QUESTION: If you pay someone a referral fee do they have to be registered? Can they be a client and also get paid a referral fee? I know this all has to be disclosed to clients but if you could help me on the rules.
RESPONSE: in nearly every state, if the investment adviser pays a referral fee to anyone, that individual or firm is required to register as a "solicitor" or an "investment adviser representative." On the exam, you'll probably get a question about a real estate professional or CPA who receives a referral fee in exchange for recommending that clients use the services of an investment adviser. If so, tell the test that this individual or firm should register as an investment adviser representative of that IA. In the real world, I believe there are five states that do not require solicitors to register--instead, they would hold the adviser responsible for the solicitor's activities. I believe Missouri is one of the five states with no registration requirement for solicitors. In that case, the adviser would simply need to be sure that the solicitor is not someone who has been disciplined by securities regulators, convicted of any felony or any securities-related misdemeanor in the past 10 years. The solicitor needs to deliver the adviser's ADV Part 2 (disclosure brochure) and also a copy of the solicitor's brochure that explains to the prospect the details of his relationship to the adviser. In most states the solicitor needs to be registered as a representative of the IA. In a handful of states, registration is not required.
Hi. I've taken and passed the 7 and 63 with your help. Thanks. I have a question that is sort of in the mindset of this thread...
ReplyDeleteRep A and Rep B are both registered with Alpha Brokers Stock Brokerage. The 2 reps together bring in an institutional client. The firm pays rep A 100% of the commission and Rep A pays Rep B 30%. Rep B leaves the firm and is unregistered. Can Rep A continue to pay Rep B from his commissions?
As you can see, I didn't exactly jump at the chance to respond to this question. This one is tough. Basically, I can find nothing that says it's okay for the existing Rep to keep paying an unregistered former rep. NASD/FINRA has a rule allowing a member firm to pay continuing commissions to a retired rep and even to his/her beneficiary upon death. But, there has to be a contract in place (for which FINRA refuses to specify the contents), and the payment has to be on old business only. And, the rule doesn't say it's okay for reps to pay other reps who are no longer in the business.
ReplyDeleteThis question makes me think the unregistered rep would be getting paid on new business from the word "commissions," which sounds like new transactions . . . as opposed to receiving "trailers" through 12b-1 fees paid on mutual fund and variable annuity accounts placed while the agent was registered.
So, I can't answer with total confidence, but unless I see a clear angle that would allow something like this, I err on the side of caution--I would answer that, no, Rep A can not continue to pay Rep B. He would be sharing commissions with an unregistered person. My contacts in the industry can find no reason to allow Rep A to pay Rep B . . . but I will keep looking.
Thanks for a tough question.