There are lots of FINRA rules, so many that some don’t get the attention they deserve because others, like the suitability rule or the supervision rule, generally hog the limelight. Moreover, some rules have such narrow application that you may not realize they even exist because they impact only a very few people or entities.
One such rule is FINRA Rule 8311, the amendments to which take effect on August 24, 2015. Most people, happily, never have to deal with Rule 8311, since it deals with what happens after a respondent is suspended, revoked or cancelled. In short, the present rule provides that once your registration is suspended (typically as a result of a disciplinary action), you may not receive any salary or commissions relating to securities transactions that you otherwise might have been entitled to receive during the period of suspension. That makes sense. If you are on the sidelines, you cannot earn money from transactions effected during that time period.
But, I am often asked about trail commissions, i.e., commissions paid on transactions done before the suspension, sometimes a long time before the suspension. Clients want to know if they are entitled to continue to receive trail commissions, which can be sizable, while suspended. Historically, I have said “yes,” but without any real hard data to support my opinion (other than the fact that FINRA has never questioned it). The answer, thanks to the soon-to-be-enacted amendments to Rule 8311, now is no longer subject to any doubt: you can receive trails while suspended, unless those trails relate back to the activity that resulted in the suspension itself.
This conclusion stems from the Supplementary Material that accompanies new Rule 8311:
Remuneration Accrued Prior to Effective Date of Sanction or Disqualification. Notwithstanding this Rule, a member may pay or credit to a person that is subject of a sanction or disqualification salary, commission, profit or any other remuneration that the member can evidence accrued to the person prior to the effective date of such sanction or disqualification; provided, however, the member may not pay any salary, commission, profit or any other remuneration that accrued to the person that relates to or results from the activity giving rise to the sanction or disqualification, and any such payment or credit must comply with applicable federal securities laws.
This Rule makes perfect sense, and I applaud FINRA for erasing any confusion, and for doing something so reasonable. Remember, there are certain circumstances under which FINRA expressly permits commissions to be paid to unregistered persons, most notably when a registered person retires (and meets the requirements of the “Continuing Commissions Policy”). Given the philosophy underlying that Policy, it makes equal sense to permit a suspended representative to continue to receive commissions earned, i.e., “accrued,” to use the language of the new Rule, prior to the effective date of the suspension. For details, refer to Regulatory Notice 15-07, released back in March.
There is one more interesting point about new FINRA Rule 2040(b), and it, too, resides in the Supplementary Material. Among other things, the new Rule continues the existing prohibition against paying commissions to unregistered persons. Nothing remarkable about that. But, here is what FINRA says about situations where it is unclear whether an unregistered person should be registered:
Members that are uncertain as to whether an unregistered person may be required to be registered under Section 15(a) of the Exchange Act by reason of receiving payments from the member can derive support for their determination by, among other things, (1) reasonably relying on previously published releases, no-action letters or interpretations from the Commission or Commission staff that apply to their facts and circumstances; (2) seeking a no-action letter from the Commission staff; or (3) obtaining a legal opinion from independent, reputable U.S. licensed counsel knowledgeable in the area. The member’s determination must be reasonable under the circumstances and should be reviewed periodically if payments to the unregistered person are ongoing in nature. In addition, a member must maintain books and records that reflect the member’s determination.
I love this language, particularly subsection (3), principally because I believe it can be employed in many other circumstances. There are several FINRA rules, the most noteworthy of which is the supervision rule, governed by a “reasonableness” standard. Here, in connection with Rule 2040, FINRA expressly concedes that an important element of establishing reasonableness is obtaining a legitimate legal opinion. If that is true for the purposes of Rule 2040, then, theoretically, it must also be true for the purposes of other rules. This new rule appropriately rewards member firms who take their compliance efforts seriously by spending money on counsel, to get opinions on which they can rely (even when those opinions are at odds with FINRA’s own opinion). One of my pet peeves has always been FINRA’s refusal to acknowledge that reasonableness can be defined by two different people in two different ways, with neither one being wrong. Perhaps I am reading too much into this language, but, seems to me, anyway, that FINRA has opened the door – a crack, at least – to entertaining contrary views on what is reasonable.
Again – twice in one post – I find myself complimenting FINRA.
 The Continuing Commissions Policy is presently found in IM-2420-1, but, as of August 24, will be moved to new FINRA Rule 2040(b). According to that Policy, a registered representative who retires from the securities industry can continue to receive trails after his retirement if: (1) there is a “bona fide contract” between the retiring rep and his broker-dealer, (2) that was entered into “in good faith,” (3) while the rep was still registered, and (4) expressly prohibits the retired rep from soliciting new business, opening new accounts, or continuing to service his old accounts. The designated beneficiary of a rep who dies with such a contract in place is also entitled to receive continuing commissions.