November 20, 1996
I am responding to your letter of June 28, 1996 wherein you request (i) confirmation that payment of a consulting fee, as described herein, does not violate NASD rules, and (ii) to the extent that the payment of the consulting fee is prohibited, that a waiver of such prohibition be granted.
Your letter and attachments thereto, state the following: You are writing on behalf of the Estate of [Person 1] (the "Estate"). [Person 1] died in an automobile accident in December 1995. Prior to his death, [Person 1] was a registered representative of [Broker/dealer], a NASD member firm. [Person 1] independent contractor agreement with [Broker/dealer] provided that all brokerage accounts introduced to [Broker/dealer] by [Person 1] ("Accounts") were the property of [Person 1] and, in the event of his death, [Broker/dealer] would continue to pay [Person 1] estate commissions earned on existing business introduced to [Broker/dealer] by [Person 1] .
Subsequent to [Person 1] death, [Widow], the widow of [Person 1] and the personal representative of the Estate, entered into a purchase agreement with [Person 2], a registered representative of [Broker/dealer], to sell the Accounts to [Person 2] for a purchase price of Twenty Five Thousand Dollars ($25,000). The purchase agreement also provides that [Person 2] and [Widow] shall enter into a consulting agreement whereby [Widow] will provide consulting services to [Person 2] in exchange for a consulting fee paid by [Person 2] equaling 20% of the "net revenues" generated from the Accounts over a four-year period, payable monthly. "Net revenues" are defined to mean any revenue generated by [Person 2] in connection with any of the Accounts, including any commissions paid by [Broker/dealer] or any mutual fund company, account management fees, financial planning fees and any commissions received in connection with any insurance products, less any administrative fees normally charged by [Broker/dealer], or any other broker-dealer. "Consulting services" are defined to mean assistance limited to administrative matters only, and shall not include anything relating to or in connection with the offering or selling of securities, the solicitation of new business, or the opening of new accounts.
You state that you believe NASD rules would not prohibit the payment of the Consulting Fee. You further note that NASD's Policy Statement with Respect to Continuing Commissions ("Continuing Commissions Policy") permits the payment of compensation to a widow of a registered representative, provided bona fide contracts call for such payments, and the payment of continuing commission generated on accounts taken over upon the transfer of accounts from one dealer-member to another. You state that the payment of the Consulting Fee comes within the spirit, if not the letter, of the Continuing Commissions Policy.
Based on the representations in your correspondence, this office believes that the arrangement to pay the Consulting Fee is not permissible under the Continuing Commissions Policy. The Policy contemplates, among other things, that agreements for the payment of continuing commissions be entered into at the time the employees are registered representatives of the employing members. The Policy has consistently been interpreted by NASD Regulation, Inc. ("NASDR") to mean that a beneficiary entitled to the payment of continuing commissions shall have no involvement or connection with the accounts generating the commissions or the broker/dealer managing and controlling such accounts, other than as the beneficial recipient of such commissions. In addition, the plain language of the Policy does not allow for the contract between the registered representative and the firm to be altered or superseded after retirement or death. In this case, although an agreement calling for payments of commissions to [Person 1] estate was entered into by [Person 1] with [Broker/dealer] while [Person 1] was a registered representative, the agreement was terminated and superseded by the purchase agreement between [Widow] and [Person 2]. The purchase agreement, moreover, contemplates that [Widow] will provide administrative services to the Accounts in return for a direct percentage of commissions generated by the Accounts.
This letter addresses only the issue that you have raised and does not address any other rule or interpretation of the Association. Further, this represents a staff position only and has not been reviewed or endorsed by the Board of Directors of NASDR.
Please be further advised that NASDR staff does not have the authority to grant waivers from the applicability of existing NASD rules.
I hope this is responsive to your inquiry. Please note that the opinions expressed herein are staff opinions only based on the facts as you have described them, and do not claim to address all the possible regulatory and legal issues involved.
Robert J. Smith
NASD Regulation, Inc.