August 20, 1997
Peter D. Koffler
Executive Vice President & General Counsel
Twenty-First Securities Corporation
780 Third Avenue
New York, NY 10017
Re: Payment of Short Interest Rebate to Non-Member
Dear Mr. Koffler:
This is in response to your letter dated August 1, 1997, in which you request interpretative guidance concerning the payment of "short interest rebate" to a person who is not a member of the National Association of Securities Dealers, Inc. ("NASD"). Based upon the representations contained in your letter, we understand the pertinent facts to be as follows. Twenty-First Securities Corporation ("TFSC") is registered as a broker/dealer and is a member of the NASD. Trust Co. is a state-chartered trust company that maintains omnibus margin accounts with TFSC for the benefit of several hundred trust clients. In these accounts, Trust Co. holds many short interest equity positions that it allocates to clients internally. TFSC is an introducing broker and pursuant to an agreement between TFSC and its clearing broker, most of the interest earned on account balances from securities sold short -- short interest rebate -- is credited to TFSC's customers. The remaining short interest rebate is shared by TFSC and the clearing broker. This arrangement is fully disclosed to TFSC's clients.
In your letter, you state that TFSC is contemplating paying a percentage of the short interest rebate it would normally retain in connection with Trust Co.'s accounts to Trust Co. as compensation for work performed in administering its omnibus accounts for the benefit of its many customers. You further state that this arrangement would be disclosed to Trust Co.'s clients.
Based upon the foregoing, it is the opinion of the staff that payment of a percentage of TFSC's short interest rebate to Trust Co., as specified above, would not violate NASD rules regarding sharing commissions with, or payment of referral fees to, non-member firms or non-registered individuals. 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 in your letter, and does not necessarily address any other rule or interpretation of the NASD or all the possible regulatory and legal issues involved.
Very truly yours,
Gary L. Goldsholle