NASD Rule 2420 - Dealing with Non-Members

Application of NASD Rule 2420 to proposed employee leasing arrangement.

 

 



December 28, 2007

Mr. Richard Schultz
President
Triad Securities Corp.
111 Broadway
New York, NY 10006

Re: Proposed Employee Leasing Arrangement

Dear Mr. Schultz:

This is in response to your letter of December 3, 2007, in which you ask whether Triad Securities Corp. ("Triad") would be permitted to enter into a business arrangement with ADP Totalsource, Inc. ("Totalsource"), an employee leasing service company, without violating NASD Rule 2420.

Based on your letter, we understand the pertinent facts to be as follows. Under the proposed arrangement, Totalsource will provide a range of human resource and employee benefit services such as health insurance, life insurance, pension plans, payroll processing and worker's compensation benefits. All insurance products that Totalsource plans to provide will be traditional insurance products, and not "securities" as defined under the federal securities law.

Totalsource will perform these activities under Triad's control and supervision. Triad will maintain supervisory control over its employees and will be wholly responsible for their proper registration, training and supervision for compliance with all applicable securities laws, rules and regulations. Triad will retain the traditional rights of an employer, including the right to hire, set pay for, give raises and bonuses to, terminate, discipline and reassign personnel of the broker-dealer. Totalsource will have no authority over any of these activities. Books and records relating to the services provided to Triad by Totalsource will be Triad's property and available for inspection by, among others, the Securities and Exchange Commission ("SEC") and FINRA.

All promotional activities, including any promotional material that Totalsource distributes, will relate solely to employee leasing services and will not in any way relate to brokerage activities. In additional, Totalsource will not identify or promote any member in its promotional activities or materials.

Totalsource will receive payment from Triad for salaries, wages and commissions, which Totalsource will then pay to member personnel. Totalsource will also provide all health, life, disability and other insurance coverage to Triad employees. For its services, Totalsource will access an administrative fee based upon Triad's gross payroll. This fee will not be based upon brokerage commissions received or generated by Triad or the employees. Moreover, Totalsource will not have discretion to determine the amount or frequency of the payment that will be distributed to Triad's employees.

NASD Rule 2420 generally prohibits payment of fees and commissions to non-member broker-dealers. This rule has been interpreted by FINRA staff to apply equally to persons that are not registered, but are required to be registered as broker-dealers under the Securities Exchange Act of 1934 ("Exchange Act"). As part of your correspondence, you have provided a copy of a "no-action" letter Totalsource has obtained from the staff of the SEC's Division of Trading and Markets stating that it will not recommend enforcement action to the SEC under Section 15(a) of the Exchange Act if Totalsource engages in the above-described employee leasing activities without registering as a broker-dealer under Section 15(b) of the Exchange Act.1

In view of the fact that Totalsource has obtained a no-action letter from SEC staff, FINRA staff believes that the proposed employee leasing activities of Totalsource, as described above, would not cause Triad to violate NASD Rule 2420. This position is contingent upon Totalsource performing the services in the manner described above, and the continuing validity of the SEC's no-action letter. If, for example, Totalsource were to modify its activities such that the SEC's no-action letter would no longer be valid, FINRA's Office of General Counsel would need to reconsider your request.2

Please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the Board of Governors of FINRA. 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 FINRA or all the possible regulatory and legal issues involved.

Sincerely,

Rachael Grad
Counsel



1 See ADP TotalSource, Inc., 2007 SEC No-Act. LEXIS 669 (December 4, 2007).

2 The SEC's no-action letter noted that the relief accorded Totalsource differs from relief given other firms in that Totalsource is an associated person (as defined in the Exchange Act) of a broker-dealer by virtue of its corporate affiliation with ADP Broker-Dealer, Inc. ("ADP Broker-Dealer"), a registered broker-dealer. Id. at note 5. The SEC's no-action letter further noted that Totalsource does not provide professional employer services or any other services to ADP Broker-Dealer and that neither ADP Broker-Dealer nor its personnel are involved in the professional employment services offered by Totalsource.