Interpretive Letter to David M. Katz, Sidley & Austin
September 25, 1997
David M. Katz
Sidley & Austin
875 Third Avenue
New York, New York 10022
Dear Mr. Katz:
I am responding to your letter of September 18, 1997 wherein you seek clarification on whether the NASD would permit the payment of transaction-based compensation to a non-member under an insurance networking arrangement.
Your letter states that Aon Securities Corporation ("Aon"), a registered broker/dealer, proposes to participate in a so-called "networking arrangement" with Affinity Insurance Services, Inc. ("Affinity"), a licensed insurance agency under state insurance laws, whereby Affinity will offer and sell variable annuity contracts under the supervisory oversight of Aon. Since the insurance laws of certain states require sales commissions for the sale of insurance products to be paid to insurance agencies, Affinity rather than Aon will receive commissions for the offer or sale of variable annuity contracts.
You further state that the networking arrangement will comport with the requirements of certain SEC "no-action" letters that permit such networking arrangements without requiring the non-member insurance entity to register as a broker or dealer under section 15(a) of the Securities Exchange Act of 1934 ("Exchange Act"). You conclude that Affinity is thus not required to registered as a broker or dealer.
NASD Conduct Rule 2420, among other things, prohibits the payment of selling concessions, discounts and other allowances to any registered broker/dealer that is a non-member of the NASD. Rule 2420 has also been interpreted to apply equally to entities that are not registered, but are required to be registered under the Exchange Act. In the past, the NASD has deferred to the SEC as to when an entity is required to be registered as a broker/dealer. Thus, if a non-member entity that receives commission payments from a member is not required to be registered pursuant to a SEC "no-action" position, then the member's payment of commissions to such entity would not violate NASD Rule 2420.
I hope this letter is responsive 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 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.