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New FINRA Rules Prohibit Compensation Sharing in the Securities Industry

By Jonah A. Toleno, Esq. of Shustak Reynolds & Partners, P.C. posted on Monday, January 19, 2015.

The Securities and Exchange Commission recently approved the Financial Industry Regulatory Authority’s (FINRA’s) proposed Rule 2040 regarding Payments to Unregistered Persons. Section (a) of the Rule prohibits members or associated persons from, directly or indirectly, paying any compensation, fees, concessions, discounts, commissions or other allowances to:

(1)     Any person that is not registered as a broker-dealer under Section 15(a) of the Exchange Act but, by reason of receipt of any such payments and the activities related thereto, is required to be so registered under applicable federal securities laws and SEA [Securities and Exchange Act] rules and regulations; or

(2)     Any appropriately registered associated person, unless such payment complies with all applicable federal securities laws, FINRA rules and SEA rules and regulations.

According to The Federal Register, “[t]he proposed change would make the rule consistent with FINRA staff interpretations under NASD Rule 2040 and SEC rules and regulations to determine whether the activities in question require registration as a broker-dealer under Section 15(a) of the Exchange Act. Persons also may rely on related published guidance issued by the SEC or its staff in the form of releases, no-action letters or interpretations. The proposal would align the rule with SEC staff guidance that states that receipt of securities transaction-based compensation is an indication that a person is engaged in the securities business and that such person generally should be registered as a broker-dealer.”

Translated into plain English: FINRA Registered Representatives, beware who you share compensation with. You may not share commissions, fees, or other compensation you earn in from your securities clients with non-registered individuals who should be registered. Brokers and financial advisors enter into compensation sharing agreements commonly, and the SEC and FINRA are paying heightened attention to these agreements. If you are a registered rep in a compensation sharing agreement or are contemplating entering into one, be sure you are in compliance with new FINRA Rule 2040.  The Federal Register provides guidance on how to determine whether an unregistered person should be registered before entering into a compensation agreement, including reasonable reliance on previously published releases or certain other documents released by the SEC, seeking a no-action letter from the SEC, or obtaining a legal opinion from independent, reputable U.S. licensed counsel knowledgeable in the area.

If you or someone you know requires guidance on compensation sharing or other securities industry related issues, please contact our firm for a confidential analysis of your situation. OurNew York, San Francisco, Irvine and San Diego FINRA and SEC attorneys are well versed in counseling financial advisors on a wide range of securities matters.

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