FINRA rules strictly prohibit registered representatives (RRs) from paying transaction-based compensation, such as commissions or referral fees, to unregistered individuals for referring securities business. The family friend is an unregistered person. Therefore, splitting commissions, paying a flat fee, or providing cash equivalents like prepaid cards are all prohibited activities. However, providing occasional non-cash compensation of nominal value, such as a thank-you dinner, is generally permissible. This is considered a normal business courtesy or entertainment, provided it is not so frequent or extensive as to raise questions of propriety and is not preconditioned on the achievement of a specific sales target.

A. Splitting commissions with an unregistered person is a direct and serious violation of FINRA rules governing compensation.

B. Paying a flat-rate referral fee is still considered transaction-based compensation to an unregistered person, which is prohibited.

D. Prepaid credit cards are cash equivalents, and tying their value to commissions earned makes this a prohibited form of payment.

1. FINRA Rule 2040, Payments to Unregistered Persons. This rule states, "(a) No member or associated person shall, directly or indirectly, pay any compensation, fees, concessions, discounts, commissions or other allowances to: (1) any person who is not registered as a broker or dealer under Section 15(a) of the Exchange Act but, by reason of receipt of such payments, is required to be so registered." This directly prohibits the actions in options A, B, and D.

2. FINRA Rule 3220, Influencing or Rewarding Employees of Others. While this rule primarily governs gifts to employees of other member firms, its principles are broadly applied. Supplementary Material .01 clarifies that "normal business entertainment" (like an occasional meal) is not considered a prohibited gift, provided it is not "so frequent or so extensive as to raise any question of propriety." This supports option C as a permissible business courtesy.

3. Securities Industry Essentials (SIE) Examination Content Outline, Section 4, "Overview of Prohibited Activities." This section outlines the knowledge required regarding prohibited practices, including "Paying or splitting commissions or fees with unregistered persons." This confirms that the activities in options A, B, and D are explicitly tested as prohibited conduct.