Interpretive Letter to Ted. A. Troutman, Esquire, Muir & Troutman
February 4, 2002
Ted A. Troutman, Esquire
Muir & Troutman
P.O. Box 25403
Portland, Oregon 97298-0403
Re: Payments to Retiring Representative Pursuant to Transition Agreement
Dear Mr. Troutman:
I am responding to your letter dated October 30, 2001 to NASD Regulation, Inc. wherein you request interpretive advice regarding the application of NASD IM-2420-2 ("Continuing Commissions Policy") to the payment by an NASD member firm ("Member Firm") of certain commissions and fees to one of its registered representatives who will be retiring and relinquishing his license ("RR").
Based on your letter and our phone conversations, I understand the facts to be as follows: RR is currently a registered representative employed by the Member Firm. The RR’s accounts consist of retirement planning accounts for public employees, generally referred to as "403(b) Plans." After an account is opened, the account holder will continue to make scheduled periodic payments into the account, which you refer to as "modal contributions." RR now plans to retire and wishes to enter into a transition agreement with the Member Firm to provide for the payment of continuing commissions on accounts established by RR prior to his retirement. You state that such agreement would provide that a licensed agent would agree, upon reassignment of accounts, to service the accounts of the RR. The licensed agent would receive 39% of the compensation arising out the business assigned; the RR would receive 61%. This compensation will be paid in percentages to the extent that the compensation arises out of modal contributions or is asset based compensation, for a period of five years.
Specifically, you ask the following:
Can the continuing commissions to be paid to the RR include commissions based on increased contributions by existing account holders established by the RR prior to his retirement, where such increases are written by the new licensed agent? Can the RR be paid continuing commission for accounts that were not originally established by the RR and are transferred to the new licensed agent after the RR’s retirement?
NASD Rule 2420
NASD Rule 2420 generally prohibits members from paying fees and commissions to non-member broker/dealers. Rule 2420 has been interpreted by NASD Regulation to prohibit such payments to persons that operate (or based on the proposed activities would operate) as unregistered broker/dealers. The determination of whether a person should be registered as a broker/dealer rests with the Securities and Exchange Commission (the "SEC").1 In this regard, you may wish to direct your inquiry to the SEC's Division of Market Regulation for guidance. To the extent that your client receives no-action relief from the SEC to make such payments, your client's payment of continuing commissions to RR would not violate NASD Rule 2420 so long as the requirements of IM-2420 are satisfied.
NASD IM-2420-2 provides that member firms are permitted to pay continuing commissions to registered representatives after they cease to be employed by a member, if, among other things, a bona fide contract between the member and the registered representative calling for the payments was entered into in good faith while the person was a registered representative of the employing member. The arrangement may not permit RR to solicit new business, open new accounts, or service the accounts generating the continuing commission payments.
Based on the facts you have provided, and assuming a bona fide contract covering the arrangement is duly executed, RR would be eligible to receive continuing commissions from the Member Firm under NASD IM-2420-2, including the payment of continuing commissions to the RR based upon increased contributions by existing account holders where the increases are written by the licensed agent after the retiring agent is no longer licensed. However, the payment to the RR of continuing commissions for new business is not permitted under NASD IM-2420-2 and, therefore, the RR may not receive continuing commissions for accounts that are established or transferred to the licensed agent after RR’s retirement.
I hope this letter responds 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 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 NASD, or all the possible regulatory and legal issues involved.
Kosha K. Dalal
Assistant General Counsel
cc: Frank Birgfeld, District Director, District 3
1 You should be aware that the staff of the SEC's Division of Market Regulation has issued "no-action" letters that address the conditions under which a former, retired registered representative, who is no longer employed by a broker/dealer, may continue to receive commissions without being required to register as a broker/dealer under Section 15 of the Exchange Act. The SEC staff has considered such factors as the age, length of service, and disciplinary history of the former registered representative in determining whether continuing commission payments made in the context of retiring registered representatives constitute a violation of the broker/dealer registration requirements of the Exchange Act.