Entity should obtain a "no action" letter from the SEC before NASD Regulation will determine whether payment of non-transaction-based compensation from a member to a non-member for administrative and clerical services under a preferred alliance agreement would violate Rule 2420.


 

January 29, 1999

 

Trish Stone-Damen
VP Administration/Legal
Investors Retirement & Management Company, Inc.
1160 Euginia Place
Carpentaria, CA 93013

 

Dear Ms. Stone-Damen:

 

I am responding to your letter of October 19, 1998 and subsequent fax sent January 20, 1999, wherein you request whether NASD Conduct Rule 2420 would permit the payment of non-transaction-based compensation by a member to a non-member for administrative and clerical services under a preferred alliance agreement.

 

Background

 

You state the relevant facts to be as follows. IRMD Distributors, Inc., ("IRMD") a California corporation, is an investment advisor registered with the Securities and Exchange Commission ("SEC") and a registered broker/dealer and member of the National Association and Securities Dealers ("NASD"). IRMD, itself or through its affiliates, markets qualified plans, individual retirement accounts and simplified employee plans funded with shares of open-ended investments companies. A New Jersey corporation ("Corporation"), a non-member firm, is the parent of the franchisers of certain real estate brokerage franchise systems.

 

IRMD and the Corporation propose to enter into an agreement ("Agreement") whereby the Corporation would recommend IRMD to its franchisers and franchisees (the "Franchisees") to provide Internal Revenue Service-qualified pension plan products and services, Individual Retirement Accounts, Simplified Employee Plans and related products funded with shares of registered open-ended investment companies. The Corporation would facilitate access to the Fanchisees by IRMD’s participation as an exhibitor at national conferences that the Corporation regularly sponsors for its real estate brokerage franchise systems. The Corporation would also provide lists of its Franchisees to IRMD.

 

The Corporation would be obligated under the Agreement to: (i) review and approve promotional and marketing materials of IRMD to ensure quality control as it relates to the Corporation’s trade and/or service marks; (ii) print certain internal non-sales-related notices and announcements and circulate them to the Franchisees; and (iii) provide such clerical, ministerial and other office operations and assistance as are necessary to support its duties under the Agreement.

In fulfilling these and other duties under the Agreement, the Corporation would incur expenses related to postage, stationery, office supplies, printing and circulating internal notices and announcements, facsimile and telephone charges, data processing expenses, labor expended for review of IRMD’s promotional materials, scheduling of IRMD’s appearances at the Corporation’s national conferences, training personnel to perform related ministerial and clerical tasks, and overall labor and overhead expended in connection with the Agreement

 

In consideration for the foregoing, the Corporation would receive an administrative fee from IRMD. The administrative fee would not be contingent upon the completion of a transaction, including selling concessions, commissions, or other transaction-based payments, and the fee would be paid from IRMD’s own separate assets. The administrative fee has three components: (1) 6.25 basis points of the gross deposits per quarter of all funds deposited by the Franchisees and their participating employees; (2) 6.25 basis points of the aggregate account value of the accounts per quarter; and (3) 25 basis points of the aggregate account value each year for a period of five years following the date of expiration or termination of the Agreement.

 

You state that: (i) IRMD will exclusively control and be responsible for all brokerage services provided to participating Franchisees, (ii) the Corporation will not conduct distribution, marketing or sales of securities-related products and services, nor handle customer funds or customer securities (iii) all fees charged to customers are fully disclosed in the prospectuses of the funds or advisory contracts where applicable, (iv) the administrative fee is not based upon the completion of a transaction as is a selling concession or commission or other transaction-based payment, and (v) the payment of the administrative fee by IRMD to the Corporation does not directly or indirectly affect the customer.

 

You believe that the proposed arrangement does not involve the payment of compensation by a member to a non-member broker/dealer in violation of Rule 2420, since the compensation paid by IRMD to the Corporation is not a "selling concession, discount or other allowance" addressed by Rule 2420.

 

Response

 

NASD Regulation has interpreted Rule 2420 to preclude members from sharing, splitting or paying commissions to any non-member that may be acting as an unregistered broker/dealer. Although it appears, based on your representations, that the Corporation will perform only ministerial and clerical functions, will not offer or sell securities, will not effect securities transactions, and will not receive commissions or transaction-based compensation, whether the Corporation is acting as an unregistered broker/dealer is a matter determined by the SEC. SEC staff regularly issues interpretations on whether a non-member is required to be registered as a broker/dealer. In the past the NASD has determined that where an entity can furnish to the NASD a "no-action" position from the SEC that it is not required to register as a broker/dealer as a result of engaging in certain activities, then it would be appropriate for the NASD to conclude that engaging in those activities would not violate Rule 2420.

 

I hope this letter is responsive to your inquiry. Please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the Board of Directors of NASD Regulation. This letter responds only the issues that you have raised based on the facts as described, and does not address any other rule or interpretation of the Association, or all the possible regulatory and legal issues involved.

 

Sincerely,

 

Robert J. Smith
Office of General Counsel
NASD Regulation, Inc.