What Is a Broker-Dealer Permitted to Accept as Payment?

A broker-dealer can accept several categories of payment: commissions and markups on customer trades, underwriting spreads on new securities offerings, soft dollar credits used to buy research, payment for order flow from execution venues, 12b-1 distribution and service fees from mutual funds, limited reimbursement for regulatory and registration costs, narrowly defined referral payments, and modest non-cash items like gifts, meals, and training. Each channel is governed by SEC rules and FINRA requirements that cap the amount, condition the arrangement, or require disclosure. Some once-common incentives, such as sales contests tied to specific products, are now flatly prohibited under Regulation Best Interest.

Commissions and Markups on Trades

The most direct form of payment is the charge a firm collects on each transaction. When the broker-dealer acts as your agent, matching you with a counterparty, it charges a commission. When it acts as principal, selling you securities from its own inventory or buying them into it, it applies a markup on your purchase or a markdown on your sale.¹

FINRA’s 5% Policy is the benchmark regulators use to test fairness. A charge at or below 5% is not automatically fair, and one above 5% is not automatically unfair, but anything over that threshold creates a presumption the firm must justify. Factors include the type of security, the dollar amount of the trade, and the difficulty of executing it. Penny stocks and illiquid bonds generally carry higher markups than large-cap equities because they cost more to source and expose the firm to more risk.¹

For bonds, pricing is more involved. FINRA Rule 2121 and MSRB Rule G-30 require markups to be calculated from the prevailing market price, presumptively set by the dealer’s own recent cost. If that cost is stale, firms must work through a waterfall of pricing references. A flat markup grid applied without regard to the individual trade’s circumstances is considered inadequate supervision.²

Underwriting Spreads on Public Offerings

When a company issues new securities, broker-dealers acting as underwriters are paid under FINRA Rule 5110, the Corporate Financing Rule. Every public offering involving a FINRA member must be filed for review, and the total underwriting compensation must be fair and reasonable.³

The main component is the gross spread, which is the difference between what the underwriter pays the issuer and the price at which shares are sold to the public. For initial public offerings under $1 billion, that spread clusters tightly around 7%. Data covering 2001 through 2025 shows a consistent median spread of 7% for IPOs under $200 million, while deals above $1 billion ran a mean spread closer to 4.4%.⁴

Underwriters may also receive non-cash compensation such as warrants or options on the issuer’s stock. These are permitted, but the underlying security must be identical to what’s offered to the public, and the value counts toward the overall compensation calculation.³ FINRA defines a review period during which anything of value passing from the issuer to the underwriter is presumed to be underwriting compensation. For a firm commitment offering, that window runs from 180 days before the required filing date through 60 days after the effective date.⁵

Soft Dollar Research Credits

Section 28(e) of the Securities Exchange Act of 1934 creates a safe harbor letting investment managers pay higher commission rates in exchange for research and brokerage services. These arrangements, called soft dollars, let managers use client commission dollars to buy outside research instead of paying for it themselves.⁶

Eligible research is defined broadly: advice on the value of securities, analyses of issuers and industries, portfolio strategy guidance, economic trend analysis, and computer-based portfolio tools. What falls outside the safe harbor is just as clear. Overhead such as office space, furniture, and clerical staff cannot be bought with soft dollars. Neither can travel, hotel, or entertainment costs for research seminars, even when the seminar itself is eligible. The rule of thumb: if it helps you make investment decisions, it qualifies; if it helps you run your office, it doesn’t.⁶

Mixed-use products complicate things. A system that handles both portfolio analysis and bookkeeping must be split: the research portion can be paid with commission dollars, the administrative portion from the manager’s own revenue. The SEC applies a reasonableness standard to that allocation and expects the manager to keep records showing how the split was made.⁶

Payment for Order Flow

Broker-dealers routinely receive small payments from market makers and exchanges for routing customer orders to those venues. Equity order flow pays fractions of a cent per share. Options pay more. Research using SEC Rule 606 reports found that a typical 100-share options order generates about 40 cents in payment for order flow, compared to roughly 20 cents for a 100-share equity order.⁷ At scale, those cents become meaningful firm revenue.

Accepting these payments is legal. SEC Rule 606 requires broker-dealers to publish quarterly reports showing where they route orders, the net payments received from each venue, and the terms of any profit-sharing arrangements that could influence routing. Rule 607 requires annual customer disclosure about the firm’s payment for order flow practices.

The ceiling on this income is best execution. FINRA Rule 5310 requires broker-dealers to use reasonable diligence to find the best market for each customer order, considering the security’s price and liquidity, the size of the order, and how many markets the firm checked.⁸ A firm that routinely sends orders to the highest-paying venue without testing whether customers get competitive prices is violating that duty regardless of how much the arrangement earns.

12b-1 Distribution and Service Fees

Mutual fund companies pay broker-dealers ongoing fees for distributing fund shares and servicing shareholder accounts under SEC Rule 12b-1. These payments come out of fund assets, so the fund’s investors ultimately bear the cost through slightly lower returns.

FINRA Rule 2341 caps the fees at two levels. Asset-based sales charges, the distribution component, cannot exceed 0.75% of the fund’s average annual net assets. Service fees, which compensate the broker-dealer for maintaining shareholder accounts and providing ongoing personal service, are capped at 0.25% per year.⁹ Combined, that’s a 1% annual ceiling. A fund with 0.25% or less in combined 12b-1 and service fees can still call itself no-load.

FINRA also prohibits broker-dealers from favoring particular mutual funds based on brokerage commissions the firm receives or expects from the fund company. A broker-dealer cannot sell shares of a fund that directs its portfolio trading to the broker-dealer as a reward for pushing the fund’s sales. Any special cash compensation arrangement between a fund company and a broker-dealer must be disclosed in the fund’s current prospectus.⁹

Reimbursement for Regulatory and Registration Costs

FINRA Rule 5250 flatly prohibits a broker-dealer from accepting payment from an issuer for publishing a quotation or acting as a market maker in the issuer’s securities. Market making is meant to be a neutral liquidity function, not a promotional service an issuer can buy.¹⁰

The rule carves out one narrow exception: a broker-dealer may accept reimbursement for actual regulatory and registration costs. Eligible expenses include SEC registration fees, state blue sky filing fees, and listing fees charged by a self-regulatory organization. State filing fees can range from nominal amounts to over $2,000 depending on the state and the size of the offering. The constraint is that reimbursements must match documented out-of-pocket costs and cannot serve as backdoor compensation for trading activity.¹¹

Referral Fees and Payments to Unregistered Persons

FINRA Rule 2040 generally prohibits broker-dealers from paying transaction-based compensation to anyone not registered as a broker-dealer, where the nature of the payments and the recipient’s activities would require registration under federal securities law.¹² Two exceptions matter in practice.

A firm may continue paying commissions on existing accounts to a representative who has retired and left the industry, provided a written contract was in place before retirement and that contract bars the retiree from soliciting new business, opening new accounts, or servicing the accounts generating those payments.

A firm may also pay transaction-based compensation to a non-registered foreign finder for directing foreign customers to the firm. The finder must be a foreign national domiciled abroad, the customers must be foreign nationals or entities, the arrangement must comply with applicable foreign law, and the firm must disclose the referral fee on transaction documents.¹²

Outside those exceptions, a firm wanting to compensate someone must first determine whether that person needs to register as a broker-dealer. It can rely on prior SEC no-action letters, request its own, or obtain a legal opinion from independent counsel, and must retain documentation of the analysis.

What Firms Cannot Accept or Pay

Knowing the limits is as important as knowing the categories. Regulation Best Interest requires firms to identify and eliminate sales contests, sales quotas, bonuses, and non-cash compensation tied to selling specific securities or specific types of securities within a limited time period.¹³ A firm cannot run a contest rewarding brokers who sell the most shares of a particular fund this quarter. That kind of incentive is prohibited because it puts the firm’s revenue interest ahead of the customer’s.

Reg BI’s conflict-of-interest obligation reaches further than the older non-cash compensation rules. Firms must maintain written policies that identify and mitigate compensation conflicts at the individual broker level, disclose material limitations on the products a broker can recommend, and prevent those limitations from producing recommendations that favor the firm. In practice, even a technically permitted compensation arrangement can violate Reg BI if the firm hasn’t built adequate guardrails around it.¹⁴

Gifts, Meals, and Training

Non-cash compensation that isn’t tied to specific product sales is allowed within narrow limits. Associated persons may accept gifts worth no more than $100 per person per year. Occasional meals, sporting event tickets, or comparable entertainment are permitted so long as they aren’t so frequent or lavish as to raise propriety concerns. Product issuers and underwriters may pay for training meetings subject to location restrictions and other conditions. Internal firm non-cash incentive programs are permitted only when based on total production with equal weighting across product types, not targeted at moving a particular security.¹³

1
FINRA. FINRA Rule 2121 – Fair Prices and Markups, Markdowns and Commissions
2
FINRA. Fixed Income—Fair Pricing
3
FINRA. FINRA Rule 5110 – Corporate Financing Rule — Underwriting Terms and Arrangements
4
University of Florida Warrington College of Business. Initial Public Offerings: Underwriting Statistics Through 2025
5
FINRA. Regulatory Notice 20-10
6
Securities and Exchange Commission. Interpretive Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934 and Related Matters
7
National Bureau of Economic Research. Payment for Order Flow and Asset Choice
8
FINRA. FINRA Rule 5310 – Best Execution and Interpositioning
9
FINRA. FINRA Rule 2341 – Investment Company Securities
10
FINRA. FINRA Rule 5250 – Payments for Market Making
11
FINRA. Regulatory Notice 20-03 – Payments for Market Making
12
FINRA. FINRA Rule 2040 – Payments to Unregistered Persons
13
FINRA. Gifts, Gratuities and Non-Cash Compensation
14
U.S. Securities and Exchange Commission. Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers – Conflicts of Interest