August 1999

Accepting Commissions in NY

Regulators Say No; Others Recommend Yes with Caution

By James L. Craig, Jr., CPA

While the State Education Department continues to express concern that taking commissions may reduce CPAs' stature and status with the public, since its policy under current law limits its ability to discipline CPAs, some advisors recommend that CPAs should cautiously look at how they can accept commissions and referral fees and develop new structures to better compete.

Speaking at a recent seminar in New York City on regulations of investment advisers, Frank Munoz, assistant commissioner in the SED's office of professional responsibilities, acknowledged the state's limited authority.

As previously reported in The Trusted Professional, the acquisition of the nonattest assets of Goldstein Golub Kessler & Co. PC last year by American Express Tax and Business Services forced the SED to more fully examine commissions and what defines public accountancy in New York. As a result of reviewing existing law, the state concluded that the scope of practice for regulatory purposes only covers attest services. This drew attention to the fact that the SED cannot discipline CPAs in public practice for accepting commissions or referral fees from clients for whom they do not perform attest work. Moreover, the SED currently cannot regulate such nonattest services as financial planning and tax preparation.

Munoz explained this scenario but pointed out that the state has introduced new legislation and also continues to examine the current law regarding what services come under its regulatory purview. He said it is possible that a new interpretation of the existing law could broaden the scope of practice to include some nonattest services. This could bring CPA financial planning services under the Board of Regents' jurisdiction, which currently prohibits third-party commissions.

Munoz took note of the two accountancy act reform bills pending in the State Legislature: the SED's proposal to expand the definition of practice to encompass a broader range of services such as tax return preparation and financial planning, and legislation supported by the Society which would maintain a narrow definition that includes only audits, reviews, and compilations, and specifically would permit commissions and referral-fee arrangements with nonattest clients. (See the accompanying sidebar for an overview of existing law and regulations, and current proposals.)

"The SED is looking at the commissions rules of other states and the AICPA, and we hope to achieve some common ground and may need to be flexible," Munoz said. "Due to court decisions, the SED may need to ease up on restrictions. We want to accommodate the evolution of the accounting profession and are working to eliminate burdensome rules as long as the public is protected."

Dan Goldwasser, an attorney with Vedder Price Kaufman & Kammholz LLP, the seminar's sponsor, feels it would be awkward for the SED to reinterpret existing law to restrict CPAs' ability to accept commissions and referral fees from nonattest clients, and that such prohibitions will not stand judicial challenges. The answer, according to Goldwasser, rests with state lawmakers. The NYSSCPA anticipates that the Legislature will act on the proposed bills some time next year.

"Until then, CPAs seeking to develop commission-based practices should proceed with caution," said James A. Woehlke, CPA, the Society's counsel and director of the technical services division.

Goldwasser pointed out that CPAs need to understand the regulatory requirements and miscellaneous costs--for example, staff training, license fees, etc.--associated with establishing such commissions-based practices as investment, securities, and brokerage services.

"As a result of these regulatory burdens, the clear message we conveyed was that CPAs should not provide these services on their own unless the volume of such business is sufficient to justify the investments that they will have to [make] to comply with the applicable regulation and to bring the firm personnel up to speed in these high risk-reward areas," Goldwasser said in a follow-up letter to clients. *

Editor's Note: The CPA Journal's September issue presents two articles to assist CPAs in making the decision about whether or not to establish a commission-based practice.

Commissions and Referral Fees in New York:

Current Regulations and Proposals

By Ann E. Spaulding

The introduction of two bills to reform the accounting profession in New York state has drawn scrutiny to how the state regulates commissions and other third-party fees. Below is a summary of existing rules and regulations and the proposals included in the reform legislation. (See the accompanying article for more on the commissions issue.)

State Education Department

The SED interprets the current education law as defining the practice of public accountancy as including only audits, compilations, and reviews. Therefore, the SED claims it and the New York State Board of Regents (the state's licensing authority) have no jurisdiction over CPAs performing other services.

Board of Regents

Regents' rules contain a prohibition against giving or receiving consideration from a third party for the referral of a client or in connection with the performance of professional services. Due to the state's recent interpretation of the state education law (see above), this restriction currently applies only to clients for whom CPAs perform attest services.

NYSSCPA and AICPA

In April, the NYSSCPA membership voted by mail ballot to revise Rule 503--Commissions and Referral Fees in the Society's Code of Professional Conduct.

The revised rule permits disclosed commissions and referral fees in relation to nonattest clients.

The Society's Professional Ethics Committee recently defined commissions and referral fees as follows: "Commission means compensation, except a referral fee, for recommending or referring any product or service to be supplied by another person. Referral fee means compensation for recommending or referring any service of a CPA to any person."

The NYSSCPA rulings mirror the AICPA definitions of commissions and referral fees relating to its 1990 agreement with the Federal Trade Commission. Commissions must be fully disclosed in writing and in plain language to the client to whom the commission relates.

The NYSSCPA and the AICPA also adopted a new interpretation to remind members of their obligation to maintain objectivity and integrity, act in the client's interest, and not misrepresent facts or subordinate their judgment. Further, members must determine that the product, service, or referral is appropriate for the client.

The AICPA recently adopted a new ruling that would allow members to have commission and contingent fee arrangements with the owners, officers or employees of an attest client. The Society's Professional Ethics Committee will use the ruling for guidance to members.

Current Legislative Proposals

The SED has introduced legislation that, if passed, would expand the definition of practice to include a broader range of services such as financial planning. This would bring CPA-financial planning services under the Regents' jurisdiction, and the prohibition against third-party compensation would apply.