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Continuing Commissions Policy

Generally, under NASD rules, a person associated with a member firm must be registered as a registered representative to receive continuing commissions for the sale of securities. However, under NASD Rule IM-2420-2, the Continuing Commissions Policy (Policy), a person who is no longer registered with a member firm may continue to receive commissions without being deemed to have violated NASD rules, subject to certain requirements. Continuing commissions include ongoing compensation generated by an account after it is initially established with the firm.

Continuing commissions must be paid according to a bona fide contract entered into by the recipient and member at the time the recipient was still registered as a representative with that member. Contracts structured after the recipient ceases to be registered are not covered by the Policy. In particular, the Policy recognizes the validity of contracts that vest in the associated person the right to receive continuing compensation upon retirement and designate such payments to the associated person's surviving spouse or other beneficiary.

The Policy also states that commission payment arrangements may not under any circumstances permit the solicitation of new business or the opening of new accounts by persons who are no longer registered. NASD Regulation has interpreted the Policy broadly to mean that a person entitled to the payment of continuing commissions shall have no involvement or connection with the account(s) generating the commissions or the broker/dealer managing and controlling the account.

The Policy specifically prohibits any arrangement for the payment of continuing commissions to a person who is not eligible for membership in the NASD or association with a member because of any disqualification, as set forth in Article III of the By-Laws, such as revocation, expulsion, or suspension.

It has been brought to the attention of NASD Regulation that some associated persons, after they leave the securities business and are no longer registered as representatives with a member firm, attempt to "sell their book" of accounts to other registered representatives either for a flat fee or for an ongoing percentage of commissions generated by the accounts.

Under the Policy, a person who ceases to be registered would not be permitted to receive any commissions generated by the accounts if a bona fide contract had not been entered into by the recipient and member for the arrangement at the time he or she was still registered as a representative with that member. Absent the contract, any receipt by an unregistered person of commissions on an ongoing basis, whether pursuant to the sale of one's "book" or otherwise, would require the recipient to become registered as a representative under NASD rules. However, the Policy would not prevent the sale of the "book" by the unregistered person for a one-time, flat fee to another registered person. Finally, registered representatives are cautioned that they are subject to the firms' policies and procedures regarding the establishment or sale of their book of business, or the application of the Policy to the book.

© 2006 NASD. All rights reserved.