Summary of New FINRA Rule 2040- Payments to Unregistered Persons, Including Foreign Finders
by Osvaldo F. Torres, Torres Law, PA (bio)
Effective as of Monday, August 24, 2015, the Financial Industry Regulation Authority (“FINRA”) implemented Rule 2040, which prohibits FINRA member firms from making payments to persons who are not registered as broker-dealers. Rule 2040 serves to modify existing rules that govern payments to unregistered persons, and expressly aligns with Section 15(a) of the Exchange Act and its related guidance on whether registration as a broker-dealer is required for certain persons to receive transaction-related compensation.
Rule 2040 does not, however, eliminate altogether the so-called “foreign finder exemption,” which allows certain payments to unregistered persons referring foreign customers to FINRA members. Instead, Rule 2040 permits such payments to unregistered persons (i) if both the finder and the customer are foreign nationals and (ii) the FINRA member (A) determines that there is “reasonable support” to conclude that the recipient of the transaction-related payment would not be required to register as a broker-dealer solely by virtue of receiving the payment; and (B) further assures itself that the compensation arrangement does not violate applicable foreign law.
Rule 2040 permits the FINRA members to derive support for their determination by reasonably relying on published SEC no-action letters, other interpretations that apply to their circumstances, or by seeking a SEC no-action letter of their own. Reasonable support may also be derived by obtaining a legal opinion from an independent U.S.-licensed counsel knowledgeable in the area. However, the foregoing methods for making a reasonable determination are not exclusive, and members may rely, for example, on in-house counsel or even foreign counsel. In any event, a member’s determination must be reasonable under the circumstances, and should be reviewed periodically if payments to unregistered persons are ongoing in nature.
Finally, foreign customers must also receive a descriptive document, similar to that required by Rule 206(4)-3(b) of the Investment Advisers Act, which discloses the compensation being paid to finders. Customers will be required to provide a written acknowledgment as to the existence of the compensation arrangement. FINRA also requires such acknowledgment to be retained in the member’s records, and made available for inspection by FINRA. Additionally, any records reflecting payments to finders, as well the actual agreements in connection therewith, must be maintained on the member’s books, and be made available for inspection by FINRA. The confirmation of each transaction must also indicate that a referral or finder’s fee is being paid pursuant to an agreement.