Sharing in Profits and Losses
When an agent wants to participate in the gains and losses of a customer's account, strict rules govern who must approve the arrangement.
Agent Restrictions
Under state securities law, an agent may not share directly or indirectly in the profits or losses of a customer's account unless:
- The customer has given written authorization, AND
- The broker-dealer the agent represents has given written authorization
Both authorizations are required; customer consent alone is not sufficient.
Under Financial Industry Regulatory Authority (FINRA) rules, the sharing arrangement must also be proportional to the agent's financial contribution to the account. State law does not explicitly state the proportionality requirement, but FINRA's standard applies to FINRA member firms.
Sharing vs. Commission Splitting
These are different concepts:
| Sharing in Account | Commission Splitting | |
|---|---|---|
| What it means | Participating in actual gains and losses - compensation rises and falls with account performance | Dividing transaction-based compensation with another person |
| Rule | State securities law | State securities law |
| Requirement | Written authorization from both customer AND broker-dealer (BD) | Other person must be registered as an agent for the same BD or a BD under common control |
| Prohibition | Cannot share without dual written consent | Cannot split with unregistered persons |
Exam Tip: Gotchas
Sharing in an account requires two written authorizations: from the customer AND the broker-dealer. If a question mentions only customer consent, the arrangement is still prohibited. Always look for both authorizations.