A member firm may pay continuing commissions to a former registered representative who is no longer in the securities business provided the conditions of NASD IM-2420-2 are satisfied, and further, that such payments are made in compliance with SEC "no-action" letters addressing the permissibility of those payments under Section 15(a) of the Securities Exchange Act of 1934.
August 9, 2001
Legal and Compliance Counsel
Commonwealth Financial Network
One University Office Park
29 Sawyer Road
Waltham, MA 02453-3483
Re: Representative Purchase of Book of Business Pursuant to NASD IM-2420-2
Dear Mr. Tully:
I am responding to your letter dated May 24, 2001 to NASD Regulation, Inc. wherein you request interpretive advice regarding the application of NASD IM-2420-2 ("Continuing Commissions Policy") to the payment by Commonwealth Financial Network ("Commonwealth") of certain commissions and fees to one of its registered representatives who will be retiring and relinquishing his license (“RR”).
Based on your letter, I understand the facts to be as follows: RR is a registered representative with Commonwealth and has a book of business that he wishes to sell prior to the time of his retirement. Another registered representative seeks to purchase RR’s book of business. At the time RR is still a registered representative with Commonwealth, the parties will enter into a "bona fide contract" that, among other things, will provide that RR will receive an ongoing percentage of the commissions/fees generated by such accounts, for a specified period of time.
NASD Rule 2420 generally prohibits members from paying fees and commissions to non-member broker/dealers. Rule 2420 has been interpreted by NASD Regulation to prohibit such payments to persons that operate (or based on the proposed activities would operate) as unregistered broker/dealers. The determination of whether a person should be registered as a broker/dealer rests with the Securities and Exchange Commission (the "SEC").1 In this regard, you may wish to direct your inquiry to the SEC's Division of Market Regulation for guidance. To the extent that your client receives no-action relief from the SEC to make such payments, your client's payment of continuing commissions to RR would not violate NASD Rule 2420.
NASD IM-2420-2 ("Continuing Commissions Policy") provides that member firms are permitted to pay continuing commissions to registered representatives after they cease to be employed by a member, if, among other things, a bona fide contract between the member and the registered representative calling for the payments was entered into in good faith while the person was a registered representative of the employing member. The arrangement may not permit RR to solicit new business, open new accounts, or service the accounts generating the continuing commission payments. Based on the facts you have provided, and assuming a bona fide contract covering the arrangement is duly executed, RR would be eligible to receive continuing commissions from Commonwealth under NASD IM-2420-2.
I hope this letter responds 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 to the issues that you have raised based on the facts as you have described them, and does not address any other rule or interpretation of the NASD, or all the possible regulatory and legal issues involved.
Kosha K. Dalal
Assistant General Counsel
cc: Frederick F. McDonald, Jr., District Director, District 11
1 You should be aware that the staff of the SEC's Division of Market Regulation has issued "no-action" letters that address the conditions under which a former retired registered representative, who is no longer employed by a broker/dealer, may continue to receive commissions without being required to register as a broker/dealer under Section 15 of the Exchange Act. The SEC staff has considered such factors as the age, length of service, and disciplinary history of the former registered representative in determining whether continuing commission payments made in the context of retiring registered representatives constitute a violation of the broker/dealer registration requirements of the Exchange Act.