Finra has imposed a $300,000 fine on Lincoln Financial Distributors, Lincoln's wholesale distribution franchise, for making transaction-based compensation payments to an unregistered entity.
According to the letter of Acceptance, Waiver and Consent on the case released Monday, Lincoln Financial Distributors, a Finra member since 1967, paid millions in transaction-based compensation to a non-registered entity between March 2018 and September 2019. The payments were in connection with sales of variable universal life insurance, a securities product.
The payments were part of a larger sum of $8.7 million directed to an unaffiliated selling broker-dealer. The firm told the selling broker-dealer to direct a portion of the funds to the unregistered entity, a limited liability company that was not affiliated with Lincoln and owned primarily by an insurance agent who was not Finra-registered.
The arrangement was also ethically questionable as one of the selling broker-dealer’s registered representatives had a minority stake in the entity, according to Finra.
“From March 2018 to September 2019, consistent with Lincoln's directives, the selling broker-dealer paid approximately $2.9 million in transaction-based compensation to the unregistered entity,” the AWC said.
The chain of payments, Finra explained, was part of a broader variable marketing agreement between Lincoln, its affiliated life insurance company, and the selling broker-dealer.
Under the agreement, the unregistered entity would receive transaction-based compensation in exchange for a variety of services to help with VUL sales, including distributing sales materials and assisting with sales promotional activities. It required all parties to stay in line with federal securities laws and further pushed supervisory responsibility around the sales activities to the selling broker-dealer.
However, Finra said the agreement “failed to contain all the terms and conditions necessary to ensure that the unregistered entity, by reason of receipt of the payments and the activities related thereto, was not required to be registered as a broker-dealer under the Exchange Act.”
Because of those shortcomings, Lincoln was in violation of Finra Rules 2040 and 2010, the AWC said.
The financial services firm, which employs over 1,000 registered representatives across eight branch offices, has agreed to pay the fine as well as a censure from the regulator.
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