September 1999

Ethics and Regulations Q & As

By Ann E. Spaulding

The NYSSCPA offers assistance for members' questions on ethics and regulation. Inquiries address a variety of topics such as:

Fee-Sharing Arrangements

We are an SEC-registered investment advisor firm and we would like to have an arrangement where CPAs, individually or as a firm, distribute and service our financial product in exchange for shared fees. The fee-sharing arrangement is based on paying the CPA a percentage of our fee for the entire client engagement, providing the CPA performs his or her role. Client fees are based on our published fee schedule that charges a percentage of the total market value of assets in the financial product program. The client pays us directly and as part of establishing each new client. The fee-sharing arrangement is fully disclosed. The CPA's compensation is based on selling and continuously servicing each financial product account and not only on referring clients. Would this arrangement be ethically permissible for CPAs in New York?

New York CPAs would not be allowed to enter into such an arrangement if the client involved is an attest client. If no attest client is involved, the CPA currently could enter into such an arrangement provided he or she observes the Code of Professional Conduct and specifically Rule 503­Commissions and Referral fees, Rule 302­Contingent Fees, Rule 301­Client Confidentiality, and Rule 102­Integrity and Objectivity. The complete code is on the Society's website, www.nysscpa.org.

The AICPA has adopted three new rulings that are relevant to this issue. Ruling No. 24 of Rule 302­Investment Advisory Services­addresses when a fee based on a percentage of an attest client's investment portfolio would not be considered a contingent fee. Ruling No. 25 of Rule 302 and No. 192 of Rule 503 address who the client is. The rulings permit commissions and contingent fee arrangements with the owners, officers, employees, and benefit plans of attest clients. According to Daniel J. Dustin, executive secretary of the New York State Board for Public Accountancy, the state has not taken a position on these rulings.

The CPA also may be subject to other regulations dealing with investment advisory services. The State Education Department has proposed legislation that if enacted could prohibit this arrangement. The NYSSCPA supports legislation introduced in both the state Senate and Assembly that would permit such fee arrangements. The Society anticipates that the state Legislature will decide these issues sometime in 2000, and advises CPAs to watch The Trusted Professional and www.nysscpa.org for the latest developments in the Legislature and at the State Education Department as things currently are in flux.

Request for Client Records and Other Information

Individuals associated with a client entity who currently are on opposing sides in an internal dispute have each issued separate requests calling for the member to supply them with client records and other information that, pursuant to Interpretation 501-1­Records Retention, must be provided in certain circumstances. What ethical obligations exist under Interpretation 501-1 with respect to complying with such requests?

In providing professional services to individuals, partnerships, or corporations, a member will often deal with someone who has been designated or held out as the client's representative. When the client is a corporation, the obligation runs to the corporation through its duly appointed representative and not to the stockholders. Similarly, in the case of an estate or trust, the obligation runs to the fiduciary and not to the beneficiaries. With a partnership or matters relating to a joint tax return, the obligation runs to the party who engaged the member's services.

A member will have satisfied his or her obligations under Interpretation 501-1 when all client records and other information, as defined therein, have been supplied, where required, to the individual previously designated or held out as the client's representative. The member need only supply such information once and need not comply with subsequent requests for the same material from the representative or other individuals associated with the client entity. *