Activities of Unregistered Persons

Securities regulation requires that anyone who solicits customers, takes orders, or receives transaction-based compensation must be properly registered. This section covers the rules that prevent unregistered persons from performing registered activities.

What You'll Learn

• What unregistered persons are prohibited from doing
• What clerical and administrative staff are allowed to do
• How trailing commissions work for retiring registered representatives

The Core Prohibition

Firms cannot pay commissions or transaction-based compensation to unregistered persons. Separate rules also restrict what unregistered persons can do in the securities business.

Unregistered persons cannot:

• Receive commissions or transaction-based compensation
• Solicit customers (make recommendations or suggest securities transactions)
• Take orders (accept and process trade instructions from customers)
• Execute transactions (enter orders into the firm's trading system)

Think of it this way: If an activity could influence a customer's investment decision or generate a commission, only a registered person can do it. Registration is the gatekeeper for anything that touches a trade.

What Unregistered Persons CAN Do

• Unregistered clerical and administrative staff may describe the firm's products in general terms
• They can answer basic factual questions ("Yes, we offer mutual funds")
• They can direct customers to a registered representative for specific questions
• They cannot make recommendations, discuss suitability, or suggest specific transactions

Exam Tip: Gotchas

• Describing products in general terms vs. making recommendations is a key distinction. A receptionist saying "Our firm offers a wide range of mutual funds" is permitted. A receptionist saying "You should buy our growth fund" is a violation.
• Working at a firm is not itself a violation. It depends on WHAT the person does, not WHERE they work.

Continuing Commissions (Trailing Commissions)

• A firm may keep paying continuing commissions (often called trailing commissions) to a retiring registered representative: one who retires from the firm (including because of total disability) and leaves the securities industry
• The payments come from the accounts of the rep's continuing customers, and they can continue even if those customers add money or securities during the retirement
• The payments must rest on a bona fide contract between the firm and the rep, entered into in good faith while the rep was still registered with the firm
• That contract must, among other things, bar the retired rep from soliciting new business, opening new accounts, or servicing the accounts that generate the payments
• Example: A broker who sold mutual funds with ongoing 12b-1 fees signs a continuing-commission contract with the firm before retiring. The firm can keep paying the broker's share of those fees, but the broker cannot call clients to recommend new purchases or service their accounts

Exam Tip: Gotchas

• Trailing commissions to a retired rep are permitted when they follow that contract. This is NOT paying an unregistered person for new business.
• The exception turns on the contract, not on when the money was invested. Without a contract made while the rep was registered, the payments do not qualify. With one, money a customer adds after the rep retires can still generate payments.

What Should You Check on Exam Day?

• Can you list the four things an unregistered person cannot do?
• Do you know the difference between describing products in general terms and making a recommendation?
• Can you explain why trailing commissions to a retired representative are permitted?
• Can you name the contract terms that let a firm keep paying a retired representative?