Nov 13 Nuances and twists in commission sharing
rules can turn into traps for securities brokers who, in an
effort to boost their bottom lines, turn to the arrangements
without paying close attention to fine-print restrictions, say
Commission sharing is widespread and generally allowed. The
practice could gain even more traction as a generation of aging
brokers recruit junior partners to, ev entually, take over their
practice. Those sharing arrangements can vary from as little as
10-percent of total commissions for a junior partner, to a 50-50
split for commissions from new clients, say recruiters.
Such agreements are also a good workaround for advisory
teams that, say, include someone who excels at bringing in
accounts - a rainmaker - but who is not skilled at day-to-day
money management, said Danny Sarch, founder of Leitner Sarch
Consultants Ltd, a wealth management recruiting firm in White
Plains, New York.
But among the potential problems that nuanced industry rules
can lead to: brokers aren't allowed to profit from securities
they aren't licensed to sell.
Brokers and teams that share commissions must be licensed to
sell the same products through the Financial Industry Regulatory
Authority (FINRA), Wall Street's industry-funded watchdog. But
commission sharing is not allowed, for example, on a team in
which one broker is licensed to sell only mutual funds and the
other only to sell stocks and bonds.
While improper commission sharing does not appear to be
widespread, according to Ivan Knauer, a lawyer for Pepper
Hamilton LLP in Washington, who represents brokerages and
brokers, he said it is not surprising when problems do crop up.
"Some people can cross the line inadvertently," Knauer said.
Brokerages typically have compliance procedures in place to
prevent brokers who aren't licensed to sell the same things from
entering sharing agreements, but mishaps can occur amid mounds
of paperwork and thousands of brokers.
Issues can also crop up when all brokers on a team are not
all licensed in the same states, said Benette Zivley, a lawyer
at Munsch Hardt Kopf & Harr, P.C. in Austin, Texas.
If, say, four brokers on a team are licensed to sell
securities in Texas, but only one is licensed in another state
where a client places an order, state regulators could raise
questions as to whether the three other brokers may legally
share in the transaction proceeds, said Zivley, who is also a
former Texas Securities Commissioner.
The answer, he said, would vary by state. Some state
regulators may take an aggressive approach by restricting
commission-sharing to only brokers licensed in their states,
CROSSING THE LINE
There are other obvious commission-sharing prohibitions that
are more difficult to track. Among them: giving kickbacks to
barred individuals who continue to work with clients in an
unofficial capacity - such as an independent, unregistered
adviser - and rely on former colleagues to process their trades.
Those helpful colleagues can suffer the same fate - being
barred from the industry. Commissions at large brokerages
typically go into the firm's account first, before being paid
out to brokers - a roadblock to improper sharing. B ut some
brokers, nonetheless, still find ways to take the risk, often to
earn extra cash.
In early November, Ryan P. Miller was barred. He allegedly
transferred about $300,000 to a barred individual between 2007
and 2010, according to a settlement between Miller and FINRA.
Miller, during most of that time, was a broker for Securities
America Inc, which fired him in 2010 for a previous
"unauthorized affiliation" with the barred person.
A spokeswoman for Nebraska-based Securities America declined
to comment. Efforts to locate Miller were unsuccessful. Miller
did not admit nor deny FINRA's findings.
Such schemes probably occur "more than any firm would like
but not as much as some cynics may think," said one brokerage
executive who is not authorized to speak to the press. "The risk
of getting caught just simply outweighs the potential benefit."
A sales assistant who was barred in March earned $4,000 from
a commission-sharing infraction after paying $65,000 to his
former boss, for instance, according to regulatory documents. A
sales assistant starting out at a small brokerage doesn't take
home a big paycheck, making such a proposition more tempting.
Monitoring for such activity is difficult for brokerages,
which would, for starters, need to analyze brokers' bank
statements to even begin to spot a potential problem. Even then,
pinning down misconduct can be difficult, especially if a broker
pays the outside person in cash. One reason the sales assistant
who blew his career over $4,000 was caught: he made payments by
check to a company set up by his former boss.