Interpretive Letter to R. Bruce Hughes, Access Mortgage Services, Inc.
December 23, 1999
R. Bruce Hughes
Access Mortgage Services, Inc.
633 Lacey Road
Forked River, NJ 08731
Re: Outside Business Activities of an Associated Person
Dear Mr. Hughes:
I am responding to your letter of November 23, 1999 to the National Association of Securities Dealers, Inc. ("NASD") wherein you ask whether the payment of referral fees by your firm to members for referring prospective clients to your firm’s mortgage services would violate NASD rules.
You have described the facts as follows. Access Mortgage Services, Inc. ("AMS") is a licensed Mortgage Banker. AMS intends to establish relationships with other business, including broker/dealers, whereby individuals employed by these businesses would refer prospective clients for the purpose of utilizing mortgage services of AMS, and would receive a fee from AMS for such referrals. The individuals would conduct this referral business either (i) from the premises of their businesses, (ii) through joint partnerships between the individuals and AMS set up as either limited liability companies or limited partnerships, or (iii) as dual employees of AMS and their firm. You ask what NASD rules govern the proposed arrangements.
NASD Rule 3030 requires that before a person associated with an NASD member firm becomes employed by, or accepts any compensation from, any other person for a business activity (other than a passive investment) outside the scope of his relationship with his member firm, the associated person must notify the member of his intent to engage in the outside business activity. While NASD Rule 3030 does not expressly forbid arrangements such as the ones you have proposed, member firms have the right to adopt and implement policies and procedures under NASD Rule 3010, the supervision rule, that would prohibit such arrangements. In addition, under the proposals, member firms would need to ensure that all advertising and promotional materials are reviewed by the member and that AMS does not engage in activity that would cause it to be deemed an unregistered broker/dealer.
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 described, and does not address any other rule or interpretation of the Association, or all the possible regulatory and legal issues involved.
Robert J. Smith
Office of General Counsel
NASD Regulation, Inc.