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NEWSLETTERS & ALERTS
Broker Fined for Sharing Commissions with an Unregistered Person
by Howard Haykin
Roy Woehrman agreed to pay a $12.5K fine to settle FINRA charges that he shared commissions that his member firm paid him with an unregistered person that were generated by securities transactions resulting from referrals by the unregistered person.
BACKGROUND. Woehrman, a resident of Oceanside, CA, has 22 years’ experience with 3 firms. He joined LPL Financial in 2005 and continues his association, serving as a General Securities Representative and a General Securities Principal. He has no prior disciplinary history.
FINRA FINDINGS. From January 2013 to June 2014, Woehrman shared commissions that his firm paid him with an unregistered person in violation of NASD Rule 2420.
In January 2013, Woehrman and an individual, “SS,” entered into a Referral/Lead Marketing Agreement under which SS would refer individuals interested in purchasing alternative investments to Woehrman. SS operated a retirement planning and investment management company and was not registered or in any way associated with a FINRA member firm.
Thereafter, from January 2013 until June 2014, Woehrman paid SS approximately $38,500 of his commissions that were generated by securities transactions resulting from these referrals. Under the terms of the Referral/Lead Marketing Agreement, these funds paid to SS were to be used for marketing expenses incurred by SS.
Woehrman compounded his situation by submitting a written questionnaire to his firm in which he inaccurately represented that he was not involved in any referral arrangement.
NASD Rule 2420, superceded by FINRA Rule 2040 (Payments to Unregistered Persons), prohibits member firms and their associated persons from sharing commissions derived from securities transactions with anyone who was not a registered entity or an associated person of a registered entity.
FINANCIALISH TAKE AWAYS. Wouldn't you like to know how LPL Financial and FINRA learned about this clandestine commission-sharing arrangement? YES! Wouldn't such knowledge help firms to police their brokers more effectively? YES!
But aside from trying to simply reinforce compliance efforts, why not use this occasion to identify alternative ways for structuring referral arrangements - which are a vital lifeline of business? What I have in mind is for member firms to team up with their brokers on referral arrangements with 3rd parties. Such arrangements would ...
- Eliminate cash payouts - i.e., the sharing of commissions and other firm revenues.
- Initiate or promote firmwide referrals of brokerage customers to unregistered professionals or entitles.
There are several benefits for adopting such alternative referral arrangements:
- Protect brokers who might otherwise enter into clandestine referral arrangements - and thus safeguard them from reputational and financial hits.
- Protect firms who stand to lose revenues when their representatives have been suspended for any length of time.
- Give 3rd parties more incentive to refer business, by offering firmwide customer referrals rather than referrals from a single broker. "There is strength in numbers."
This case was reported in FINRA Disciplinary Actions for September 2017.
For details on this case, go to ... FINRA Disciplinary Actions Online, and refer to Case #2014041853701.