Prohibited Compensation for Unregistered Introducers and Finders

This prohibition covers fees, concessions, discounts, and commissions alike. Renaming the payment doesn't change the analysis; what matters is whether the unregistered person is effectively acting as a broker by bringing in securities business for pay.

What Makes a Payment Trigger This Rule?

• No member or associated person may, directly or indirectly, pay compensation, fees, concessions, discounts, commissions, or other allowances to an unregistered person if, by reason of receiving the payment and the activities tied to it, that person would be required to register as a broker-dealer.
• The test looks at substance: a payment based on the business, accounts, or transactions an unregistered person brings in is transaction-based compensation for effecting securities business, whatever the firm calls the fee.
• The rule has a second half the finder question can hide. A payment to an appropriately registered associated person is allowed only where the payment itself complies with the federal securities laws, the FINRA rules, and the Securities and Exchange Commission (SEC) rules.

Exam Tip: Gotchas

• Relabeling a transaction-based payment doesn't cure the violation. Calling it a "referral fee," "consulting fee," or "marketing allowance" doesn't change the analysis if the payment is tied to the business the unregistered person produced.

What Must the Firm Do Before It Pays?

The rule is not only a bar against a bad outcome. Supplementary material under the same rule puts an affirmative burden on the firm:

• The firm must determine that its proposed activities would not require the person receiving the payments to register as a broker-dealer, and must be able to reasonably support that determination.
• A firm that is uncertain can derive support "among other things" by reasonably relying on previously published releases, no-action letters, or staff interpretations from the SEC that fit its own facts, by seeking a no-action letter from SEC staff, or by obtaining a legal opinion from independent, reputable U.S. licensed counsel knowledgeable in the area.
• The determination must be reasonable under the circumstances, and it should be reviewed periodically where the payments are ongoing rather than one-time.
• The firm must maintain books and records that reflect the determination it made.

Exam Tip: Gotchas

• Those three supports are examples, not a checklist. The rule introduces them with "among other things," so none of the three is individually required and a firm isn't limited to them. What the rule does require is a reasonable determination, records reflecting it, and periodic review while the payments continue.

Is There Any Exception to This Prohibition?

One narrow exception covers finder compensation: a member may pay a nonregistered foreign finder transaction-related compensation for customer business the finder directs to the member, but only when all of the following are true:

• The member has assured itself the finder isn't required to register as a U.S. broker-dealer, isn't subject to a statutory disqualification, and that the arrangement doesn't violate foreign law.
• Both the finder and the customers the finder brings in are foreign nationals (not U.S. citizens) or foreign entities domiciled abroad. Those customers may transact in either foreign or U.S. securities; the exception doesn't turn on which market.
• Customers receive a descriptive document disclosing the compensation paid to the finder, and provide written acknowledgment of the arrangement. The member must retain that acknowledgment and make it available for FINRA inspection.
• The member keeps records of the payments to finders on its own books, makes the actual finder agreements available for FINRA inspection, and ensures each transaction confirmation discloses that a referral or finder's fee is being paid.

Exam Tip: Gotchas

• Foreign status is required on both sides of the introduction, not just one. A foreign finder bringing in a U.S. customer doesn't qualify, and neither does a U.S.-based finder bringing in a foreign customer.

How Is This Different From an Issuer's Own Insider Selling Its Securities?

• An issuer's own associated person, such as an officer or director, can help sell the issuer's securities without registering as a broker, but only inside a narrow safe harbor (the associated-person safe harbor, covered in the distribution-mechanics unit).
• Paying an outside, unregistered introducer or finder for bringing in business is a different and more serious problem. That outside person isn't the issuer's own associated person, so the associated-person safe harbor doesn't reach them.

Exam Tip: Gotchas

• These two rules are often confused. One narrowly excuses a specific insider, the issuer's own officer or director, from registering. The other flatly prohibits paying an outsider for unregistered transaction-based activity.

What Should You Check on Exam Day?

• Look for the substance test: a payment tied to business an unregistered person brought in triggers this rule no matter what label the firm puts on it.
• Confirm every condition of the foreign-finder exception is met before treating a cross-border referral fee as permitted, especially the foreign-status test on both sides.
• Don't extend the issuer's-insider safe harbor to an outside finder; it reaches only a partner, officer, director, or employee of the issuer, or of one of the three affiliated entities that unit names.
• Watch for a scenario that pays a domestic, unregistered finder for U.S. customer business; that arrangement has no exception available.
• Separate the prohibition from the firm's own duty: it must determine that no registration is required, support that determination reasonably, keep records of it, and revisit it while payments continue.