October 2, 2001
Kevin L. Palmer, Vice President
WMA Securities, Inc.
11315 Johns Creek Pkwy.
Duluth, Georgia 30097-1517
RE: NASD Rule 1120 - Regulatory Element
Dear Mr. Palmer:
I am responding to your letter of August 29, 2001, in which you ask whether the firm may pay certain compensation to registered representatives ("RRs") who are on inactive status due to their failure to satisfy the Regulatory Element of NASD Rule 1120. You specifically request an interpretive letter regarding the payment of commissions on transactions initiated before the RR became inactive, "override commissions" earned during the period the RR was inactive, and 12b-1 fees received by the firm on accounts assigned to the RR. You correctly state that an inactive RR may not engage in, or receive compensation for, any activities requiring registration.1
One fact pattern involves commissions received by the firm for transactions initiated before the RR became inactive. You ask whether the firm can hold these commissions and pay them to the RR after he has successfully completed the Regulatory Element. A second fact pattern involves 12b-1 fees received by the firm on accounts assigned to the RR. You ask whether the firm can pay the 12b-1 "servicing fee" to the RR while on inactive status and, if not, whether the firm can suspend payment of these "servicing fees" until the RR has successfully completed the Regulatory Element.
Both of these examples involve the right to fees or commissions earned by the RR prior to the period that he or she became inactive for failing timely to complete the Regulatory Element. Trail or residual commissions for business completed before the inactive period may be paid unless the person's firm has a policy that prohibits it. (See Notice to Members 95-35 (May 1995)). Therefore, your firm may pay an inactive RR trail or residual commissions for business completed before the inactive period unless the firm has a policy to the contrary. The firm may make these payments to the RR during the period that he or she is inactive.
In the next scenario, you ask whether the firm may pay an inactive RR "override" commissions on securities business conducted by another registered person during the time that the RR was inactive. You state that the inactive RR has no supervisory or transaction approval responsibilities over the registered person who conducted the business.
This example differs from the other two because the event that triggered the RR's right to receive the "override" commissions took place during the period that the RR was inactive. Under Rule 1120(a)(2), a person who is inactive cannot engage in, or be paid for, activities that require a securities registration. Since inactive individuals may neither solicit securities transactions nor receive commissions on securities sales while on inactive status, the RR in your example cannot receive a portion of the commissions earned by another registered person during that time. The RR, in effect, forfeits these "overrides."
Please note that the interpretive guidance provided in this letter is limited to commenting on the payment of compensation to registered representatives who are on inactive status due to the failure to satisfy the Regulatory Element of Rule 1120. The guidance provided in this letter does not necessarily apply outside of this narrow context.
I hope this letter is responsive to your inquiry. Please note that the opinions expressed in this letter are staff opinions only and have not been reviewed or endorsed by the Board of Directors of NASD Regulation. This letter responds only to the issues you have raised and does not necessarily address any other rule or interpretation of the NASD or all the possible regulatory and legal issues involved.
Very truly yours,
Shirley H. Weiss
|cc:||Alan W. Wolper, District Director
NASD Regulation, District 7
1 Rule 1120(a)(2) provides in part that, "[a]ny person whose registration becomes inactive cannot conduct a securities business, perform any of the functions of a registered person, or receive compensation for activities that require registration until he or she meets the requirements of the Regulatory Element." (Quoted in the Status Report on the Securities Industry Continuing Education Program, published in March 1995).