Study guide
6.4 Referral Payments, Bank Networking, and Unregistered Persons
Investment Company and Variable Contracts Products Principal Series 26
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1 Chapter 1: Registration of the Broker-Dealer and Its Associated Persons
1.1 Broker-Dealer Registration, FINRA Membership, and Firm Filings 1.2 Individual Registration: Forms U4 and U5, Registration Categories, and Exempt Persons 1.3 Pre-Hire Screening, Fingerprinting, and Statutory Disqualification 1.4 Heightened Supervision, Interim Plans, and the Taping Rule 1.5 Broker-Dealers, Investment Advisers, Dual Registrants, and Unregistered Entities
2 Chapter 2: Training, Continuing Education, and Product Knowledge
2.1 Continuing Education (Rule 1240), the Maintaining Qualifications Program, and the Annual Compliance Meeting 2.2 The Investment Company Act of 1940: Classifications, Registration, and Fund Governance 2.3 Mutual Fund Pricing, Redemption, Exchanges, Sales Charges, and Share Classes 2.4 Variable Annuities and Variable Life Insurance: Structure, Charges, and Rule 2320 2.5 Closed-End and Interval Funds, UITs, Money Market Funds, 529 Plans, and Investment Risks
3 Chapter 3: Supervisory System, Conduct Standards, Insider Trading, and Discipline
3.1 The Supervisory System, Written Supervisory Procedures, and Standards of Conduct 3.2 Insider Trading, Information Barriers, and Personal Trading Supervision 3.3 FINRA Investigations, Disciplinary Proceedings, Sanctions, and Exemptions
4 Chapter 4: Communications with the Public
4.1 Communications Categories, Principal Approval, Filing, and Recordkeeping (Rule 2210) 4.2 Content Standards, Investment Company Advertising, and Professional Designations 4.3 Variable Contract Communications, Fund Rankings, Bond Fund Volatility Ratings, and Investment Analysis Tools 4.4 Correspondence and Internal Communications, Social Media, Public Appearances, and Telemarketing
5 Chapter 5: Recommendations, Customer Accounts, and Product Sales Supervision
5.1 Regulation Best Interest, Conflicts, and Form CRS 5.2 Know Your Customer, FINRA Suitability, and Institutional Accounts 5.3 New Accounts, Customer Authority, Discretion, and Order Handling 5.4 Mutual Fund Breakpoints, Share Classes, and Switching Supervision 5.5 Deferred Variable Annuities and the Seven-Business-Day Principal Review 5.6 Prospectuses, Summary Prospectuses, SAIs, and Ongoing Disclosures
6 Chapter 6: Compensation, Outside Activities, and Personal Conduct
6.1 Cash Compensation, Distribution Arrangements, and Conflicts 6.2 Gifts, Gratuities, and Business Entertainment (Rule 3220) 6.3 Training Meetings, Sales Contests, and Non-Cash Compensation 6.4 Referral Payments, Bank Networking, and Unregistered Persons 6.5 Outside Business Activities, Private Securities Transactions, and Rule 3290 Transition 6.6 Outside Accounts, Borrowing and Lending, Account Sharing, and Guarantees
7 Chapter 7: Customer Account Operations, Transfers, and Privacy
7.1 Account Records, Trusted Contacts, Confirmations, and Statements 7.2 Cash Accounts, T+1 Settlement, Regulation T, Extensions, and Freeriding 7.3 ACATS Transfers, Transfer-on-Death Accounts, and Account Changes 7.4 Regulation S-P, Incident Response, Service Providers, and Identity Theft
8 Chapter 8: Anti-Money Laundering, Customer Identification, and Sanctions
8.1 AML Program, Independent Testing, Training, and Governance 8.2 Customer Identification, Due Diligence, and Beneficial Ownership 8.3 SARs, CTRs, OFAC, Information Sharing, and AML Red Flags
9 Chapter 9: Supervisory Controls, Business Continuity, and Regulatory Reporting
9.1 Supervisory Controls, Annual Testing, and CEO Certification 9.2 Business Continuity, Systems Resilience, Cybersecurity, and Vendors 9.3 Rule 4530, FOCUS and Annual Reports, and Customer-Asset Events
10 Chapter 10: Office Classifications, Inspections, and Records
10.1 OSJs, Branches, RSLs, and Inspection Cycles 10.2 Inspection Reports, Independent Review, Signage, and Office Files 10.3 Broker-Dealer Books and Records, Electronic Storage, and Correspondence
11 Chapter 11: Complaints, Arbitration, Mediation, and Expungement
11.1 Customer Complaints, Investigation, Retention, and Reporting 11.2 Predispute Agreements, Arbitration Codes, Eligibility, Panels, and Awards 11.3 Mediation and Customer-Dispute Expungement
12 Chapter 12: Financial Responsibility, Membership Changes, and Investor Protection
12.1 Net Capital, Minimum Tiers, Haircuts, and Early Warning 12.2 Customer Protection, Possession or Control, Reserve Formula, and Exemptions 12.3 New-Product Review and Continuing Membership Applications 12.4 SIPC, Fidelity Bonds, Proxy Materials, and Financial Reports
6.4 Referral Payments, Bank Networking, and Unregistered Persons
Key Takeaways Explain This Topic AI
Rule 2040 prohibits paying compensation to an unregistered person whose receipt of the payment would require broker-dealer registration, and members must reasonably support a determination that registration is not required.
Continuing commissions may go to a retiring representative who leaves the industry under a bona fide contract made while registered that bars soliciting new business, opening accounts or servicing the paying accounts.
Foreign finders may receive transaction-related compensation only for referring foreign nationals abroad, with written customer disclosure and acknowledgment and a notation on each confirmation.
Rule 3160 requires clear identification of the broker-dealer, physical separation from deposit-taking where practicable, a written agreement, and written (and, on premises, oral) not-FDIC-insured, not-a-deposit, may-lose-value disclosures.
Under Regulation R, an unregistered bank employee may receive only a nominal one-time cash referral fee of a fixed dollar amount that is not contingent on whether the referral results in a transaction.
Last updated: September 2026
FINRA Rule 2040: Payments to Unregistered Persons
FINRA Rule 2040(a) prohibits a member or associated person from directly or indirectly paying any compensation, fees, concessions, discounts, commissions or other allowances to:
any person that is not registered as a broker-dealer under Exchange Act Section 15(a) but, because of receiving the payment and the related activities, would be required to register ; or
any appropriately registered associated person unless the payment complies with the federal securities laws, FINRA rules and SEC rules.
The test is whether the recipient's activity, together with the payment, is broker activity. Transaction-based compensation , meaning payment that depends on whether a securities transaction occurs or how large it is, is the classic indicator. Rule 2040.01 expects members to determine, and reasonably support , that a payment would not require the recipient to register. Support can come from reasonable reliance on SEC releases, no-action letters or staff interpretations that fit the facts, a no-action letter the member obtains, or an opinion from independent, reputable U.S. counsel. The determination must be documented and reviewed periodically if payments are ongoing.
Unregistered Referral Fees
A registered representative cannot agree to pay a real estate agent, tax preparer or mortgage broker a share of mutual fund commissions for referring clients. Calling the payment a "consulting fee" does not change its character, and a private payment would also bypass the firm's books and records.
Continuing Commissions to Retiring Representatives (Rule 2040(b))
A member may pay continuing commissions to a retiring registered representative after the person stops being associated with the member, derived from accounts held for the representative's continuing customers, even if customers add funds or securities during the retirement period, provided that:
a bona fide contract providing for the payments was entered into in good faith while the person was a registered representative of the member;
the contract prohibits the retiring representative from soliciting new business, opening new accounts, or servicing the accounts that generate the payments; and
the arrangement complies with the federal securities laws and SEC rules.
A "retiring registered representative" retires from a member, including because of total disability, and leaves the securities industry . If the person dies, the beneficiary named in the contract, or the estate if none is named, may receive the payments.
Foreign Finders (Rule 2040(c))
A member may pay transaction-related compensation to a nonregistered foreign finder who directs customers to the member only if:
the member has assured itself that the finder is not required to register in the United States as a broker-dealer, is not subject to a disqualification under FINRA's By-Laws, and that the arrangement does not violate foreign law;
- the finder is a foreign national (not a U.S. citizen) or a foreign entity domiciled abroad;
- the customers are foreign nationals or foreign entities domiciled abroad ;
customers receive a descriptive document disclosing the compensation paid to finders and give the member a written acknowledgment of the arrangement, which is retained for FINRA;
the member records the payments on its books and keeps the finder agreements available for inspection; and
each confirmation states that a referral or finder's fee is being paid under an agreement.
FINRA Rule 3160: Networking Arrangements with Financial Institutions
Many broker-dealers offer services at banks and credit unions through networking arrangements . Because bank customers associate the setting with deposit insurance, FINRA Rule 3160 requires safeguards against confusion between deposits and uninsured securities products.
Setting, Agreement and Identification
The member must be clearly identified as the provider of broker-dealer services and must distinguish its services from the financial institution's.
To the extent practicable, the member must conduct its broker-dealer services in a location physically separate from routine retail deposit-taking activities.
The arrangement must be governed by a written agreement setting out the parties' responsibilities and compensation and including the broker-dealer obligations in Rule 701 of SEC Regulation R . The agreement must give the member's supervisors, the SEC and FINRA access to the premises where the member conducts business.
Confirmations and account statements must clearly show that the member, not the bank, provides the broker-dealer services.
Mandatory Customer Disclosures
At or before account opening, the member must disclose in writing that the broker-dealer services are provided by the member and not the financial institution, and that securities products:
- are not insured by the FDIC ;
- are not deposits or other obligations of the financial institution and are not guaranteed by it ; and
are subject to investment risks, including possible loss of the principal invested .
For accounts opened on the financial institution's premises , the disclosures must also be made orally . Retail communications that announce the location or promote the institution's name or services, or that are distributed on its premises, must carry the disclosures; the member may use the conspicuous legend Not FDIC Insured • No Bank Guarantee • May Lose Value . The member must also promptly notify the financial institution if it terminates for cause an associated person who is employed by the institution.
Bank Employee Referral Fees (Regulation R)
The limit on referral pay for unregistered bank employees comes from the bank networking exception in the Exchange Act, implemented by SEC Regulation R , rather than from Rule 3160 itself. An unregistered bank employee may refer customers to the broker-dealer and receive only a nominal one-time cash fee of a fixed dollar amount that is not contingent on whether the referral results in a transaction . "Nominal" is measured by pay: no more than twice the average of the minimum and maximum hourly wage the bank sets for the employee's job family (or 1/1000th of that job family's average annual base salary), twice the employee's own base hourly wage (or 1/1000th of the employee's annual base salary), or a fixed inflation-adjusted amount that began at $25. The fee may depend on whether the customer keeps an appointment or meets objective baseline criteria such as minimum assets, but not on whether an account is opened, a security or a particular type of security is bought, or multiple transactions result.
Referral-Control Workflow
Before approving a referral arrangement, the firm documents the referrer's role, registration status, jurisdiction, customers, communications and payment formula. Legal analysis should address whether the person solicits, recommends, negotiates or participates in execution. A recurring flat fee can still be a problem if its amount or payment effectively depends on securities business.
At a bank location, mystery shopping and branch inspection can test whether tellers stay within permitted referral activity, signs are visible, disclosures are delivered, and securities personnel are distinguished from deposit staff. Customer interviews and compensation data may reveal practices that written agreements conceal.