Can I Act as a Referral Service for Selling Bonds in Washington?

Full Question:

This is a Broker-Dealer question so I'm looking for somebody with expertise in securities (investment products). We organize Broker-Dealer inventories (bonds available for sale) in a bulletin board. Our customers subscribe to this bulletin board (web page, like 'the Pink Sheet') and can search through available bonds (mortgage backed securities). Once they found the bond they want to buy, they call the seller directly (we disclose the name). So we are just an information provider. As an alternative to the monthly subscription fee, we want to offer our customers the option of paying a broker by executing trades with him. So instead of calling the seller directly, our customer would call a broker (third party - not affiliated with us) and have the broker buy the bond for them. The transaction would occur between our customer and the third-party broker. The broker would then send us a check as a % of the commission he made. Since we are not a broker-dealer, can the broker pay us directly for sending business to him? Would this be considered a simple referral business or the broker can pay only another broker-dealer?
04/05/2010   |   Category: Licenses   |   State: Washington   |   #21680

Answer:

The answer will depend on all the circumstances involved, including the types of investments involved. You may be considered a salesperson and subject to licensing requirements. Please see the statutes below to determine applicability. While some fee-splitting arrangements are allowed, disclosures may be required to be made. For example, in one case, the court stated as follows:

Brown also failed to disclose the true purpose, nature, and extent of the fee-splitting arrangement with Arthurs Lestrange. Bova's February 18 letter suggested that the firms had decided to pool their fees because their efforts were "inextricably integrated," and pooling would promote "close professional cooperation" to the benefit of the Commonwealth. The Senior Banker, however, knew that Alex. Brown agreed to the fee-splitting because he understood, based on his discussion with McCarthy, that Alex. Brown needed to do so in order to obtain the escrow business. The Senior Banker further knew that the 60/40 terms of the fee split would disproportionately compensate Arthurs Lestrange given that Arthurs Lestrange's contribution to the pool from its financial advisory fee would be small compared to the revenues related to the escrow trades, and that Arthurs Lestrange would not be involved in structuring or assembling the escrow and would bear no risk on the escrow. The Senior Banker did not disclose any of these facts to the Commonwealth. These facts were material because they affected the integrity of the process by which Alex. Brown was selected to provide the escrow securities.10 In fact, for his role in helping secure the escrow business for Alex. Brown, McCarthy obtained for his law firm undisclosed compensation out of the pooled Alex. Brown/Arthurs Lestrange fees in the form of a payment from an Arthurs Lestrange consultant who had originated the idea for the fee split with Arthurs Lestrange.

We are prohibted from giving legal advice, as this service provides information of a general legal nature. I suggest contacting a local attorney who can review all the facts and documents involved.

For further information, please see:
http://apps.leg.wa.gov/wac/default.aspx?cite=460-21B-060
http://apps.leg.wa.gov/wac/default.aspx?cite=460-22B-090

Please see the following WA statutes to determine applicability:

RCW 21.20.005 The definitions set forth in this section shall apply
throughout this....

The definitions set forth in this section shall apply throughout this
chapter, unless the context otherwise requires:

(1) "Director" means the director of financial institutions of this
state.

(2) "Salesperson" means any individual other than a broker-dealer who
represents a broker-dealer or issuer in effecting or attempting to effect
sales of securities. "Salesperson" does not include an individual who
represents an issuer in (a) effecting a transaction in a security exempted
by RCW 21.20.310 (1), (2), (3), (4), (9), (10), (11), (12), or (13), (b)
effecting transactions exempted by RCW 21.20.320 unless otherwise expressly
required by the terms of the exemption, or (c) effecting transactions with
existing employees, partners, or directors of the issuer if no commission
or other remuneration is paid or given directly or indirectly for
soliciting any person in this state.

(3) "Broker-dealer" means any person engaged in the business of effecting
transactions in securities for the account of others or for that person's
own account. "Broker-dealer" does not include (a) a salesperson, issuer,
bank, savings institution, or trust company, (b) a person who has no place
of business in this state if the person effects transactions in this state
exclusively with or through the issuers of the securities involved in the
transactions, other broker-dealers, or banks, savings institutions, trust
companies, insurance companies, investment companies as defined in the
investment company act of 1940, pension or profit-sharing trusts, or other
financial institutions or institutional buyers, whether acting for
themselves or as trustees, or (c) a person who has no place of business in
this state if during any period of twelve consecutive months that person
does not direct more than fifteen offers to sell or to buy into or make
more than five sales in this state in any manner to persons other than
those specified in (b) of this subsection.

(4) "Guaranteed" means guaranteed as to payment of principal, interest,
or dividends.

(5) "Full business day" means all calendar days, excluding therefrom
Saturdays, Sundays, and all legal holidays, as defined by statute.

(6) "Investment adviser" means any person who, for compensation, engages
in the business of advising others, either directly or through publications
or writings, as to the value of securities or as to the advisability of
investing in, purchasing, or selling securities, or who, for compensation
and as a part of a regular business, issues or promulgates analyses or
reports concerning securities. "Investment adviser" also includes financial
planners and other persons who, as an integral component of other
financially related services, (a) provide the foregoing investment advisory
services to others for compensation as part of a business or (b) hold
themselves out as providing the foregoing investment advisory services to
others for compensation. Investment adviser shall also include any person
who holds himself out as a financial planner.

"Investment adviser" does not include (a) a bank, savings institution, or
trust company, (b) a lawyer, accountant, certified public accountant
licensed under chapter 18.04 RCW, engineer, or teacher whose performance of
these services is solely incidental to the practice of his or her
profession, (c) a broker-dealer or its salesperson whose performance of
these services is solely incidental to the conduct of its business as a
broker-dealer and who receives no special compensation for them, (d) a
publisher of any bona fide newspaper, news magazine, news column,
newsletter, or business or financial publication or service, whether
communicated in hard copy form, by electronic means, or otherwise, that
does not consist of the rendering of advice on the basis of the specific
investment situation of each client, (e) a radio or television station, (f)
a person whose advice, analyses, or reports relate only to securities
exempted by RCW 21.20.310(1), (g) an investment adviser representative, or
(h) such other persons not within the intent of this paragraph as the
director may by rule or order designate.

(7) "Issuer" means any person who issues or proposes to issue any
security, except that with respect to certificates of deposit, voting trust
certificates, or collateral-trust certificates, or with respect to
certificates of interest or shares in an unincorporated investment trust
not having a board of directors (or persons performing similar functions)
or of the fixed, restricted management, or unit type; the term "issuer"
means the person or persons performing the acts and assuming the duties of
depositor or manager pursuant to the provisions of the trust or other
agreement or instrument under which the security is issued.

(8) "Nonissuer" means not directly or indirectly for the benefit of the
issuer.

(9) "Person" means an individual, a corporation, a partnership, a limited
liability company, a limited liability partnership, an association, a
joint-stock company, a trust where the interest of the beneficiaries are
evidenced by a security, an unincorporated organization, a government, or a
political subdivision of a government.

(10) "Sale" or "sell" includes every contract of sale of, contract to
sell, or disposition of, a security or interest in a security for value.
"Offer" or "offer to sell" includes every attempt or offer to dispose of,
or solicitation of an offer to buy, a security or interest in a security
for value.

Any security given or delivered with, or as a bonus on account of, any
purchase of securities or any other thing is considered to constitute
part of the subject of the purchase and to have been offered and sold for
value. A purported gift of assessable stock is considered to involve an
offer and sale. Every sale or offer of a warrant or right to purchase or
subscribe to another security of the same or another issuer, as well as
every sale or offer of a security which gives the holder a present or
future right or privilege to convert into another security of the same or
another issuer, is considered to include an offer of the other security.

(11) "Securities Act of 1933," "Securities Exchange Act of 1934," "Public
Utility Holding Company Act of 1935," "Investment Company Act of 1940," and
"Investment Advisers Act of 1940" means the federal statutes of those names
as amended before or after June 10, 1959.

(12)(a) "Security" means any note; stock; treasury stock; bond;
debenture; evidence of indebtedness; certificate of interest or
participation in any profit-sharing agreement; collateral-trust
certificate; preorganization certificate or subscription; transferable
share; investment contract; investment of money or other consideration in
the risk capital of a venture with the expectation of some valuable
benefit to the investor where the investor does not receive the right to
exercise practical and actual control over the managerial decisions of
the venture; voting-trust certificate; certificate of deposit for a
security; fractional undivided interest in an oil, gas, or mineral lease
or in payments out of production under a lease, right, or royalty;
charitable gift annuity; any put, call, straddle, option, or privilege on
any security, certificate of deposit, or group or index of securities,
including any interest therein or based on the value thereof; or any
put, call, straddle, option, or privilege entered into on a national
securities exchange relating to foreign currency; or, in general, any
interest or instrument commonly known as a "security," or any certificate
of interest or participation in, temporary or interim certificate for,
receipt for, guarantee of, or warrant or right to subscribe to or
purchase, any security under this subsection. This subsection applies
whether or not the security is evidenced by a written document.

(b) "Security" does not include: (i) Any insurance or endowment policy or
annuity contract under which an insurance company promises to pay a fixed
sum of money either in a lump sum or periodically for life or some other
specified period; or (ii) an interest in a contributory or noncontributory
pension or welfare plan subject to the Employee Retirement Income Security
Act of 1974.

(13) "State" means any state, territory, or possession of the United
States, as well as the District of Columbia and Puerto Rico.

(14) "Investment adviser representative" means any partner, officer,
director, or a person occupying similar status or performing similar
functions, or other individual, who is employed by or associated with an
investment adviser, and who does any of the following:

(a) Makes any recommendations or otherwise renders advice regarding
securities;

(b) Manages accounts or portfolios of clients;

(c) Determines which recommendation or advice regarding securities should
be given;

(d) Solicits, offers, or negotiates for the sale of or sells investment
advisory services; or

(e) Supervises employees who perform any of the functions under (a)
through (d) of this subsection.

(15) "Relatives," as used in RCW 21.20.310(11) includes:

(a) A member's spouse;

(b) Parents of the member or the member's spouse;

(c) Grandparents of the member or the member's spouse;

(d) Natural or adopted children of the member or the member's spouse;

(e) Aunts and uncles of the member or the member's spouse; and

(f) First cousins of the member or the member's spouse.

(16) "Customer" means a person other than a broker-dealer or investment
adviser.

(17) "Federal covered security" means any security defined as a covered
security in the Securities Act of 1933.

(18) "Federal covered adviser" means any person registered as an
investment adviser under section 203 of the Investment Advisers Act of
1940.

RCW 21.20.040 (1) It is unlawful for any person to transact business in
this state as....

(1) It is unlawful for any person to transact business in this state as
a broker-dealer or salesperson, unless: (a) The person is registered
under this chapter; (b) the person is exempted from registration as a
broker-dealer or salesperson to sell or resell condominium units sold in
conjunction with an investment contract as may be provided by rule or
order of the director as to persons who are licensed pursuant to the
provisions of chapter 18.85 RCW; (c) the person is a salesperson who
satisfies the requirements of section 15(h)(2) of the Securities Exchange
Act of 1934 and effects in this state no transactions other than those
described by section 15(h)(3) of the Securities Exchange Act of 1934; (d)
the person is a salesperson effecting transactions in open-end investment
company securities sold at net asset value without any sales charges; or
(e) the person participates only in the sale or offering for sale of
variable contracts which fund corporate plans meeting the requirements
for qualification under section 401 or 403 of the United States Internal
Revenue Code as set forth in RCW 48.18A.060.

(2) It is unlawful for any broker-dealer or issuer to employ a
salesperson unless the salesperson is registered or exempted from
registration.

(3) It is unlawful for any person to transact business in this state as
an investment adviser or investment adviser representative unless: (a)
The person is so registered or exempt from registration under this
chapter; (b) the person has no place of business in this state and (i)
the person's only clients in this state are investment advisers
registered under this chapter, federal covered advisers, broker-dealers,
banks, savings institutions, trust companies, insurance companies,
investment companies as defined in the Investment Company Act of 1940,
employee benefit plans with assets of not less than one million dollars,
or governmental agencies or instrumentalities, whether acting for
themselves or as trustees with investment control, or (ii) during the
preceding twelve-month period the person has had fewer than six clients
who are residents of this state other than those specified in (b)(i) of
this subsection; (c) the person is an investment adviser to an investment
company registered under the Investment Company Act of 1940; (d) the
person is a federal covered adviser and the person has complied with
requirements of RCW 21.20.050; or (e) the person is excepted from the
definition of investment adviser under section 202(a)(11) of the
Investment Advisers Act of 1940.

(4) It is unlawful for any person, other than a federal covered adviser,
to hold himself or herself out as, or otherwise represent that he or she is
a "financial planner", "investment counselor", or other similar term, as
may be specified in rules adopted by the director, unless the person is
registered as an investment adviser or investment adviser representative,
is exempt from registration under RCW 21.20.040(1), or is excluded from the
definition of investment adviser under RCW 21.20.005(6).

(5)(a) It is unlawful for any person registered or required to be
registered as an investment adviser under this chapter to employ,
supervise, or associate with an investment adviser representative unless
such investment adviser representative is registered as an investment
adviser representative under this chapter.

(b) It is unlawful for any federal covered adviser or any person required
to be registered as an investment adviser under section 203 of the
Investment Advisers Act of 1940 to employ, supervise, or associate with an
investment adviser representative having a place of business located in
this state, unless such investment adviser representative is registered or
is exempted from registration under this chapter.

RCW 21.20.310 RCW 21.20.140 through 21.20.300, inclusive, and 21.20.327 do
not apply to....

RCW 21.20.140 through 21.20.300, inclusive, and 21.20.327 do not apply to
any of the following securities:

(1) Any security (including a revenue obligation) issued or guaranteed by
the United States, any state, any political subdivision of a state, or any
agency or corporate or other instrumentality of one or more of the
foregoing; or any certificate of deposit for any of the foregoing; but this
exemption does not include any security payable solely from revenues to be
received from a nongovernmental industrial or commercial enterprise unless
such payments are made or unconditionally guaranteed by a person whose
securities are exempt from registration by subsection (7) or (8) of this
section: PROVIDED, That the director, by rule or order, may exempt any
security payable solely from revenues to be received from a nongovernmental
industrial or commercial enterprise if the director finds that registration
with respect to such securities is not necessary in the public interest and
for the protection of investors.

(2) Any security issued or guaranteed by Canada, any Canadian province,
any political subdivision of any such province, any agency or corporate or
other instrumentality of one or more of the foregoing, or any other foreign
government with which the United States currently maintains diplomatic
relations, if the security is recognized as a valid obligation by the
issuer or guarantor; but this exemption does not include any security
payable solely from revenues to be received from a nongovernmental
industrial or commercial enterprise unless such payments shall be made or
unconditionally guaranteed by a person whose securities are exempt from
registration by subsection (7) or (8) of this section.

(3) Any security issued by and representing an interest in or a debt of,
or guaranteed by, any bank organized under the laws of the United States,
or any bank or trust company organized or supervised under the laws of any
state.

(4) Any security issued by and representing an interest in or a debt of,
or guaranteed by, any federal savings and loan association, or any building
and loan or similar association organized under the laws of any state and
authorized to do business in this state.

(5) Any security issued by and representing an interest in or a debt of,
or insured or guaranteed by, any insurance company authorized to do
business in this state.

(6) Any security issued or guaranteed by any federal credit union or any
credit union, industrial loan association, or similar association organized
and supervised under the laws of this state.

(7) Any security issued or guaranteed by any railroad, other common
carrier, public utility, or holding company which is (a) a registered
holding company under the public utility holding company act of 1935 or a
subsidiary of such a company within the meaning of that act; (b) regulated
in respect of its rates and charges by a governmental authority of the
United States or any state or municipality; or (c) regulated in respect of
the issuance or guarantee of the security by a governmental authority of
the United States, any state, Canada, or any Canadian province; and
equipment trust certificates in respect of equipment conditionally sold or
leased to a railroad or public utility, if other securities issued by such
railroad or public utility would be exempt under this subsection.

(8) Any security which meets the criteria for investment grade securities
that the director may adopt by rule.

(9) Any prime quality negotiable commercial paper not intended to be
marketed to the general public and not advertised for sale to the general
public that is of a type eligible for discounting by federal reserve banks,
that arises out of a current transaction or the proceeds of which have been
or are to be used for a current transaction, and that evidences an
obligation to pay cash within nine months of the date of issuance,
exclusive of days of grace, or any renewal of such paper which is likewise
limited, or any guarantee of such paper or of any such renewal.

(10) Any security issued in connection with an employee's stock
purchase, savings, pension, profit-sharing, or similar benefit plan if:
(a) The plan meets the requirements for qualification as a pension,
profit sharing, or stock bonus plan under section 401 of the internal
revenue code, as an incentive stock option plan under section 422 of the
internal revenue code, as a nonqualified incentive stock option plan
adopted with or as a supplement to an incentive stock option plan under
section 422 of the internal revenue code, or as an employee stock
purchase plan under section 423 of the internal revenue code; or (b) the
director is notified in writing with a copy of the plan thirty days
before offering the plan to employees in this state. In the event of late
filing of notification the director may upon application, for good cause
excuse such late filing if he or she finds it in the public interest to
grant such relief.

(11) Any security issued by any person organized and operated as a
nonprofit organization as defined in RCW 84.36.800(4) exclusively for
religious, educational, fraternal, or charitable purposes and which
nonprofit organization also possesses a current tax exempt status under the
laws of the United States, which security is offered or sold only to
persons who, prior to their solicitation for the purchase of said
securities, were members of, contributors to, or listed as participants in,
the organization, or their relatives, if such nonprofit organization first
files a notice specifying the terms of the offering and the director does
not by order disallow the exemption within the next ten full business days:
PROVIDED, That no offerings may be made until expiration of the ten full
business days. Every such nonprofit organization which files a notice of
exemption of such securities shall pay a filing fee as set forth in
RCW 21.20.340(11) as now or hereafter amended.

The notice shall consist of the following:

(a) The name and address of the issuer;

(b) The names, addresses, and telephone numbers of the current officers
and directors of the issuer;

(c) A short description of the security, price per security, and the
number of securities to be offered;

(d) A statement of the nature and purposes of the organization as a basis
for the exemption under this section;

(e) A statement of the proposed use of the proceeds of the sale of the
security; and

(f) A statement that the issuer shall provide to a prospective purchaser
written information regarding the securities offered prior to consummation
of any sale, which information shall include the following statements: (i)
"ANY PROSPECTIVE PURCHASER IS ENTITLED TO REVIEW FINANCIAL STATEMENTS OF
THE ISSUER WHICH SHALL BE FURNISHED UPON REQUEST."; (ii) "RECEIPT OF NOTICE
OF EXEMPTION BY THE WASHINGTON ADMINISTRATOR OF SECURITIES DOES NOT SIGNIFY
THAT THE ADMINISTRATOR HAS APPROVED OR RECOMMENDED THESE SECURITIES, NOR
HAS THE ADMINISTRATOR PASSED UPON THE OFFERING. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE."; and (iii) "THE RETURN OF THE FUNDS OF THE
PURCHASER IS DEPENDENT UPON THE FINANCIAL CONDITION OF THE ORGANIZATION."

(12) Any charitable gift annuities issued by a board of a state
university, regional university, or of the state college.

(13) Any charitable gift annuity issued by an insurer or institution
holding a certificate of exemption under RCW 48.38.010.