STATE OF NEW YORK
ONE COMMERCE PLAZA
ALBANY, NEW YORK 12257
Eric R. Dinallo
The Office of General Counsel issued the following opinion on August 27, 2007 representing the position of the New York State Insurance Department.Re: Services on Behalf of an Investment Adviser
May a licensed insurance agent or broker, in exchange for functioning as a “finder”, receive a fee, based on a percentage of assets invested, from an investment adviser?
As a general matter, yes. While acting as a “finder” for an investment adviser is not inconsistent with being licensed as an insurance agent or broker, it would be an untrustworthy act for such agent or broker to perform functions without the appropriate license from or registration with a governing regulatory entity.Facts:
According to the records of the Insurance Department, the inquirer is licensed as an insurance agent in accordance with N.Y. Ins. Law § 2103(b) (McKinney 2006). Her employer is licensed as an insurance agent in accordance with Insurance Law § 2103(a), and as an insurance broker in accordance with Insurance Law § 2104(b)(1)(A).
The inquirer reports that her employer has been approached by an entity-which represents that it is registered as an investment adviser with the Securities & Exchange Commission (“SEC”) pursuant to the Investment Advisers Act, 54 Stat. 847 (1940),-to perform certain functions for the entity. According to the records of the Insurance Department, various corporate affiliates of the entity are licensed as insurance agents and brokers in accordance with Insurance Law §§ 2103 and 2104.
The inquirer further reports that the entity proposes to retain her employer “as an independent contractor to refer clients to the entity for participation in one or more Programs.” Indeed, pursuant to the terms of a “Finders Agreement, the entity aims to compensate her employer in an amount equal to 25% of the annual Program fees received by the entity from each such Client, net of the amount, if any, paid to any third party investment manager.” The “Finder Agreement” does not indicate with any specificity the services that the employer will perform.
The inquirer asks whether the Finders Agreement is acceptable for an insurance agent or broker duly licensed by the Department.
The functions and duties of insurance agents and brokers are set forth in Insurance Law §§ 2101, 2103, and 2104. Nothing in those statutes prevents insurance agents and brokers from engaging in other activities. Accordingly, an insurance agent or broker may engage in other businesses, provided that in so doing, the agent or broker does not violate any other applicable statute.
An “investment adviser” is defined in 15 U.S.C.A. § 80b-2(a)(11) (West 2003):
[A]ny person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities . . . .
The requirement that investment advisers register with the SEC is set forth in 15 U.S.C.A. § 80b-3.
If a licensed insurance agent or broker were to furnish a client list to an investment advisor, and provided that the agent or broker, inter alia, had previously informed the client of the possibility of the referral as required by § 420.4 of N.Y. Comp. Codes R. & Regs, tit. 11, Part 420 (Regulation 169), then that agent or broker would not be acting in violation of the Insurance Law. Similarly, if a licensed insurance agent or broker, in response to a client’s inquiry concerning investments, were to refer that client to an investment advisor, such referral would not violate the Insurance Law. However, if the insurance agent or broker were to recommend that the client invest in a particular type of security, that recommendation could constitute acting as an investment advisor within the meaning of 15 U.S.C.A. § 80b-2(a)(11). Further, if a licensed insurance agent or broker were to so function without properly registering with the SEC, such activity could be considered to be “untrustworthy” within the meaning of Insurance Law § 2110(a)(4)(C).
Moreover, please be advised that Insurance Law § 4224(c) prohibits rebating with regard to life insurance, accident & health insurance, and annuities. That statute provides:
(c) No . . . insurer doing in this state the business of life insurance . . . and no licensed insurance broker and no employee or other representative of any such insurer, agent or broker, shall pay, allow or give, or offer to pay, allow or give, directly or indirectly, as an inducement to any person to insure, or shall give, sell or purchase, or offer to give, sell or purchase, as such inducement . . . any valuable consideration or inducement whatever not specified in such policy . . .
Thus, if a licensed insurance agent or broker were to share any “finders” fee with a client, that would constitute a violation of Insurance Law § 4224(c).
If the employer has any questions about the desirability or wisdom of entering into the Agreement, it should consult with its own attorney.
For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.