⁴epending on the role, a financial professional may need both or either.

Q: Do all jobs require a license?

A: No, only professions or activities deemed to have a significant impact on public health, safety, or welfare typically require a license. The percentage of the workforce requiring a license has grown, but many occupations remain unlicensed.

²### Q: How do licenses contribute to risk management in finance?
A: Licenses contribute to risk management by ensuring that financial professionals meet minimum competency standards and adhere to regulatory rules. This helps reduce the risk of fraud, misconduct, and unqualified advice, thereby protecting investors and maintaining market integrity.

¹### Q: Can a license be revoked?
A: Yes, a license can be revoked or suspended by the issuing authority if the licensee violates regulatory rules, engages in unethical conduct, or fails to meet ongoing requirements like continuing education or capital requirements (for firms).