Managing Conflicts
Managing a broker dealer’s gifts and business entertainment conflicts can be an ongoing challenge for even the best compliance team. This task can become even more challenging as the holidays approach. You want to thank your clients for their business, but you should also remind your salespeople that they need to comply with the policies that are in place related to gifts and business entertainment and in compliance with FINRA and other regulatory requirements.
FINRA Requirements
The requirements related to gifts are outlined in FINRA Rule 3220.[1] Specifically, the rule states:
“No member or person associated with a member shall, directly or indirectly, give or permit to be given anything of value, including gratuities, in excess of one hundred dollars per individual per year to any person, principal, proprietor, employee, agent or representative of another person where such payment or gratuity is in relation to the business of the employer of the recipient of the payment or gratuity. A gift of any kind is considered a gratuity.” The rule also requires that broker-dealers keep a separate record of all payments or gratuities.
The requirements related to business entertainment are even less specific and are subject to a broker dealer’s interpretation. The requirements are as follows:
“an occasional meal, sporting event, theater production or comparable entertainment event provided that the entertainment is neither so frequent nor so extensive as to raise any question of propriety”.
This FINRA guidance is based on an interpretative letter from 1999[2] and is based on FINRA’s rules governing non-cash compensation in connection with the offer and sale of investment company shares and variable annuities.
Reminders, Reminders, Reminders
In order to stay in front of these potential conflicts this holiday season, we have outlined the following steps that every broker-dealer should be considering:
- Send a reminder now to all of your staff reminding them of their responsibilities. You should also include a link to your current broker-dealer’s written supervisory procedures.
- Review the FINRA Disciplinary Actions Database for examples of broker-dealers and registered representatives who have been disciplined for gift and entertainment rule violations. Include these examples as part of your reminders and in your training program.
- Make your reporting log easily accessible. Include a link to the log-in reminders.
- For gifts, try to utilize the broker dealer’s approved list of gifts, which typically have been approved by the compliance team and stay within FINRA requirements.
- Regarding business entertainment, given there is no prescribed limit in the FINRA rules, broker-dealers should have a principles-based approach when setting limits or expectations, based on the broker dealer’s business model including regional business cost and geographical cost differences.
- Include examples of permissible and non-permissible gifts and business entertainment in the reminders.
- Make your reminders engaging. Utilize humor, stories, and real-life examples.
Other Regulatory Considerations
There are other considerations that a broker-dealer needs to have analyzed and incorporated into their written supervisory procedures and monitoring process. We have outlined some of these considerations below:
What about the client who also happens to be a good friend of a registered representative of the broker-dealer and this client gets married or is celebrating the birth of a child? Can a gift be given?
Typically, gift-giving related to life events, personal gifts, and giving related to charitable events can be exempted from the requirements. Compliance personnel should review their written supervisory procedures for these types of exemptions and provide clarity and examples in the reminders.
If the broker-dealer has clients that are international government officials (or family members), make sure to consider the gift and business entertainment prohibitions and requirements outlined in the Foreign Corrupt Practice Act (FCPA).
The FCPA was enacted by Congress in 1977 in response to concerns of widespread bribery of foreign officials by U.S. companies. Under the FCPA, a gift or business expense may be in violation of the statute if there is corrupt intent to improperly influence a government official, regardless of the dollar amount of the gift or business entertainment. The corrupt intent requirement protects companies that engage in the ordinary and legitimate promotion of their businesses while targeting conduct that seeks to improperly induce officials into misusing their positions.[3]
For broker-dealers who have ERISA plan clients, your written supervisory procedures should outline the monitoring and reporting requirements as required by the Department of Labor (“DOL”) Section 406(b)(3).
The DOL limitation on the value of gifts, gratuities, meals and entertainment given to fiduciaries (including their relatives) of ERISA plans, such as plan trustees is limited to an aggregate annual value of less than $250 per planned fiduciary and the receipt does not violate any plan policy or provision. This dollar amount includes the reimbursement of expenses associated with educational conferences.[4]
For broker-dealers who service clients that are union pension plans under the Department of Labor, there are special monitoring and reporting requirements that need to be considered.
Under DOL rules, Form LM-10, is a reporting and disclosure form issued by the DOL pursuant to the Labor-Management Reporting and Disclosure Act of 1959. It must be filed by a vendor of financial services to a union-affiliated pension plan that has provided a gift or entertainment worth more than $250 in aggregate during the fiscal year to a union or union pension plan.[5]
Finally, broker-dealers should also send reminders regarding any planned gifts or entertainment to clients who are also local or state municipalities.
The rules vary by state and jurisdiction, so the broker-dealer written supervisory procedures should include a specific section related to these requirements. In some states, for example, in California, registered representatives who service state pension plans may need to register as lobbyists. Additionally, elected state officials, members of the legislature, and legislative employees may not accept a gift or gifts totaling more than $10 in a calendar month from any individual who is registered as a lobbyist under state law.[6]
Conclusion
The giving of gifts and entertainment is part of the business landscape, especially during the holiday season. Navigating the various rules and regulations, depending on the broker dealer’s business model can be challenging and may pose difficulties for compliance personnel. As part of your regular process, you should take the proper time to review your firm’s business model, products and clients and ensure that your written supervisory procedures and compliance processes capture and convey the necessary information to your registered salespeople and employees. Also, make sure to routinely remind them of their obligations at this crucial time of the year. Also, there are similar requirements for investment advisers. So whether you are a dually registered firm (both broker-dealer and investment adviser) or have a sister company that is registered as an investment adviser, we encourage compliance personnel to review these requirements and remind sales teams and employees of their responsibilities.
The consultants at Core Compliance & Legal Services, Inc., have extensive experience in the financial services industry and can help you with updates to your written supervisory procedures, develop or enhance your current gifts and entertainment monitoring and reporting, as well as crafting compliance reminders and communications.
Even if you feel that your compliance program is in good shape, it always helps to get a second opinion. Core Compliance consultants have extensive experience in performing reviews and assisting firm with ensuring their compliance program are healthy and appropriate for their business model.
For more information about our services, please contact us at (619) 278-0020 or visit us at www.corecls.com for more information.
Author: Core Compliance & Legal Services (“Core Compliance”). Core Compliance works extensively with investment advisers, broker-dealers, investment companies, hedge funds, private equity firms and banks on regulatory compliance issues.
This article is for information purposes and does not contain or convey legal or tax advice. The information herein should not be relied upon in regard to any particular facts or circumstances without first consulting with a lawyer and/or tax professional.
[1] https://www.finra.org/rules-guidance/rulebooks/finra-rules/3220#the-rule
[2] https://www.finra.org/rules-guidance/guidance/interpretive-letters/henry-h-hopkins-and-sarah-mccafferty-t-rowe-price-investment-services-inc
[3] https://www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf
[4] https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/enforcement/oe-manual/chapter-48
[5] https://www.dol.gov/olms/regs/compliance/LM10_FAQ.htm
[6] http://www.fppc.ca.gov/learn/public-officials-and-employees-rules-/gifts-and-honoraria.html