Amendment to FINRA Rule 8311 Approved

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FINRA Notice to Member 15-07 noted that the amendments to FINRA Rule 8311 will be effective August 24, 2015.  In general, while the amendments to FINRA Rule 8311 eliminate duplicative provisions in NASD IM-2420-2, the most significant impact is that it clarified  the scope of the rule on payments by member firms to persons subject to suspension, revocation, cancellation, bar (each a sanction), or other disqualification … that being, you can’t pay any compensation to such persons.

Rule 8311 provides that if a person is subject to a sanction or other disqualification, a member firm may not allow such person to be associated with it in any capacity that is inconsistent with the sanction imposed or disqualified status, including a clerical or ministerial capacity.  Thus, a member firm may not pay or credit to any person subject to a sanction or disqualification, during the period of the sanction or disqualification or any period thereafter, any salary, commission, profit, or any other remuneration that the person might accrue, not just earn, during the period of the sanction or disqualification.

With that said, a member firm may make payments or credits to a person subject to a sanction that are consistent with the scope of activities permitted under the sanction where the sanction solely limits an associated person from conducting specified activities (such as a suspension from acting in a principal capacity) or to a disqualified person that has been approved (or is otherwise permitted pursuant to FINRA rules and the federal securities laws) to associate with a member firm.

Specifically, the rule clarifies that:
  1. other disqualifications, not just suspensions, revocations, cancellations or bars, are subject to the rule (and the rule is not limited to orders issued by FINRA or the SEC);
  2. a member firm may not allow a person subject to a sanction or disqualification to “be” associated with such firm in any capacity that is inconsistent with the sanction imposed or disqualified status, including a clerical or ministerial capacity, not simply “remain” associated;
  3. a member firm may not pay any remuneration to a person subject to a sanction or disqualification, not just payments that result directly or indirectly from any securities transaction; and
  4. the rule applies to any salary, commission, profit or remuneration that the associated person might “accrue,” not just “earn” during the period of a sanction or disqualification, not just suspension.
Notwithstanding the above, to address human resource issues, new paragraph (b) to Rule 8311, expressly permits a member firm to pay to any person subject to a sanction or disqualification any remuneration pursuant to an insurance or medical plan, indemnity agreement relating to legal fees, or as required by an arbitration award or court judgment.
Additionally, Supplementary Material .01 allows a member firm to pay or credit to a person subject to a sanction or disqualification, salary, commission, profit or other remuneration that the firm can evidence accrued to the person prior to the effective date of the sanction
or disqualification, unless the remuneration relates to or results from the activity that gave rise to the sanction or disqualification. A member firm must be able to demonstrate that the remuneration accrued prior to the effective date of the sanction or disqualification in order to pay or credit the remuneration to the individual.

We hope that this information has been helpful to you. Should you have any additional questions or concerns, please feel free to contact Daniel E. LeGaye or Michael Schaps by e-mail or phone, at 281-367-2454, or consult with your legal counsel or compliance consultant. This legal update has been provided to you courtesy of The LeGaye Law Firm, P.C., 2002 Timberloch Drive, Suite 200, The Woodlands, Texas 77380.

The information contained herein is not, nor is it intended to be legal advice or establish or further an attorney-client relationship. All facts and matters reflected in this information should be independently verified and should not be taken as a substitute for individualized legal advice. You should consult an attorney for individual advice regarding your own situation. Not Board Certified by Texas Board of Legal Specialization. Michael Schaps is not an attorney.