Payments to Unregistered Persons

The general prohibition is the federal expression of "if you are paid like a broker, you must be registered as a broker." The two exceptions are narrow and tested literally for their preconditions.

The General Prohibition

No member or associated person (AP) may, directly or indirectly, pay any compensation, fees, concessions, discounts, commissions, or other allowances to any person that is not registered as a broker-dealer under the SEA's broker-dealer registration requirement but is, by reason of the payments and related activities, required to be registered.

The framework places the burden on the member firm to determine that the recipient is not required to register. The firm must:

• Make a determination that the proposed activity would not require the recipient to register as a broker-dealer
• Reasonably support the determination, by relying on:
  • SEC published releases, no-action letters, or interpretations that fit the firm's facts
  • A no-action letter from SEC staff for the specific arrangement
  • A legal opinion from counsel

Think of it this way: A firm cannot simply pay an unregistered finder and assume the finder is not required to register. The firm must affirmatively conclude, based on documented authority, that the finder's activities fall outside the broker-registration requirement. Without that documented determination, the payment violates the prohibition even if the finder turns out not to need registration.

Exam Tip: Gotchas

• The default presumption is that a person who receives transaction-based compensation is required to register as a broker-dealer. A firm that wants to pay an unregistered person must overcome that presumption with documented support, not the other way around.
• "Compensation" reaches indirect and non-cash transfers. A firm cannot avoid the prohibition by routing payment through a third party, paying the recipient's family member, or substituting non-cash items for cash. The substance of the arrangement controls.

Retiring Representative Continuing Commissions

A FINRA member may pay continuing commissions to a retiring registered representative (or the retiree's beneficiaries) for continuing customer accounts of the retiring rep, provided the arrangement satisfies all three of the following preconditions.

What "Bona Fide" and "Continuing" Mean

• Bona fide means the contract was entered for a legitimate business purpose, not as a pretext for paying compensation to an unregistered person who will keep doing broker activity informally
• Continuing customer accounts means accounts the rep produced before retirement; the rep cannot generate new commissionable business after retirement under this exception
• The retiree may receive continuing commissions on trail commissions (e.g., 12b-1 fees, ongoing variable-annuity payments) and on transactions executed during pre-retirement servicing, as long as the rep is not driving new transactions after retirement

Death of the Retiring Rep

The continuing-commission exception extends to the retiree's beneficiaries. If the retiring rep dies, the firm may continue to pay the rep's contractual continuing commissions to the rep's estate or designated beneficiary, provided the original written contract addressed the death contingency.

Exam Tip: Gotchas

• The written contract must be entered while the rep is still registered. A handshake or post-retirement side letter does not qualify. A firm that fails to put the contract in place before retirement has no authority to pay continuing commissions to the now-unregistered ex-rep, and the payments would violate the general prohibition.
• The retiring rep cannot service the accounts post-retirement. "Servicing" includes calls, account reviews, recommendation discussions. A retiree who continues to talk to the customer about the customer's investments has crossed into broker activity that requires registration, and the continuing-commission exception evaporates.

Foreign Finders

A member may pay transaction-related compensation to non-registered foreign finders for the initial referral of foreign clients, provided all of the following conditions are met.

What Counts as "Initial Referral"

The finder's role is strictly the introduction. After the introduction:

• The finder may not solicit the customer further
• The finder may not participate in account-opening or onboarding discussions
• The finder may not take orders or transmit instructions
• The finder may not discuss the merits of any specific securities product

If the finder participates in any of these activities, the finder is engaged in broker activity in the U.S., the foreign-finder exception is unavailable, and the payment violates the general prohibition.

Customer Acknowledgment

The customer must acknowledge in writing that the finder is being compensated. This acknowledgment serves both the customer-protection purpose (the customer knows the finder has a financial interest) and the firm-protection purpose (the firm has documentation that the customer was informed).

Exam Tip: Gotchas

• The "initial referral only" condition is binary. A finder who participates in any subsequent securities activity for the firm fails the exception, regardless of whether the activity was minor or unpaid. The exam frequently presents fact patterns where the finder "helped translate documents" or "attended one meeting"; both disqualify the exception.
• The customer must be a non-U.S. citizen and non-U.S. resident. A U.S. citizen living abroad temporarily does not qualify, nor does a foreign citizen who has become a U.S. resident. The exception is built around customers entirely outside the U.S. registration framework.