Notice To Members 84-48

New SEC Staff Interpretation Concerning the Treatment of Concessions Receivable and Related Concessions Payable Under the Uniform Net Capital Rule

Published Date:

IMPORTANT

PLEASE DIRECT THIS NOTICE TO ALL FINANCIAL AND OPERATIONAL OFFICERS AND PARTNERS

TO: All NASD Members and Other Interested Persons

In NASD Notice to Members 81-12, the Association advised the membership of the SEC's Division of Market Regulation interpretation concerning the treatment of concessions receivable and related commissions payable under the Uniform Net Capital Rule (SEC Rule 15c3-l). The Commission took the position at that time that concessions receivable must be deducted from net worth in computing net capital and that any related commissions payable be included in the computation of aggregate indebtedness. However, it said it would not recommend any action if concessions receivable were not deducted from net capital to the extent they are offset by related commissions payable to sales representatives or unaffiliated selling group members provided that the following four conditions were met:

(a) a written contract exists between the broker/dealer and sales representative or unaffiliated selling group member, whereby the sales representative or unaffiliated selling group member waives payment of the commission until the broker/dealer is in receipt of the concession;
(b) an opinion of counsel is obtained which states that such contract is enforceable in the state in which the broker/dealer and sales representative or unaffiliated selling member reside;
(c) the broker/dealer's liability for the commission payable is limited solely to the proceeds of the concession receivable; and,
(d) the entire amount of the commission payable is included in aggregate indebtedness at the time of the accrual.

Based on the experience gained from the application of the above interpretation and as a result of discussions with the Association's staff, the Division of Market Regulation has reconsidered the above provisions and found it appropriate to modify items (b) and (d) as follows:

  • with respect to the requirement of an opinion of counsel there was some question as to whether a contract that obligates the broker-dealer to pay a commission to a sales representative only upon the broker-dealer's receipt of the concession may be void or voidable under various state laws. Counsels' opinions have been rendered on the validity of these agreements under the laws of most if not all states. To date, no agreement has been found invalid because of applicable state laws and consequently, the opinion of counsel may not generally be necessary. Rather, the Designated Examining Authority may now impose the requirement in those instances where it is deemed appropriate.
  • the inclusion of the entire liability for commissions payable in aggregate indebtedness may unnecessarily restrict the ability of a broker-dealer to expand its business, particularly if a substantial amount of the commissions are payable years after the net capital computation is prepared. Effective immediately, a broker-dealer should include in the calculation of aggregate indebtedness that portion of the liability which is payable within twelve months from the net capital computation date and in addition include in such calculation an amount equal to one percent of the remaining commission payable.

Please note that while provisions (b) and (d) enumerated above have been modified, the requirements addressed under (a) and (c) with respect to the written contract and the limitation of the liability to proceeds of the concessions receivable remain intact.

Questions concerning this notice may be directed either to I. William Fishkind, Assistant Director, Surveillance Department at (202) 728-8405 or your local District office.

Sincerely,

John E. Pinto, Jr.
Senior Vice President
Compliance