When I began planning for my retirement, I made an agreement with "John" (another registered rep in my office) for him to take over my clients and pay me half the commissions. Around the same time, John and I also purchased "Peter's" book of business. There was no provision to pay Peter any continuing commissions. For various reasons, John and I put those clients under John's rep number. I've since retired and my firm is now saying it won't pay me the commissions on Peter's book. I don't understand why it will pay me the commissions from my clients but not the others. No one disputes that John and I bought Peter's book together and, in fact, before I retired, John and I both received commissions from those clients.
R. J., Florida
In general, commissions can only be paid as long as the person is a registered representative of a member firm. However, FINRA Interpretive Memo IM-2420-2 sets forth the Continuing Commissions Policy, which says that the payment of continuing commissions to a former registered representative, or his widow or other beneficiaries, will not be deemed a violation so long as a bona fide contract calls for such payment. IM-2420-2 states that a registered representative may enter into a bona fide contract with another registered representative to take over and service his accounts and, after he ceases to be a member, to pay continuing commissions generated on such accounts. This does not, of course, apply to new business or new accounts. Once you retired, the firm could only pay you pursuant to "a bona fide contract." While you don't specify, I can only assume that your contract did not include Peter's clients, since they were only under John's number and not a joint rep number. You may want to speak with an attorney to see if it's possible to amend the contract to redefine the accounts included.
I'm a registered rep with a big wirehouse. I'm planning on leaving to start my own RIA firm. My attorney has cautioned me, however, that if I don't let my employer know what I'm doing, the firm could claim a violation of Rule 3030 and say that it constitutes an outside business activity that required notice. He says I should resign first, but that would effectively put me out of business for months. What do you think?
S. W., Illinois
Without addressing whether your firm has an internal policy regarding these situations, FINRA says that merely applying for registration should not be considered an outside business activity. In a Dec. 6, 2001, Interpretive Letter, FINRA, citing NASD Notice to Members 88-5, explained that Rule 3030 enables members to "exercise appropriate supervision over the activities of their associated persons." FINRA went on to say that "the notice requirements of NASD Rule 3030 are not triggered when, in an effort to apply for membership as a new broker/dealer, an associated person takes the following steps: (1) forms a company, (2) files an application on behalf of the company to become a member and (3) files a Form U-4 with NASD designating such associated person as a principal of such company."
The staff did include a caveat, however. They said that the associated person could not accept any compensation from the new company or from anyone other than his or her current member firm and could not engage in any securities or investment banking activity on behalf of the new company, nor raise capital or solicit customers for it. So as long as you are not actually engaging in any "business activity" on behalf of the company, FINRA won't consider you to be engaged in an OBA. Although this Interpretive Letter focuses on a registered rep setting up a new broker-dealer, the same analysis should apply to a representative setting up a registered investment advisory firm as well.
Alan J. Foxman is an attorney with the law offices of Rita G. Dew, P.A.
and a senior consultant with National Compliance Services, Inc.
in Delray Beach, Fla. He can be contacted at: this email address.
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