Standard VI(C) – Referral Fees

Members and Candidates must disclose any remuneration, consideration, or advantages received from or provided to anyone to recommend products or services to their employer, clients, and prospective clients, as applicable.

Application 1: Disclosure of Interdepartmental Referral Agreements

Britney Sullivan works in the research department at Zeus Investment Bank. She receives compensation for each referral to the brokerage department that results in any trading activity. She refers numerous clients to the brokerage department at Zeus Investment Bank but fails to disclose this arrangement to her clients.

Has Sullivan violated Standard VI(C) – Referral Fees?

1. No, because she only needs to disclose referral arrangements to her employer.
2. No, because the referral arrangements and payments are made within the firm.
3. Yes, because she did not disclose the referral arrangements to her clients.

Solution

The correct answer is C.

Sullivan has violated Standard VI(C) – Referral Fees by failing to disclose the referral arrangement at Zeus Investment Bank. Standard VI(C) – Referral Fees does not distinguish between compensation paid to external or internal referees. Members and Candidates must disclose all referral compensation. Therefore, Sullivan is required to disclose the internal referral compensation in place at the point of referral. The disclosure must include the amount and nature of the compensation.

Application 2: Disclosure of Referral Arrangements and Informing Firm

Phillip Evans is a portfolio manager at Bridging Finance Corporation. Evans has routinely asked the trading desk to direct a small portion of its trading activity to Jaystar Brokerage, a mid-size broker/dealer headed by his brother-in-law. Jaystar’s commissions are above the industry average, and the traders find the research provided to be uninformative. Evan’s brother-in-law reciprocates this arrangement by frequently recommending Bridging Finance Corporation and Evans to all his clients. This arrangement is not disclosed to his employer or clients referred to by Jaystar Brokerage.

Has Evans violated Standard VI(C) – Referral Fees?

1. Yes, because he fails to disclose the nature and value of the referral arrangement to his employer.
2. No, because his brother-in-law reciprocates by referring his clients to Bridging Finance Corporation.
3. No, because he is prohibited from receiving any referral compensation.

Solution

The correct answer is A.

Evans has violated Standard VI(C) – Referral Fees by failing to inform his employer of the referral arrangement. Evans must disclose the nature and value of the referral arrangements to his employer; conversely, his brother-in-law must disclose the arrangement to his clients. Standard VI(C) – Referral Fees does not prohibit any referral compensation; however, full and timely disclosures are required.