Rules on CPA Commissions and Referral Fees from NC CPA State Board of Examiners

From Web Site of CPA State Board of Examiners

Commissions and Referral Fees

Q.    Where can I find a copy of the rule on commissions and referral fees?
A.    The new rules, including the rule on commissions and referral fees, 21 NCAC 8N .0303, were published in the March 1999 issue of the Activity Review and are available on the Board's web site. The rules will be published in the 1999 issue of the North Carolina Accountancy Statutes and North Carolina Administrative Code, which will be mailed to licensees in late May or early June.

Q.    What is the difference between a commission and a referral fee?
A.    A commission is compensation for recommending a product for sale or service to be provided by the CPA or a third party. The commission is always based on whether the product is purchased or the service is provided. A referral fee is compensation paid by a third party to a CPA for referring a client to the third party for the sale of a product or service to be provided by the third party. The referral fee is usually not based on whether the product is purchased or the service is provided to the client.

Q.    I have a friend who is a licensed real estate broker. May I receive a referral fee for referring a client to him? May I receive a commission if my friend sells a house to my client?
A.    In North Carolina, only individuals licensed by the NC Real Estate Commission (NCREC) may receive a referral fee for the referral of a client or receive a commission for the sale of real estate, so you may not receive a referral fee or commission from your friend.

Q.    My friend is a licensed insurance agent. May I receive a referral fee for referring a client to her? May I receive a commission if the client purchases a policy from my friend?
A.    A CPA may receive a referral fee from a licensed agent, agency, or insurance company as long as the fee is not contingent upon the sale of an insurance product or service. The NC Department of Insurance (NCDOI) prohibits referral fees based on a sale. A CPA who is licensed by the NCDOI may be paid a commission by, or split a commission with, a licensed agent, agency, or insurance company for the sale of products or services to a client that is referred to the agent, agency, or insurance company by the CPA.

Q.    I have a friend who is a stockbroker. May I receive a referral fee for referring a client to him? May I receive a commission if my friend sells stocks or mutual funds to the client?
A.    A stockbroker may not pay a referral fee to any person other than a licensed employee of the broker/dealer firm. Likewise, a stockbroker may not pay to, or split a commission with, any person other than a licensed employee of the broker/dealer firm.

Q.    May a CPA receive a referral fee or commission from a registered investment advisory firm?
A.    A CPA may receive a referral fee for referring a client to a registered investment advisory (RIA) firm only if the CPA is properly registered as an investment advisory representative (IA) with the RIA firm. In some cases, there may be an exception to registering as an IA. The Securities Division of the Office of the NC Secretary of State can provide information on registering as an IA or an RIA firm. A CPA may receive a commission from the RIA firm for placement of a client's funds for asset management by the RIA firm. However, a CPA may not be registered with more than one RIA firm unless the additional RIA firms are under common ownership and supervision.

Q.    What, if anything, am I required to disclose to a client if I receive a referral fee or commission?
A.    A disclosure to a client regarding a referral fee or commission must meet the following requirements:

• The disclosure must be in writing;
• The disclosure must be dated;
• The disclosure must state the service or product to be rendered or referred as well as the amount of the referral fee or   commission to be charged;
• The disclosure must be made by the CPA and signed by the client prior to the referral, sale, or performance of services;
• The disclosure must be made on every referral, sale, or service to be provided to the client; and
• A copy of the disclosure must be provided to the client.

Q. Are there any Board rules that I should read and understand before I accept a referral fee or commission?
A. Before accepting a referral fee or commission, you should be familiar with the following Board rules found in 21 NCAC:

• 8N .0202(b)(6)(7)(8) Deceptive Conduct Prohibited
• 8N .0204(a) Discipline by Federal and State Authorities
• 8N .0205(a) Confidentiality
• 8N .0212 Competence
• 8N .0301(a) Professional Judgment
• 8N .0303 Objectivity and Conflicts of Interest (Effective 4/1/99)
• 8N .0304 Management Consulting Services Standards
• 8N .0305 Retention of Client Records
• 8N .0402 Independence

For more information, contact the agencies as listed below:

Board rule on commissions and referral fees:
Robert N. Brooks, Executive Director
NC State Board of CPA Examiners
(919) 733-4222

Licensed real estate brokers:
NC Real Estate Commission
(919) 875-3700

Licensed insurance agents, agencies or companies:
NC Department of Insurance
(919) 733-7487

Registered investment advisory representatives and registered investment advisory firms:
Sec. Division Office of the NC Secretary of State
(919) 733-3924