Is it acceptable for me to have my sales assistant enter a trade at my instruction and direction?
S.P., New York
Since 1988 FINRA has had a registration category for "Assistant Representatives-Order Processing." FINRA Rule 1041 defines an Assistant Representative-Order Processing as "persons associated with a member who accept unsolicited customer orders for submission for execution by the member." However, Rule 1042 provides restrictions on what these individuals may do. "An Assistant Representative-Order Processing may not solicit transactions or new accounts on behalf of the member, render investment advice, make recommendations to customers regarding the appropriateness of securities transactions, or effect transactions in securities markets on behalf of the member," the rule says. Even if your "sales assistant" doesn't fall specifically into the definition of Assistant Representative, he or she would not be permitted to actually enter trading orders. But, I did find a July 19, 2000 Interpretive Letter on the FINRA website which stated in relevant part that, "at the direction and supervision of an appropriately registered person, administrative personnel may perform the mechanical task of typing orders into Instinet, SelectNet and/or Posit. The administrative personnel, however, cannot exercise any discretion in performing these activities. They must be following the specific instructions of the appropriately registered representatives." While this might seem to contradict Rule 1042, I would proceed with caution if you were going to rely on that Interpretive Letter and double check with FINRA.
I own a registered investment advisory firm and would like to hire someone to solicit business for me and pay them for each referral. My state requires a solicitor to be registered as an investment adviser representative so I was going to hire the person as an independent contractor. I don't want them providing investment advice to clients. I only want them to solicit new business for me. Under that scenario, does the solicitor have to provide a separate solicitor disclosure statement?
R. P., Kansas
In my opinion you would not need to provide a solicitor disclosure statement. Your question really comes down to whether, in light of the independent contractor relationship and the limits you'll place on their duties, the solicitor would be considered an "employee" since employees of the advisory firm are not required to provide the separate solicitor disclosure statement. I believe the person does qualify as an "employee" for several reasons. First, the independent contractor agreement you sent me indicates that the person will be required to comply with your firm's compliance manual, just like any employee would. Second, and more importantly, the individual will be considered an "employee" under the definition contained in the Form ADV Part 1, which says that an employee "includes an independent contractor who performs advisory functions on your behalf." Although there is no specific definition of "advisory functions" in the Form ADV, your state's law requires individuals who solicit business to register as advisory representatives. Consequently, I think it's safe to say that the state would consider solicitation to be an "advisory function." Keep in mind that, while you wouldn't have to provide the separate solicitor disclosure statement, you should disclose the employee solicitation and his receipt of compensation in your Form ADV Part 2A Disclosure Brochure under Item 14. This is based on a Kansas statute that allows for a fee to be paid to employees "if the status of the solicitor as a partner, officer, director, or employee of the investment adviser...is disclosed to the client at the time of the solicitation or referral."
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.