FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProfessional Conduct and Ethical ConsiderationsMedium
A registered representative (RR) is offered a significant referral fee by an unaffiliated insurance agent for directing clients to purchase the agent's fixed annuity products. The RR's firm does not offer fixed annuities. What is the RR's most appropriate action?
- AAccept the referral fee and disclose the arrangement to clients before recommending the fixed annuity.
- BAccept the referral fee, but only refer clients who explicitly ask about fixed annuity products.
- CDecline the referral fee and inform the firm's compliance department about the offer.
- DAccept the referral fee, as fixed annuities are not offered by the firm, so there's no conflict of interest.
Show answer & explanationAnswer & explanation
Correct answer: C. Decline the referral fee and inform the firm's compliance department about the offer.
Accepting undisclosed compensation or referral fees from outside parties for recommending products, even if the firm doesn't offer them, is generally prohibited and creates a conflict of interest. The RR must decline the offer and report it to compliance.
Why the other options are wrong
- A. While disclosure is good, the primary issue is accepting an undisclosed referral fee from an outside party, which is generally prohibited and creates a conflict.
- B. Limiting referrals does not mitigate the conflict of interest created by accepting an undisclosed referral fee.
- D. Even if the firm doesn't offer the product, accepting an undisclosed referral fee is a conflict of interest and prohibited.
Undisclosed Referral Fees
Compensation received by a registered representative from an outside party for referring clients to products or services not offered by their employing firm, typically without proper disclosure and firm approval.
- Creates a conflict of interest.
- Generally prohibited without firm approval and disclosure.
- Must be reported to the firm's compliance department.
- Can lead to disciplinary action for the RR and the firm.
Memory trick: Outside money for referrals? No, report it all, don't fall.