FINRA Rule 2040: Payments to Unregistered Persons

The final piece of agent regulation ties registration directly to compensation. Rule 2040 ensures that anyone receiving transaction-based compensation for securities activities is properly registered.

General Prohibition

A member firm (BD) and its associated persons may NOT pay any compensation, fees, commissions, concessions, discounts, or other allowances to any person who is required to be registered as a broker-dealer but is NOT so registered.

In plain terms: a BD cannot split commissions with or pay referral fees to an unregistered person who is functioning as an agent.

Retiring Representatives Exception

A BD may continue to pay commissions to a former registered representative who has retired from the securities industry, provided:

  • A bona fide contract for continuing commissions existed while the person was still registered
  • The retired representative does not solicit new business, open new accounts, or service the accounts generating the continuing commission payments
  • The representative must have left the securities industry entirely (not just switched firms)

This exception also applies to the beneficiary or estate of a deceased representative.

Exam Tip: Gotchas

  • Retiring representative payments require a PRIOR written contract. A BD cannot start paying continuing commissions to a retiree after the fact; the bona fide contract must have existed while the person was still registered.

Foreign Finders Exception

A BD may compensate a non-registered foreign finder for directing foreign customer business, subject to specific conditions:

  • The finder is a foreign national or entity
  • The customers are foreign nationals or entities
  • Disclosure is provided to customers about the finder arrangement
  • Records are maintained for FINRA inspection

Connection to Agent Registration

Rule 2040 reinforces the registration requirement from a different angle:

  • If a person receives transaction-based compensation for securities activities, that person is likely functioning as an agent and must be registered
  • Paying commissions to an unregistered person violates both Rule 2040 and the USA's registration requirements
  • The violation falls on the BD making the payment, not just the unregistered recipient

Exam Tip: Gotchas

A BD cannot pay a "finder's fee" or referral bonus to an unregistered friend, family member, or business acquaintance for bringing in customers. If the payment is tied to securities transactions, the recipient must be registered. The only exceptions are retiring reps (with a prior contract prohibiting new business solicitation) and qualifying foreign finders.