May 17, 2005
Mr. Christopher J. Juall
Re: Denial of No-Action Request of Wolff Juall Investments, LLC
Dear Mr. Juall and Mr. Wolff:
In your letter dated March 23, 2005, on behalf of Wolff Juall Investments, LLC ("Wolf Juall Investments"), and indirectly on behalf of Moors & Cabot, Inc., a registered broker-dealer ("Moors & Cabot"), you requested assurances that the Division of Market Regulation ("Division") would not recommend enforcement to the Commission under Section 15(a) of the Securities Exchange Act of 1934 ("Exchange Act") if Wolff Juall Investments, along with Moors & Cabot and Moors & Cabot's registered representatives in its Sarasota and Englewood offices engage in the activities described in your letter without Wolff Juall Investments registering as a broker-dealer1 in accordance with Section 15(b) of the Exchange Act.
Based on your letter, I understand the facts to be as follows:
Moors & Cabot paid commissions to Marc Wolff, representing the aggregate commissions for the registered representatives employed by Moors & Cabot in its Sarasota and Englewood offices. Mr. Wolff transferred such payments to Wolff Juall Investments, which in turn paid the registered representatives, Mr. Wolff, Mr. Juall, and the offices' support staff. Wolff Juall Investments also paid for office expenses. On review, NASD examiners found these activities to be in violation of NASD Rule 2420.
As you know, NASD Rule 2420 generally prohibits the payment of commissions and fees to entities that operate (or, based on proposed activities, would operate) as unregistered broker-dealers. Section 3(a)(4)(A) of the Exchange Act defines a "broker" as a person "engaged in the business of effecting transactions in securities for the account of others." Section 15(a) of the Exchange Act generally requires brokers-dealers to register with the Commission.
You propose to address the alleged violation of NASD Rule 2420 by Moors & Cabot by having Moors & Cabot pay commissions individually to each of its registered representatives in its Sarasota and Englewood offices. The registered representatives then would transfer such payments to Wolff Juall Investments. Wolff Juall Investments would then make payments to the registered representatives, Mr. Wolff, Mr. Juall, and the offices' support staff, and pay for office expenses. In your view, however, this plan would be inefficient.
Based on the facts and representations set forth in your letter, the Division is unable to assure you that it would not recommend enforcement action to the Commission if Wolff Juall Investments, along with Moors & Cabot and Moors & Cabot's registered representatives in its Sarasota and Englewood offices engage in the activities described in your letter without Wolff Juall Investments registering as a broker-dealer. We note that the Division has previously declined to grant no-action relief to the practice of routing commissions or other transaction-related compensation from a broker-dealer directly or indirectly to an unregistered entity for the benefit of the broker-dealer's registered representatives.2 This is because the ability to control the compensation of registered representatives is a key mechanism by which registered broker-dealers exercise supervisory control over sales practices. Compensation schedules can create significant incentives that could undermine a firm's supervisory systems and thus investor protection. Therefore, in order to maintain adequate supervision by registered broker-dealers, registered broker-dealers, not unregistered entities, should determine compensation to natural persons associated with a registered broker-dealer. Accordingly, while there is an exemption from registration for natural persons associated with a registered broker-dealer,3 that exemption is not available to Wolf Juall Investments. The Division has also previously indicated that the receipt of transaction-related compensation is a key factor in determining whether a person or entity is acting as a broker-dealer, and that absent an exemption, an entity that receives commission or other transaction-related compensation in connection with securities-based activities that fall within the definition of "broker" or "dealer" contained in Sections 3(a)(4) and 3(a)(5), respectively, of the Exchange Act generally is required to register as broker-dealer under Section 15 of the Exchange Act.4
We express no view with respect to other questions these activities may raise, including the applicability of any other provision of the federal securities laws, any state law, or any self-regulatory organization rules. Before engaging in the activities described in your letter, you should consult with private counsel familiar with the federal securities laws to obtain legal advice as to how the above issues should be resolved in your particular circumstances. Private counsel would be in a position to advise you on the basis of a more thorough understanding of your proposed activities.
Brian A. Bussey
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