Though I am aware of the restrictions imposed on commission sharing with non-registered persons, my broker-dealer has communicated that a registered rep sharing commissions with other registered reps of the same broker-dealer is a prohibited practice, if not done through a "split code." I haven't been able to find a FINRA rule covering this aspect, and wanted to learn if you had an opinion on the matter.
-I.I., via email
In answer to your question, the issue of paying referral fees, or splitting commissions, with unregistered persons initially derives from Section 15(a)(1) of the 1934 Securities Exchange Act. As FINRA has stated in Notice to Members 09-69: "SEC guidance states that receipt of securities transaction-based compensation is an indication that a person is engaged in the securities business and that such person generally should be registered as a broker-dealer." This led to a series of NASD, NYSE and FINRA rules (which FINRA is seeking to consolidate into one new rule) that generally prohibit payment of commissions to unregistered individuals. There is no rule, however, that prevents splitting commissions between registered individuals, and it sounds like you're dealing with an internal policy of your firm. That's not to say that your firm has no basis for the requirement. On the contrary, there are many valid reasons why a firm would want to require you to use a "split code" when sharing commissions with another rep at your firm. For example, FINRA Interpretive Memo IM-2420-2 says that commissions can be paid to the widow of a registered representative as long as there's a bona fide contract that called for such payment. Absent such a contract, payment to a widow, or other beneficiary of a deceased registered rep would be tantamount to paying an unregistered individual. Consequently, the firm's requirement that commissions be split using a split code allows the firm to keep track of such payments. In addition, sometimes reps will get into a dispute concerning the split. Issues such as which clients were going to be shared, or whether a split was a one-time deal for a particular trade or an ongoing agreement for all trades in a client's account, often arise and force the firm to play mediator. By creating a specific policy to address such issues, the firm is being proactive and attempting to head off any problems down the road.
I was named in an arbitration two years ago. My broker-dealer was also a party, and I worked closely with the compliance department on our defense. The case recently ended with a small award for the customer which was disclosed to Central Registration Depository. I've recently applied to become a registered investment adviser and was asked by the state to explain why the arbitration wasn't previously disclosed. Since we disclosed the award, I don't understand what more the state wants.
-D.S., via email
Article V, Section 2(c) of the FINRA By-Laws requires that "every application for registration filed with [FINRA] shall be kept current at all times by supplementary amendments." The bylaws futher state that such amendment "shall be filed with the Corporation not later than 30 days after learning of the facts or circumstances giving rise to the amendment." [Note, statutory disqualifications must be reported within 10 days after the disqualification occurs.] In your case, when you were served with the arbitration claim the 30-day period began to run since Question 14I(1) of the U4 ("Have you ever been named as a respondent in ...an arbitration...") required a "yes" answer at that point. While the rules require the member firm to file the Amended U4, (See, for example, Notice to Members 10-39) the state examiner may feel that it was your obligation to ensure that the firm did its job. For example, Notice to Members 97-31 focuses on an individual's obligation to keep his address current, and also mentions broadly that "all persons who are already registered [with a FINRA member firm] must file an amendment to the Form U4 when information contained on the original Form U4 changes."
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.