FINRA Rule 3160

A bank employee who is not registered refers bank customers to the firm's registered representatives and receives a fee for each referral, without any restriction on whether the fee depends on the referral opening an account. Does this satisfy Rule 3160's conditions for permissible networking arrangements?

1. A.No, because unregistered bank employees may never receive any referral-related compensation under any circumstancesWrong. Rule 3160 does permit certain referral fee arrangements to unregistered persons when its specific conditions are met; the problem here is the contingent structure, not referral compensation in general.
2. B.Yes, any bank-referral arrangement involving disclosed fees satisfies Rule 3160Wrong. Rule 3160 has specific conditions; a fee contingent on the referral converting to an account fails to meet them regardless of disclosure.
3. C.No, because Rule 3160 requires that referral compensation not be contingent on whether the referral results in an opened accountCorrect. Rule 3160's conditions include that unregistered persons' referral compensation cannot depend on the referral converting to an account or on resulting transaction value.
4. D.Yes, because bank employees are exempt from Rule 2040's restrictions on compensating unregistered personsWrong. Bank employees are not categorically exempt; the arrangement must independently satisfy Rule 3160's specific conditions.

Why: No. Rule 3160 permits certain networking arrangements between members and financial institutions, but among its conditions, referral compensation to unregistered persons must not be contingent on whether the referral results in an opened account or on the value of resulting transactions, and unregistered persons must be limited to purely clerical, ministerial referrals without discussing securities. A fee tied to whether an account is opened does not meet those conditions.

Under a firm's Rule 3160 networking arrangement with a bank, an unregistered bank employee refers customers to the firm's representatives and is paid a fixed fee per referral that does not depend on whether the referral opens an account. However, the bank employee also routinely tells customers which of the firm's mutual funds tend to perform best before referring them. Does the fee structure alone make this arrangement compliant?

1. A.Yes — since the fee is not contingent on the referral converting to an account, the arrangement satisfies the networking arrangement's core condition.Wrong. Meeting the fee-contingency condition addresses only one requirement; it does not cover the separate problem created by the employee's comments about fund performance.
2. B.No — even with a compliant, non-contingent fee structure, an unregistered person describing which specific securities perform best has moved from making a referral into providing investment recommendations, which requires registration regardless of how the referral fee itself is structured.Correct. Describing which products perform best crosses from a permissible referral into recommending securities, an activity requiring registration independent of the fee structure.
3. C.No, but only because the bank employee's compensation should have been paid by the firm directly instead of through the bank.Wrong. Which entity pays the referral fee does not address the substantive problem of unregistered activity crossing into recommendations.
4. D.Yes, provided the bank employee's comments about fund performance are limited to publicly available performance data.Wrong. The source of the performance information does not change that describing which products perform best is itself a recommendation requiring registration.

Why: No. Even with a compliant, non-contingent fee structure, an unregistered person describing which specific securities perform best has moved from making a referral into providing investment recommendations, which requires registration regardless of how the referral fee itself is structured.