Interpretive Letter to Leslie D. Smith, Berthel Fisher & Company
December 9, 1998
Leslie D. Smith
Berthel Fisher & Company
100 Second Street SE
P.O. Box 74250
Cedar Rapids, IA 52407-4250
Dear Mr. Smith:
I am responding to issues raised in your letter of August 27, 1998, in which you requested interpretive advice regarding whether IM-2420-2 ("Continuing Commissions Policy") would permit the payment of a portion of a commission to a former broker-dealer for transferred and new accounts opened at a new broker-dealer.
In your letter and subsequent telephone conversations, you stated the relevant facts to be as follows. Berthel Fisher & Company Financial Services, Inc. ("Berthel"), a licensed broker-dealer, entered into a transfer agreement with another licensed broker-dealer, ADM Securities Inc. ("ADM"), which transferred all the brokers associated with ADM to Berthel effective as of the close of business, March 27, 1998 ("effective transfer date"). As part of the agreement, Berthel agreed to pay ADM a portion of the commissions earned by the former ADM brokers on existing accounts which were transferred to Berthel on the effective transfer date, as well as a portion of the commission earned on new accounts which might be opened by the former ADM brokers after the effective transfer date. Subsequent to the effective transfer date, ADM chose to terminate its registration as a broker-dealer and filed a Form BDW. After ADM terminates its registration, it will continue as a non-member corporate entity receiving commission payments from Berthel under the terms of the agreement.
The Continuing Commissions Policy permits the payment of continuing commissions to registered representatives after they cease to be employed by a member of the Association or payment to their widows or other beneficiaries, provided a bona fide contract calls for such payment. The Continuing Commissions Policy also provides that "…a dealer member may enter into a bona fide contract with another dealer-member to take over and service his accounts and, after he ceases to be a member, to pay to him or to his widow or other beneficiary continuing commissions generated on such accounts."
The NASD’s Policy was adopted primarily to accommodate registered persons who are retiring from the business and allow them or their beneficiaries to receive continuing commissions after they terminate their registration. Under your facts, the former ADM brokers who initially generated the accounts and commissions are not retiring, will not be the beneficiaries of the continuing commissions paid to ADM, and will still be actively managing the same accounts once they and the accounts are transferred to Berthel. The Policy was not intended to cover the corporate sale of brokers and customer accounts by a broker-dealer and the receipt by the former broker-dealer (now a non-member corporation) of continuing and new commissions generated by the same brokers on transferred and new business. After ADM ceases to be a registered broker-dealer, Rule 2420 would apply to prohibit the payments to ADM contemplated by the agreement.
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, Inc. This letter responds only to the issues that you have raised based on the facts as you have described them, and does not address any other rule or interpretation of the Association or all the possible regulatory and legal issues.
Robert J. Smith
Office of General Counsel
NASD Regulation, Inc.