RIA Compliance Blog
In a letter dated December 11, 2015, the Texas State Securities Board (“Board”) granted a no-action request by Managed Financial Service Corporation, Inc. (“MFSC”) that paves the way for a retiring investment adviser representative to receive continuing compensation after retirement. The Board confirmed that it would not commence or seek enforcement proceedings against either MFSC or a specified retiring investment adviser representative if certain procedures were followed. MFSC and its retiring representative requested the no-action letter in order to implement a plan under which the retiring representative would continue to receive compensation derived from the residual value of the work as an investment adviser for certain accounts.
The no-action was requested based on a concern, predominant in the investment adviser industry, that receipt by a retired adviser representative of ongoing advisory fees or a portion of advisory fees received by a successor adviser or firm would subject the retired representative to discipline for conducting business without registration.
The no-action relief granted by the Board is similar to the practice in the brokerage industry that has been codified in FINRA Rule 2040 (b) in which, prior to that date, was sanctioned by a FINRA no-action letter issued to Merrill Lynch in March 2012.
The relief sought by MFSC closely mirrored the requirements of FINRA Rule 2040, but tailored them to meet the unique services that investment advisers, as opposed to brokers, provide to their clients. Among other things, in order to obtain the requested relief, MFSC agreed that it would promptly inform the retiring representative’s clients of the new supervised person who would be providing advice and would cease to pay any compensation to the retiring representative should that person ever be subject to a disqualifying event such as specified disciplinary proceedings. The RIA representative also agreed, as a condition to receiving the payments, not to solicit new advisory business, open new accounts, provide investment advice, endorse MFSC, or engage in certain similar activities.
MFSC also represented that the retiring representative would execute an agreement by which she agreed to abide by the conditions outlined in the no-action request. In granting the request, the Board confirmed that it would recommend no action to require the representative to register as an investment adviser representative of MFSC following her retirement.
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