FINRA’s National Adjudicatory Counsel (“NAC”), recently, affirmed a disciplinary panel decision significantly sanctioning a broker-dealer for paying unregistered persons and entities. See https://www.finra.org/sites/default/files/2020-07/NAC_2014042606902_Silver-Leaf_062920.pdf.
FINRA alleged, among other things, that a broker-dealer paid transaction-based compensation to “unregistered finders,” and non-registered entities owned by its registered persons. Ultimately, the NAC agreed that, over a 3 year period, the broker-dealer paid and/or shared certain transaction-based compensation with unregistered finders and entities affiliated with registered persons, rather than paying the registered persons directly. The NAC noted that the broker-dealer had previously been warned after an examination by the United States Securities and Exchange Commission’s (“SEC”) Staff, but it seemed to ignore this warning, and then went onto wrongfully pay over $2 million to these unregistered persons and entities.
The writing has been on the wall for some time. FINRA Rules prohibit FINRA members from paying such transaction-based compensation to non-members, and this position has been consistent. See NASD Notice to Members 05-18. FINRA has been clear that broker-dealers violate industry rules if they pay transaction-based compensation in connection with nearly all securities transactions to an unregistered person or entity. Additionally, the NAC made it clear that broker-dealers could not pay transaction-based compensation to entities affiliated with its registered persons, rather than paying the registered persons directly, relying upon the SEC’s previously published guidance.
In sum, broker-dealers should consult with secured securities counsel before entering into business relationships with “finders” or third parties that raise business opportunities. Member firms may not pay success compensation to these parties. Finally, there are no exemptions– pay the registered representatives, not their companies.
[View source.]
