What is FINRA Rule 2040?
FINRA Rule 2040, “Payments to Unregistered Persons", restricts when a member firm may pay transaction-based compensation to unregistered individuals.
The rule aligns with Section 15(a) of the Securities Exchange Act of 1934, ensuring only properly registered broker-dealers or associated persons receive such payments.
Violations of FINRA Rule 2040 can lead to fines, suspensions, or expulsion.
What does FINRA Rule 2040 prohibit?
Member firms and associated persons may not pay transaction-based compensation to unregistered persons unless:
- Payments comply with federal securities laws,
- Payments align with Exchange Act rules, and
- Payments are consistent with FINRA rules.
FINRA Rule 2040 and retiring representatives
Retired registered representatives may continue to receive commissions on existing accounts if:
- A bona fide contract was in place while they were registered
- The agreement prohibits soliciting new business
- The arrangement compliance with federal securities laws and the Exchange Act
FINRA Rule 2040 and non-registered foreign finders
FINRA permits member firms to compensate non-registered foreign “finders” for directing foreign customers to the firm, provided strict conditions are met.
Who qualifies:
- Foreign individuals or entities domiciled outside the U.S.
- No disqualifications under securities laws
Requirements for compensation:
- Compensation must comply with foreign law
- Customers must be foreign nationals or foreign entities
- Customers must receive disclosure and provide written acknowledgement
- Member firms must maintain agreements and records for FINRA inspection
- Transaction and confirmations must disclose referral fees
How can firms determine if registration is required under Section 15(a)?
Supplementary Material .01 offers guidance when firms are uncertain if a person must register. Firms may:
- Review prior SEC releases, no-action letters, or staff interpretations
- Request a no-action letter from the SEC
- Obtain an opinion from independent U.S.-licensed counsel
Firms must make a reasonable determination and retain documentation for inspection.
Penalties for violating FINRA Rule 2040
Noncompliance with FINRA 2040 may result in:
- Substantial fines
- Suspension of individuals or firms
- Industry expulsion
How Smarsh helps firms comply with FINRA Rule 2040
Smarsh solutions make it easier for firms to monitor, document, and detect risks related to FINRA 2040 compliance.
With Smarsh, you can:
- Capture every conversation. Ensure all communications are archived for compliance and inspection.
- Detect more real risk with AI. Identify potential violations and reduce false positives.
- Customize and test supervision models. Test and refine detection logic to match regulatory expectations.
- Scale with confidence. Manage increasing communications while staying compliant.
FINRA Rule 2040 FAQs
What is the purpose of FINRA Rule 2040?
To prevent firms from paying transaction-based compensation to unregistered persons unless permitted under securities law.
Can retired representatives receive compensation under Rule 2040?
Yes, if a valid contract exists, no new business is solicited, and the arrangement complies with federal laws.
Are foreign finders covered by Rule 2040?
Yes, foreign individuals or entities may receive compensation if specific disclosure, recordkeeping, and compliance requirements are met.
What should firms do if unsure about registration requirements?
They may seek SEC guidance, review prior no-action letters, or obtain an opinion from U.S.- licensed counsel.
What are the penalties for violating FINRA Rule 2040?
Violations can result in fines, suspensions, or expulsion from the industry.