- SEC No-Action Letter Updating Guidance on Paying Continuing Commissions to Retired Registered Representatives; State Rules Remain More Complicated SEC No-Action Letter Updating Guidance on Paying Continuing Commissions to Retired Registered Representatives; State Rules Remain More Complicated
- December 21, 2008 | Authors: Christine A. Bruenn; Jeff Goldman
- Law Firm: Bingham McCutchen LLP - Portland Office
On November 20, 2008, the SEC approved a request for a no-action letter relating to “continuing commissions policies,” as described in NASD Rule IM-2420-2. SIFMA submitted a request asking the SEC to approve policies that allow firms to pay retired registered representatives a percentage of commissions earned from accounts of their former customers without maintaining the retirees’ registrations. The NASD/FINRA has allowed these continuing commissions policies at least since IM-2420-2 became effective in 1998, and FINRA has clarified that NYSE Rule 353(b), a ban on most payments after termination of a broker’s association with a firm, does not bar such programs. Updating similar relief offered to three brokerage firms in the mid 1990s, the SEC made clear that conforming policies will not be grounds for an enforcement action.
Continuing commissions policies are intended to provide a post-employment benefit to retired brokers and help their firms retain clients. Generally, retirees agree to assist in a one-time, complete transfer of their clients to a “receiving” broker or group of brokers. In exchange, the retiree receives a share of the commissions the receiving broker earns on those accounts, usually a percentage that begins at roughly 50% and declines to zero over four or five years. The policies also generally provide benefits to a retiree’s estate or heirs in the event that the retiree does not survive the term of payments.
Firms prefer to administer continuing commissions policies without maintaining securities registrations for the retirees. To qualify for the relief from federally-required registration under this month’s release, these policies must meet at least the following standards:
- Retirees must have been with the firm for at least three years.1 (The SEC no-action letter does not require that retirees be of a minimum age to qualify for relief from registration).
- Retirees must have demonstrated appropriate professional conduct. At a minimum, retirees must have been subject to no more than a low incidence of investment-related customer complaints and arbitrations settled or decided for more than $25,000 in the three years prior to retirement or pending at retirement, and if the retiree has been subject to such complaints, the firm must have determined that the complaints did not require disciplinary action or heightened supervision, and that the retiree was not at fault for improper sales practices. Further, the retiree must not have been subject to a statutory disqualification during the three years prior to retirement.
- Retirees must contractually agree to cease all securities-related conduct, meaning that they cannot contact former clients to discuss past or present securities transactions, cannot remain associated with any broker dealer or investment adviser (except with the firm as necessary to maintain any state registrations required to receive commissions), and cannot take a job at a bank or insurance company that involves securities transactions.
- Retirees must also obey all securities laws and regulations, to the extent they remain applicable, and must certify compliance with the policy at least annually.
- Receiving brokers must generally have been in the industry for three years and at the firm for one year, with some exceptions for junior brokers in teams, and must not have been subject to a statutory disqualification during the previous three years.
- The firm may pay the retiree commissions for no longer than five years after retirement.
- The firm must contact annually a sample of clients whose accounts are subject to the program, including a large percentage of high-net-worth clients, to ensure that the retiring broker has not contacted them to discuss securities.
Firms should consider state law before discontinuing state registration for retirees. Some state securities regulators have interpreted their regulations prohibiting “splitting” commissions with a non-registered person to prohibit participation in a retirement program unless the broker remains state-registered. The good news is that more than 40 state securities regulators have issued no-action letters in connection with continuing commissions policies. Note that states generally have granted relief only to specific firms, based on more complete program descriptions than the SEC considered in its recent release. A few states have insisted on additional conditions not reflected above, including access upon request to the names and files of program participants. A handful of states continue to require registration for retirees participating in a continuing commissions program. In some of those states, however, exceptions may be available upon separate application in cases of hardship, such as where an infirm retiree no longer is able to complete the continuing education requirements for registration, or where a retiree dies while enrolled in the program.