How Barred Advisors Sell Their Books

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A registered rep at my firm got into trouble at his previous employer. I think FINRA is likely to bar him from the industry. Since he is in his mid-60s, he’s considering retiring from the business and wants to sell his book of business to another rep. If he sells his book for a fixed amount to be paid on a monthly basis, would that be legal?

FINRA Rule 8311, which was amended  effective last month, prohibits payment of any “remuneration that the person might accrue during the period of the sanction or disqualification.” The interpretive material for the rule says, however, that you “may pay or credit to a person that is the subject of a sanction or disqualification … remuneration that … accrued to the person prior to the effective date of such sanction or disqualification” (except for remuneration relating to the activity that caused the sanction).

So the issue turns on what is meant by “accrue.” The legal definition of “accrued income” is “income which is earned but not yet payable.”

Consequently, I think if a rep enters into a contract with another rep to buy his book of business at a set price, the amount accrues when the contract is entered into and the payments that are spread out over time can continue to be paid even after the rep is barred.

Keep in mind, however, that any continuing commissions — that is, commissions for transactions that occur after he has been barred — could not be paid even if the firm has a continuing compensation agreement with the rep that would otherwise comply with FINRA Rule 2040(b).

Does FINRA’s suitability rule apply to a foreign client of mine?

Yes. FINRA Rule 2111 applies equally to foreign clients and to U.S. citizens. FINRA has an interest in making sure that its member firms are complying with its rules and, therefore, the way to look at this is as your obligation and not something that belongs to the client.

Remember also that the suitability rule is composed of two obligations. The first is so-called reasonable-basis suitability, under which a broker-dealer must perform reasonable diligence to understand the nature of a recommended security or investment strategy, including its potential risks and rewards, and then determine whether there is a reasonable basis to believe that it is suitable for at least some investors.

Under the customer-specific obligation, a broker-dealer must have a reasonable basis to believe that a recommended security or investment strategy is suitable for a particular customer based on his or her profile, which includes, among other things, age, other investments, financial situation, tax status, investment objectives, investment experience, time horizon, liquidity needs and risk tolerance.

Another factor that could affect the customer-specific suitability obligation is the customer’s status as a foreign national. For example, if the customer were looking to take advantage of the foreign investor visa program, that aspect could make an otherwise risky investment seem more appropriate for that particular client. Of course, it should go without saying that you may need to perform extra due diligence for foreign clients (for example, by running an OFAC check to make sure they’re not on the prohibited persons list).

Be cautious of foreign clients who appear more interested in obtaining a visa than in actually making money from their investments.

My father-in-law, who also happens to be a client of mine, lent my wife and me money for home renovations. We signed a promissory note and have been paying him back regularly. My branch manager overheard me talking about it and has said this could be a problem. I thought family members didn’t count in the rule against borrowing money from clients. Is this a problem?

FINRA Rule 3240 prohibits borrowing money from clients or lending money to them. While you are correct that family members are generally excluded from this prohibition, the rule nevertheless requires that your member firm have written procedures allowing such borrowing or lending. (Fathers-in-law, by the way, are specifically included in the definition of family members in the rule.)

There is a provision of the rule that says the firm’s written procedures may indicate that registered persons are not required to notify the firm or receive approval before borrowing money from family members, but it doesn’t say that such borrowing or lending is automatically permitted.

The first thing you need to do, therefore, is look at your firm’s policies and procedures and see if they have a provision that covers this. If they do and you are allowed to borrow money from family members without getting approval first, then you’re fine.

If the policies don’t say that you’re exempted from getting preapproval when borrowing from family or have some other procedure you should have followed, however, then you could have a problem with your firm.

I’m opening my own registered investment advisory business and I just realized that Vermont, my home state, requires a certification that I am current on all my tax obligations. I’m embarrassed to say that I’m overdue on paying my taxes for last year and didn’t file for an extension either. Do all states require this certification? What do you suggest I do now?

To answer your second question first, I suggest you immediately make arrangements to pay your taxes along with any penalties and interest that may have accrued.

Not all states require such a certification when you apply to register as an investment advisor. However, most states do require some supplemental documents to be filed in addition to your registration application.

Typically, these are things like balance sheets, sample contracts and an affidavit that you haven’t been acting in an unregistered capacity as an investment advisor in the state (unless you had an exemption from registration).

There are a number of other documents that different states request. California, for example, requires that you sign a form giving the state access to view your bank records. Florida requires that you get fingerprinted. And, as you’ve discovered, Vermont requires that you submit a certification that you’ve paid your taxes.

Consequently, before spending the time and money to begin the registration process, it’s generally a good idea to check with your state (and other states you may need to register in) to see what supplemental documents they require.

In your case, keep in mind that even if you were to register in a state that doesn’t require the tax certification (and assuming you did not otherwise do any business in Vermont), at some point in time it’s possible that the IRS will catch up with you and impose a lien (or worse) against you.

This, then, would become a disclosable event that you would list on your ADV and CRD report. Consequently, it would behoove you to take care of this sooner rather than later.

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