FINRA Regulatory Notice 15-07 informs broker-dealer FINRA members (“members”) of the expanded governance regarding payments to unregistered persons for securities-related and capital-raising activities. The Notice alerts members to the SEC approval to adopt these new FINRA rules and amendments effective August 24, 2015:
- FINRA Consolidated Rule 2040 (Payments to Unregistered Persons)
- FINRA Rule 8311 amended (Effect of a Suspension, Revocation, Cancellation, or Bar
- FINRA Rule 0190 (Effective Date of Revocation, Cancellation, Expulsion, or Resignation)
FINRA Consolidated Rules 2040
FINRA Rule 2040 covers the payment of transaction-based compensation by members to unregistered persons.
Under Securities and Exchange Act of 1934 (“SEA”) Section 15(a), members are prohibited from compensating unregistered persons, with few exceptions. FINRA Rule 2040(a) (General) essentially matches this regulation, and it defers all questions determining the payment of unregistered persons to SEA Section 15(a).
To Pay or Not to Pay Non-Registered Persons
Members and their associated persons may not make payments in the form of compensation, fees, concessions, commissions or allowances to any individual who is not SEC registered as a broker-dealer but should be.
Supplemental Material.01 helps members make a reasonable determination as to whether they may indeed make payments to an unregistered person. It gives uncertain firms latitude on the matter of being reasonably sure they can make payments in their situation.
- Rely on past releases, no-action letters, and SEC staff interps
- Ask the SEC for a no-action letter
- Ask in-house counsel or a reputable lawyer with know how in the industry
When payments are ongoing, on an annual basis, members should revisit their decision to pay the unregistered person to be sure it remains defensible.
Additionally, the codified rule covers FINRA’s “continuing commission” policy regarding payment to retiring registered representatives and non-registered foreign finders.
FINRA Rule 2040(b) (Retiring Representatives), allows members to make continuing paying commissions to retiring registered representatives—defined as one who retires from a FINRA broker-dealer, including from total disability and leaves the securities industry— under two circumstances:
- “A bona fide contract between the member firm and the retiring registered representative providing for the payments was entered into in good faith while the person was a registered representative of the firm and such contract, among other things, prohibits the retiring registered representative from soliciting new business, opening new accounts or servicing the accounts generating the continuing commission payments; and”
- All federal securities laws and SEA rules are followed
FINRA Rule 2040(c) (Nonregistered Foreign Finders) allows members to pay foreign finders if all of these conditions are met:
- Member is sure that foreign finder is not required to register in the U.S. and is not a disqualified person
- Finder is a foreign national (not US citizen) or entity domiciled abroad
- Finder’s customers are foreign nationals or entities domiciled abroad transacting foreign or US securities
- Member sends descriptive doc to customers disclosing the finder fee
- Customers provide written acknowledgements of finder fee which member retains
- Member explicitly discloses with each transaction that a finder’s fee is being paid
- Member records finder transactions in their books and makes finder contracts available for FINRA inspection
FINRA Rule 8311
The amendments to FINRA Rule 8311 (Effect of a Suspension, Revocation, Cancellation, or Bar) clarify the scope of the rule and eliminate duplicated provisions.
Under Rule 8311, a member may not permit a person subject to a sanction or other disqualification “to be associated with it in any capacity that is inconsistent with the sanction imposed or disqualified status, including a clerical or ministerial capacity.”
During a period of sanction or disqualification, or any period thereafter, a member maynot pay any such person “any salary, commission, profit, or any other remuneration that the person might accrue, not just earn, during the period of the sanction or disqualification.”
However, a member may make payments or credits to:
- “A person subject to a sanction that are consistent with the scope of activities permitted under the sanction where the sanction solely limits an associated person from conducting specified activities (such as a suspension from acting in a principal capacity) or”
- “A disqualified person that has been approved (or is otherwise permitted pursuant to FINRA rules and the federal securities laws) to associate with a member firm.”
New paragraph (b) to Rule 8311, enables a member firm to pay to:
- “Any person subject to a sanction or disqualification any remuneration pursuant to an insurance or medical plan, indemnity agreement relating to legal fees, or as required by an arbitration award or court judgment.”
Supplementary Material .01 allows a member to pay or credit to a person, if the firm can evidence that the remuneration:
- Accrued to the person before sanction or disqualification effective date
- Did not relate to or result from the activity that gave rise to the sanction or disqualification.
FINRA Rule 0190
FINRA Rule 0190 (Effective Date of Revocation, Cancellation, Expulsion, or Resignation) establishes a new general standard for when a member will be treated as a non-member of FINRA.
FINRA Rule 0190 largely reflects NASD IM-2420-1(a), which considers all members issued a revocation, cancellation, expulsion or suspension from FINRA or the SEC to thereby be non-member firms. If a firm is suspended from membership, it will be automatically reinstated at the end of the suspension period.
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