Earlier this month, FINRA agreed to a Letter of Acceptance, Waiver, and Consent (AWC) imposing a $10 million fine and finding that, from 2018 through at least February 2024, the brokerage firm violated FINRA Rule 2341(l)(5), which generally prohibits broker-dealers from paying or accepting non-cash compensation tied to sales, as well as recordkeeping and supervisory rules. On top of the fine, the firm was censured and agreed to an undertaking, including annual supervisory certifications for at least three years. The AWC offers a good reminder, just before the 2025 holiday season, that broker-dealers must be vigilant and forthright with non-cash compensation practices.
The Non-Cash Compensation Rule
FINRA Rule 2341 generally concerns investment company securities, like mutual funds or exchange-traded funds (ETFs). Paragraph (l) sets forth requirements regarding a broker-dealer’s receipt or payment of cash and non-cash compensation in connection with the sale and distribution of such securities. Rule 2341(l)(5) prohibits “directly or indirectly accept[ing] or mak[ing] payments or offers of payments of any non-cash compensation,” subject to certain exceptions. Those exceptions are:
(A) Gifts that do not exceed an annual [$100] per person … and are not preconditioned on achievement of a sales target [(“de minimis gifts”)].1
(B) An occasional meal, a ticket to a sporting event or the theater, or comparable entertainment which is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target.
(C) Payment or reimbursement by offerors in connection with meetings held by an offeror or by a member for the purpose of training or education of associated persons of a member, provided that [specified conditions are met].2
(D) Non-cash compensation arrangements between a member and its associated persons or a non-member company and its sales personnel who are associated persons of an affiliated member, provided that [specified conditions are met].3
(E) Contributions by a non-member company or other member to a non-cash compensation arrangement between a member and its associated persons, provided that the arrangement meets the criteria in paragraph (l)(5)(D).
Rule 2341(l)(3) requires members to maintain records of all cash and non-cash compensation, other than non-cash compensation permitted under 2341(l)(5)(A) or (B) (i.e., de minimis gifts, meals, event tickets, or comparable entertainment). Such records must include the names of investment company or investment advisor (an “offeror” under Rule 2341(b)(1)(E)), the names of the associated persons, the amount of cash, the nature and, if known, the value of non-cash compensation.
FINRA has previously warned members about the proliferation of non-cash compensation and the risks it creates, including possible conflict of interest. In a 1998 Notice to Members, FINRA cautioned that non-cash compensation “creates significant point-of-sale incentives that may compromise the requirement to match the investment needs of the customer with the most appropriate investment product.” Notice to Members 98-75 (Sep. 1998). Indeed, the exceptions outlined in Rule 2341(l)(5) are expressly conditioned on the non-cash compensation arrangements being “consistent with the applicable requirements of” the SEC’s Regulation Best Interest rule (Rule 15l-1).
FINRA has also issued specific guidance for meals and entertainment permitted under Rule 2341(l)(5)(B). FINRA requires that “a member must accompany or participate in an event for it to be considered business entertainment” and, therefore, “for example, if a member gives tickets to a sporting event but does not accompany the recipient to the event,” the tickets must be treated as a gift (i.e., they must meet the de minimis gift criteria in 2341(l)(5)(A)). Notice to Members 06-06 (Jan. 2006).
Violations in the AWC
According to the AWC, the firm routinely provided gifts valued in excess of $100, including bottles of alcohol and tickets to sporting and entertainment events that firm representatives did not also attend. FINRA found that meals and entertainment were provided so frequently as to raise questions of propriety and, in several instances, gifts and entertainment were preconditioned on the clients achieving sales targets with respect to the products offered by the brokerage. The AWC concluded that this conduct violated Rule 2341(l)(5) and Rule 2010 (failure to observe high standards of commercial honor and just and equitable principles of trade).
FINRA also found that the firm failed to make and maintain records, as required by Rule 4511 and Section 17(a) of the Securities and Exchange Act of 1934, as well as Rule 17a-3(a) thereunder. Rule 17a-3(a)(2) requires broker-dealers to maintain accurate records of all expenses. Importantly, the broker’s representatives at issue created false expense reports that omitted material information and underreported the value of the non-cash compensation. FINRA also found that the firm provided similarly inaccurate reports to certain of its clients, which imposed limits on non-cash compensation, in violation of Rule 2010.
Finally, FINRA found that the firm failed to establish and maintain an adequate supervisory system. Although the firm had policies and procedures governing cash and non-cash compensation, those policies and procedures did not provide guidance on how to evaluate whether non-cash compensation was excessive and the broker’s reporting systems relied almost exclusively on individuals creating accurate reports of their expenses, with no objective oversight or verification. Additionally, FINRA found that the firm lacked adequate controls because, among other things, employees could alter and revise expense reports after they were approved and without further oversight.
Takeaways for Broker‑Dealers
The $10 million fine shows that FINRA is prepared to aggressively punish violations of these compensation rules. The AWC findings highlight a variety of supervisory failings, including internal controls gaps and overreliance on accurate reporting, without adequate training and oversight. Brokers should be mindful of entertainment and events, which must be attended by firm representatives, business appropriate, and not so frequent as to appear improper, and keep accurate records of such events and their frequency on a client-by-client basis. Further, non-sales compliance personnel should function as a check on non-cash compensation practices and be empowered to review, approve, and audit firm expense records.
The AWC serves as a good reminder that broker’s must implement robust supervisory oversight and the forthcoming changes to aspects of Rule 2341(l)(5) are an opportunity for brokers to assess their practices and implement meaningful changes to improve compliance.
Thompson Hine attorneys are always available to assist and answer any questions.
- FINRA recently proposed increasing this amount to $300. See 90 Fed. R. 44855 (Sep. 17, 2025). ↩︎
- Those conditions are: (i) recordkeeping as required by (l)(3); (ii) the member’s prior approval to attend the meeting and that attendance by the associated persons is not preconditioned by the member on achievement of sales targets or any other incentives (including a non-cash compensation arrangement permitted by (l)(5)(D); (iii) a business appropriate location for the meeting; (iv) payment or reimbursement is not applied to the expenses of guests of the associated person; and (v) payment or reimbursement by the offeror is not preconditioned by the offeror on achievement of sales targets or any other non-cash compensation arrangement permitted by paragraph (l)(5)(D). ↩︎
- Those conditions are: (i) if the non-cash compensation arrangement includes investment company securities, it is based on the total production of associated persons with respect to all investment company securities distributed by the member; (ii) the arrangement requires that credit received for each investment company security is equally weighted; (iii) no unaffiliated non-member company or other unaffiliated member directly or indirectly participates in the member’s or non-member’s organization of a permissible non-cash compensation arrangement; and (iv) recordkeeping as required by (l)(3). ↩︎