Lincoln Financial's $300K FINRA Fine Over VUL Payments

Updated October 2026 to correct what the case was about. First published July 2024.

On July 8, 2024, FINRA censured Lincoln Financial Distributors, Inc. and fined it $300,000. An earlier version of this post said the fine was for weak oversight of third-party marketing materials for variable universal life insurance (VUL). The Letter of Acceptance, Waiver, and Consent (AWC No. 2020065474002) says otherwise. The case was about where Lincoln sent VUL compensation: about $2.9 million of it went to a firm that wasn't registered as a broker-dealer. Lincoln neither admitted nor denied the findings.

Lincoln Financial Distributors has been a FINRA member since 1967. It has more than 1,000 registered representatives in eight branch offices, and it mainly wholesales variable insurance products and mutual funds. The case started with a regulatory tip.

How the Money Moved

VUL is a securities product, and Lincoln caused about $8.7 million in transaction-based compensation on VUL sales to be paid to an unaffiliated selling broker-dealer. Lincoln directed that part of that money go on to a limited liability company. The LLC wasn't affiliated with Lincoln, and it was mostly owned by an insurance agent who wasn't registered with FINRA. One of the selling broker-dealer's registered representatives held a minority stake.

From March 2018 to September 2019, following Lincoln's directions, the selling broker-dealer paid the LLC about $2.9 million in transaction-based compensation.

The arrangement rested on a Variable Marketing Agreement among Lincoln, its affiliated life insurance company, the selling broker-dealer, and the LLC. It said the LLC would be paid transaction-based compensation for services that helped VUL sales, including distributing sales materials and helping with sales promotion. The agreement required the parties to follow the federal securities laws, and it tried to hand supervision of the sales activity to the selling broker-dealer. FINRA found that it didn't contain the terms needed to make sure the LLC, given the payments and what it did for them, wasn't required to register as a broker-dealer.

The Rule

FINRA Rule 2040(a) bars a member or associated person from paying, directly or indirectly, any compensation, fees, concessions, discounts, commissions, or other allowances to a person that isn't registered as a broker-dealer but that, because of those payments and the related activity, would have to be. FINRA found that Lincoln violated Rules 2040 and 2010.

Two parts of the case show how the rule works in practice.

The payment was indirect. Lincoln didn't pay the LLC; it told the selling broker-dealer to. The rule says "directly or indirectly," and the AWC says Lincoln "indirectly paid" the $2.9 million.

The contract didn't settle the question. A clause that says everyone will comply with the securities laws, and a clause that gives supervision to another firm, don't answer whether a particular payee needs to be registered. Supplementary Material .01 to Rule 2040 says what does. The paying firm has to determine that the payee wouldn't need to register and reasonably support that determination, for example by relying on SEC releases, no-action letters, or interpretations that fit the facts, by getting its own no-action letter, or with an opinion from independent, reputable U.S.-licensed counsel. If the payments continue, it has to review the determination periodically, and it has to keep it in its books and records.

What to Check

List every agreement under which your firm pays, or tells another firm to pay, compensation tied to sales to anyone that isn't a registered broker-dealer. Marketing agreements, wholesaling arrangements, and referral deals all belong on the list.
For each payee, find the written Rule 2040 determination and what supports it. If the support is a no-action letter, write down why your facts fit it.
Put a review date on every ongoing arrangement. Supplementary Material .01 asks for periodic review, and a determination made when the agreement was signed may no longer fit what the payee does.
Find out who owns each payee. In this case, a selling-firm representative held a minority stake in the LLC, a fact a Rule 2040 review should bring to the surface.
Read any "marketing" agreement for what the payee is paid for. If the pay rises with sales, treat it as transaction-based compensation and run it through the Rule 2040 analysis.

Lincoln entities also appear in another 2024 case on this site: Lincoln Financial Advisors and Lincoln Financial Securities paid $8.5 million in the SEC's February 2024 off-channel recordkeeping settlements. Those are different firms and a different issue.

This post is for informational purposes only and does not constitute legal advice. For guidance on specific regulatory obligations, consult your counsel or compliance advisor.