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Referral Fees For Securities
By Mitchell S. Ostwald

It seems like investment advice is as popular as talking about the success of our local sports team. Well, quietly and without much fanfare, the person who may be giving you advice is your certified public accountant - and he may want to be your stockbroker too.

Several years ago, the NASD began to explore the ability to provide compensation from its members to unregistered persons in connection with the solicitation of securities transactions. The securities industry for many years has paid forms of compensation to registered investment advisors and brokers from mutual fund companies and the like to secure additional investors. To meet the industry's insatiable need for additional investment dollars, the highest priority was placed on the changing of the laws affecting payments to, and referrals by, accountants to the brokerage industry.

The industry for years had been subject to many claims of misconduct as a result of payment of money (or trips and other types of incentives) to its brokers for investments placed in specific securities. This was a rampant practice in the 1980's for the sale of limited partnerships. "Soft dollars" continue today through the sale of mutual funds. The NASD was aware if they were able to change the regulations as to non-members, like accountants, they may be able to legitimize payment of "finders fees" or referral fees to third parties who introduce or refer prospective brokerage customers to the firm.

After a year of public comment, the NASD enacted the legislation allowing payment of referral fees by NASD members to non-members. Soon thereafter, the California senate and assembly passed SB1289, which was signed by the governor and became law in January 1999. Perhaps as an admission by our lawmakers that this new law has created both legal and ethnical dilemmas, they included subsection (c), which states in part that "an accountant is prohibited from performing services for a client for commission.during the period in which the person also performs for that client any of the services listed below. (1) an audit, (2) a compilation of a financial statement or (3) an examination of prospective financial information. "  This leads one to ask how then can an accountant be your accountant and your financial advisor at the same time?  Well, it's the law.

Wallstreet firms have an answer - recruiting CPA's to be licensed registered reps for their company. As one firm recently stated, "we are paying the CPA to solicit and to refer, not to be an investment advisor. "  Time will tell if this truly provides clients with another service or is it another example of the breaking down of confidences in our professionals by American society.

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