Interpretive Letter to Martin H. Kaplan, Esq., Gusrae, Kaplan & Bruno, PLLC
February 4, 2004
Martin H. Kaplan, Esq.
Gusrae, Kaplan & Bruno, PLLC
120 Wall Street
New York, NY 10005
Re: Proposed Profit Sharing Arrangement
Dear Mr. Kaplan:
This is in response to your May 22, 2003 letter requesting interpretive guidance regarding the direct proportionate share requirement set forth in NASD Rule 2330(f)(1)(A)(iii).
Based upon your letter, I understand the facts to be as follows. Your client, Firm X, is a registered broker/dealer under the Securities Exchange Act of 1934 and an NASD member. Firm X proposes to enter into a written agreement with a customer to share in the profits in the customer’s account. The customer would open an account with Firm X and deposit funds in that account. Firm X would permit the customer to use Firm X’s computer-based trading platform at a discount and would provide the customer with a discount on all transactional fees and charges. In exchange for these discounts, Firm X would share in 25% of all profits generated in the customer’s account. Your letter states that Firm X’s 25% share of potential profits is equivalent to the value of the discounts provided to the customer. Firm X will not share in losses except to the extent of its discounted transactional fees and charges and the value of its computer-based trading platform. You request that the staff concur with you that the proposed arrangement satisfies the requirements of Rule 2330(f)(1)(A).
NASD Rule 2330(f)(1)(A) prohibits members and persons associated with members from sharing in the profits or losses in a customer’s account except under certain limited conditions. Rule 2330(f)(1)(A) permits a member to share in the profits or losses in a customer’s account only to the extent that the member obtains the customer’s prior written authorization and shares in the profits or losses in the account in direct proportion to the financial contributions made to the account by the member. This exception to the general prohibition requires that the member directly contribute financially to, or invest in, the account. The arrangement described in your letter, which entails discounting costs, fees, or charges that are otherwise due to the member from a customer would not be considered a direct financial contribution. Moreover, the exception also requires that the member share in both the profits and losses of the account in direct proportion to the financial contribution. Accordingly, even if Firm X were to provide a direct financial contribution, the agreement does not include a proportionate sharing of the losses. Therefore, Firm X’s proposed arrangement does not meet the condition set forth in Rule 2330(f)(1)(A)(iii).
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 NASD Board of Governors. 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 NASD, or all the possible regulatory and legal issues involved.
Very truly yours,
Robert B. Kaplan, Associate Vice President and Acting Director