Firm Settles FINRA Charges for Compensation Payments to an Unregistered Broker
Commentary by Glen Barrentine
A firm settled FINRA charges for making unlawful compensation payments to an unregistered entity.
According to the Letter of Acceptance, Waiver and Consent, the firm "caused payments totaling approximately $8.7 million in transaction-based compensation to be paid to an unaffiliated selling broker-dealer in connection with the sale of variable universal life insurance." FINRA said that the firm "directed a portion of those funds to be paid to an unregistered entity" not affiliated with the firm or registered with FINRA. FINRA stated that the firm was primarily owned by an insurance agent, and one of the broker-dealer's registered sales persons also had an interest in the firm that received compensation.
FINRA found that the firm violated FINRA Rules 2040 ("Payments to Unregistered Persons") and 2010 ("Standards of Commercial Honor and Principles of Trade").
To settle the charges, the firm agreed to (i) censure and (ii) pay a $300,000 fine.
Commentary
Under the federal securities laws, it is generally the case that, absent an exemption, only registered broker-dealers may receive transaction-based compensation in connection with a securities transaction. FINRA Rule 2040 ("Payments to Unregistered Persons") prohibits such payments by FINRA members to unregistered broker-dealers except where such payment would otherwise be permissible under the federal securities laws. As is typically the case under securities rules, FINRA Rule 2040 prohibits both direct and indirect payments.