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DEATH, RETIREMENT
AND COMMISSIONS
By letter dated August 27, 1998, Berthel Fisher
& Company (BFC) General Counsel Leslie D. Smith requested interpretive advice
regarding whether NASD IM-2420-2 (Continuing Commissions Policy) would permit the payment
of a portion of a commission to a former broker-dealer for both transferred accounts and
newly opened accounts at a new broker-dealer.
BACKGROUND
Licensed broker-dealers BFC and ADM Securities, Inc.
(ADM) entered into an agreement transferring ADM's registered representatives (RRs) to
BFC. BFC agreed to pay ADM a portion of the commissions earned by the former ADM RRs on
- existing accounts
that were transferred to BFC on the
effective transfer date, and
- new accounts
opened at BFC after the effective transfer
date.
Subsequent to the effective transfer date, ADM terminated its
broker-dealer registration and filed a Form BDW, and under the terms of the agreement it
will continue as a non-member corporate entity receiving commission payments from BFC.
NASD IM-2420-2: CONTINUING COMMISSIONS POLICY
The NASD's Continuing Commissions Policy recognizes
the validity of good faith contracts entered into between employers and their RRs. Such
contracts may vest an employee with the right to receive continuing compensation on
business done in the event the employee retires. The contract may further vest an employee
with the right to designate such payments to his widow or other beneficiary.
NASD IM-2420-2: Continuing Commissions Policy
žWHAT'S ALLOWED:
- Payment of compensation
- to RRs
- after they cease to be employed by an NASD member, or
- to their widows or other beneficiaries
- provided bona fide contracts call for such payment.
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IM-2420-2 assumes that any arrangement
conforms to applicable laws or regulations, and specifically prohibits the solicitation of
new business or the opening of new accounts by unregistered persons. Under no
circumstances shall payment of any kind be made by a member to any person who is not
eligible for NASD membership or to be associated with a member because of any
disqualification, as set forth in Article III of the Association’s By-Laws, such as
revocation, expulsion, or suspension still in effect.
NASD RESPONSE
In responding to General Counsel Smith, the NASD
noted that the Continuing Commissions Policy was adopted primarily to accommodate RRs who
are retiring from the business and allow them or their beneficiaries to receive continuing
commissions after they terminate their registration.
| What Bothered the NASD The former ADM RRs who initially generated the accounts and
commissions
- are not retiring,
- will still be actively managing
the same accounts once they and the accounts are transferred to BFC, and
- will not be the beneficiaries of the
continuing commissions paid to ADM.
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NASD'S CONCLUSION
The Continuing Commissions 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.
LAfter ADM ceases to be a registered broker-dealer,
Rule 2420 would prohibit the payments to ADM contemplated by the agreement
For further reference:
December 9, 1998, NASDR Interpretative Letter to Leslie D. Smith from Robert J. Smith, Esq.
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