Client referrals help grow your business, and validate the service you give existing clients. But, be careful with referral arrangements. That’s when a registrant agrees to pay or receive a referral fee. Regulators have detailed rules on what you can and can’t do. Here’s what you need to know.

DON’T enter into a referral arrangement with a so-called finder, whose main business is introducing people to prospective clients in return for a fee. Regulators look closely at people who act like registrants, but aren’t. Even though you aren’t breaking the rules if you deal with such people, doing so could put your firm under closer scrutiny.

DO enter into arrangements with appropriately qualified or registered individuals. Receiving a referral from an accountant, lawyer or insurance agent is acceptable, since whatever compensation they may receive is incidental to the main focus of their businesses (they don’t make a living from referrals). Depending on any regulations they’re subject to, you may also receive referral fees for introducing clients to them.

DON’T enter into an arrangement on your own, especially not on a handshake.

DO advise compliance of your intentions, since the firm must be party to the agreement. A written agreement must be drawn up, detailing roles and responsibilities of each party, fees to be paid and disclosure that’s provided to the client.

Compliance must review and approve the arrangement, collect and pay out fees, and ensure the referral agent’s role ends once the investor becomes a client. Compliance must ensure the referral agent isn’t promoting a product, doing presentations on it, giving financial advice or acting in any way that appears as if she’s an employee of the firm. Establish clear boundaries with the referral agent at the outset.

DON’T provide the client verbal-only details of the arrangement. As part of the agreement between the registrant and the referral agent, the client must receive a written explanation of who the parties are, their respective categories of registration and what their registration authorizes them to do. It should also detail their roles and how the referral fee will be calculated.

You also have to address potential for conflicts of interest; for instance, whether a referral agent is also a board member of an issuer seeking to raise capital. A client may then think twice about investing. Disclosure must be provided to the client before an account’s opened or services provided, and it should be clear that only registered persons will conduct permitted activities.

DON’T rely on the person making the referral to conduct activities you’re responsible for, such as explaining product features and gathering KYC information.

DO explain to the client that, once the referral’s made, you’re now responsible for ensuring she qualifies for investments. This is especially important when it comes to exempt products. As with all clients, you need to explain the product’s features and risks, and conduct a suitability review based on the client’s financial situation and goals. Referral arrangements don’t lessen your regulatory obligations to clients.

by Jonathan Heymann, president of Wychcrest Compliance Services Inc., a consulting firm specializing in securities compliance and registration (

Originally published on

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