FINRA Rule 2040

A representative wants to pay a referral fee to an unregistered friend for referring new brokerage customers to him. What must the principal do?

1. A.Permit it as long as the fee is paid only once per referred customerWrong. The frequency of payment does not change the underlying Rule 2040 problem with compensating an unregistered person.
2. B.Permit it, as long as the referral fee is fully disclosed to the referred customersWrong. Disclosure to customers does not cure paying an unregistered person compensation tied to securities referrals under Rule 2040.
3. C.Stop or prevent the proposed arrangement, since Rule 2040 generally prohibits paying transaction-related compensation to unregistered personsCorrect. Rule 2040 generally bars compensating unregistered persons for referring or effecting securities business.
4. D.Permit it only if the friend signs a written acknowledgment that he is not providing investment adviceWrong. A written acknowledgment from the unregistered person does not satisfy Rule 2040's prohibition.

Why: Rule 2040 generally prohibits paying transaction-related compensation to unregistered persons for referring or effecting securities business, subject to narrow exceptions. The principal must stop or prevent this arrangement as proposed.

An unregistered administrative assistant, who schedules client meetings and answers basic account questions, is paid a percentage of the commissions generated by the representatives she supports. Is this compensation arrangement permitted?

1. A.Yes, because scheduling and account questions are themselves registrable activities that justify commission-based payWrong. Scheduling and answering basic account questions are clerical functions, not activities that justify transaction-based compensation for an unregistered person.
2. B.No, but only if her commission percentage exceeds what a registered assistant would receiveWrong. The problem is paying an unregistered person any transaction-based compensation, not a specific percentage threshold.
3. C.Yes, as long as she never directly discusses specific securities with clientsWrong. Avoiding securities discussions does not cure paying an unregistered person commission-based compensation under Rule 2040.
4. D.No, Rule 2040 generally prohibits paying unregistered persons compensation tied to commission or sales resultsCorrect. Compensation for an unregistered person's support role must not be tied to commissions or sales results under Rule 2040.

Why: No. Rule 2040 generally prohibits paying transaction-based compensation to unregistered persons. Purely clerical or ministerial support may be compensated with a salary, but not with compensation tied to sales or commission results.

Two registered representatives at the same firm want to set up a referral-fee arrangement: one will pay the other a fee for referring a client to her specialty advisory desk. Does Rule 2040's prohibition on compensating unregistered persons apply to this arrangement?

1. A.No, but only because both representatives work in the same physical branch officeWrong. The determining factor is that both are registered, not that they share a physical office location.
2. B.Yes, Rule 2040 bars any referral-fee compensation regardless of the recipient's registration statusWrong. Rule 2040 specifically addresses payments to unregistered persons; it does not govern referral arrangements between two registered persons the same way.
3. C.No, Rule 2040 addresses payments to unregistered persons; a referral fee between two registered persons is governed by other firm and compensation policiesCorrect. Since both parties are registered, Rule 2040's unregistered-person prohibition is not the governing restriction here.
4. D.Yes, because any inter-desk referral fee automatically constitutes an unlawful commission splitWrong. An inter-desk referral fee between registered persons is not automatically unlawful; it is subject to the firm's own compensation policies, not a blanket prohibition.

Why: No. Rule 2040 addresses payments to unregistered persons for securities-related referrals or transactions. A referral arrangement between two properly registered persons within the same firm is governed by the firm's own compensation policies and other applicable rules, not by Rule 2040's unregistered-person prohibition.