Application of Rules 3030 and 3040 to associated persons who receive commissions for brokering viatical settlement contracts.
March 1, 2002
Quality of Life Settlements
5349 Lake Jessamine Drive
Orlando, FL 32839
Re: Viatical Settlement Contract Commissions
Dear Mr. Almeida:
This is in response to your November 21, 2001 email request and our subsequent phone conversations in which you sought interpretive guidance on whether state licensed life insurance agents who also maintain securities licenses can receive commissions on the brokering of viatical settlement contracts.
According to your email and the subsequent phone conversations, I understand the facts to be as follows. Quality of Life Settlements ("QOLS") is a viatical brokerage company. A number of the state licensed life insurance agents who are engaged in the sale of viatical settlement contracts for QOLS also are registered representatives associated with various NASD member firms. You represent that aside from selling viatical settlement contracts, the agents would not be involved in any other activity involving QOLS. You asked whether these registered representatives may receive commissions on the brokering of viaticals under NASD rules.
Depending on the structure, a viatical instrument may be a security under the federal securities laws. Whether the instrument is a security will affect the application of NASD rules as well as federal and state securities laws1 and Securities and Exchange Commission ("SEC") rules and regulations. The staff of the Office of General Counsel, NASD Regulation ("staff") recommends that you consult with the SEC staff or your own legal advisor if you have any questions as to whether the instruments sold by QOLS are securities.
If the QOLS instruments are securities, registration and licensing issues must be considered. For instance, the sale of securities products on behalf of QOLS could implicate broker/dealer registration requirements for QOLS. The determination of whether a person or entity must be registered as a broker/dealer rests with the SEC. In this regard, you may wish to direct your inquiry to the SEC’s Division of Market Regulation for guidance. In addition, if the QOLS instruments are securities, any person involved in the sale of the instruments would need to be registered with a broker/dealer and licensed appropriately to sell the particular type of security.
Life insurance agents selling securities instruments on behalf of QOLS who are also registered persons of various NASD member firms also are subject to the requirements of NASD Rule 3040. Rule 3040 provides that no person associated with a member may engage in securities transactions away from his or her member firm without providing prior written notice to and, if the associated person is to receive selling compensation, receiving prior written approval from the member firm. If the member approves the insurance agent's participation and the agent receives compensation, the agent's member firm must record the transactions on its books and records and supervise the agent's participation in the transaction as if the transaction were executed on behalf of the agent's member firm.
If the QOLS instruments are not securities, NASD Rule 3030 nevertheless requires persons associated with a member firm in any registered capacity to give prompt written notice to the member firm if he or she engages in an outside business activity (except a passive investment) or accepts compensation from anyone, other than his or her employer firm. Among other things, the written notice should describe the outside activity in sufficient detail to enable the member firm to evaluate the specifics of the proposed activity.
You should be aware that NASD considers the prohibition against outside business activities and private securities transactions to be important elements of an associated person’s duty to his or her member firm and to the investing public. In this regard, as explained in Notice to Members 01-79 (a copy of which is enclosed), violations of Rules 3030 and 3040 can result in formal disciplinary actions against the associated person, with severe sanctions. The Notice also emphasizes the need for associated persons to consult with their employer member firm regarding any proposed outside activities to ensure compliance with applicable federal securities laws and regulations and NASD Rules.
I hope that this letter is responsive to your request. 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, Inc. This letter responds only to the issues 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.
Assistant General Counsel
1 See SEC v. Life Partners, Inc., 87 F.3d 536 (D.C. Cir. 1996), reh’g denied, 102 F. 3d 587 (D.C. Cir. 1996); Timothy James Fergus, et al., C8A990025 (NAC May 17, 2001).