FINRA Proposal Would Clarify Payments to Unregistered Persons
FINRA has proposed a new rule clarifying the circumstances under which a broker-dealer may make payments to a non-BD. The new Rule would make clear that a BD could make payments to an unregistered person/entity so long as the recipient is not required to register as a broker-dealer under Section 15(a) of the Exchange Act. FINRA would defer to SEC interpretations under Section 15(a), which generally require the receipt of transaction-based compensation to trigger BD registration. FINRA proposes eliminating Rule 2420, which has been the source of much confusion over the years.
OUR TAKE: This is a welcome reform. We can dispense with the argument that mere receipt of compensation from a broker-dealer makes the recipient a broker-dealer. It also clarifies that solicitors who receive compensation that is not transaction-based (i.e. asset-based) do not have to register as broker-dealers.