In a request for interpretive guidance, a member asks if NASD Rules prohibit a member from paying finders or referral fees to CPAs that are not registered as associated persons.


 

September 16, 1998

 

Brian C. Underwood
Senior Vice President and Director of Compliance
A. G. Edwards & Sons, Inc.
One North Jefferson Street
St. Louis, Missouri 63103

 

Re: Finders or Referral Payments Paid From Registered Broker-Dealer and Investment Advisor to CPAs

 

Dear Mr. Underwood:

 

I am responding to your request for interpretive guidance in your letter dated June 2, 1998, asking if A.G. Edwards & Sons, Inc. (Edwards) may pay finders or referral fees to certified public accountants (CPAs). You stated that Edwards is considering initiating a referral program (Program) with certified public accountants (CPAs) that would pay the CPAs a fee for directing their clients to make investments through Edwards. Under the Program, Edwards will form business alliances with various CPA firms in which the CPAs would agree to solicit and refer prospects to Edwards to participate in the various investments advisory programs and services offered by Edwards. For these solicitation and referral efforts, Edwards will agree to pay the CPAs a percentage of the investment advisory fees that the referred clients pay to Edwards. The CPAs will not provide investment advice regarding Edwards’ investment advisory programs, and the CPAs will be required to disclose the arrangement with Edwards in advance to the prospective clients.

 

You noted that until recently such an arrangement would have been prohibited under state accountancy rules; under such rules, CPAs were not allowed to accept referral fees for their solicitation efforts. You indicated that recently the American Institute of Certified Public Accountants, the National Association of State Boards of Accountancy, and many states have changed their rules and regulations to allow CPAs to accept some form of compensation related to investment services so long as certain conditions are met. You stated that other states are considering making such changes. You referred to Rule 206(4)-3, "Cash Payments For Client Solicitations," of the Investment Advisors Act of 1940 (IA Act), that permits a registered investment advisor to pay a fee to a third party solicitor as long as the conditions of the Rule are met.

 

The NASD historically has prohibited members from paying persons not registered as associated persons a commission or fee derived from a securities transaction. Thus, payments that are transaction-based made by members who are registered broker/dealers to non-registered persons, including accountants, are still prohibited under NASD Rule 2420, "Dealing With Non-Members." The NASD, however, takes no position on the payment by an investment advisor to a third party of fees that are permitted expressly under Rule 206(4)-3 of the IA Act. Accordingly, an NASD member providing multiple services to its clients that is also registered as an investment advisor may make payments to unregistered third parties, if such payments are paid solely as a percentage of the advisory fees paid by clients for programs and services performed by Edwards in its capacity as a registered investment advisor and such payments fall squarely within the specific requirements of Rule 206(4)-3. The NASD will scrutinize such arrangements, however, in order to assure that payments otherwise prohibited are not being made. In particular, the NASD may review agreements and arrangements in order to determine that referral or finders fees or payments are not being calculated, directly or indirectly, based upon orders entered or transactions executed.

 

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, Inc. This letter responds only to the issues you have raised based on the facts as you have described them in your letter, 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,

 

Sharon Zackula

 

cc: District 4