RIA Compliance Blog
Earlier this month, FINRA issued a regulatory notice advising that it has proposed various changes to the rules relating to gifts, gratuities and non-cash compensation. If adopted, the proposal would amend FINRA Rule 3220 (the “Gifts Rule”) and would create two new rules, Rule 3221 (“Non-Cash Compensation”) and Rule 3222 (“Business Entertainment”).
The current Gifts Rule prohibits any FINRA member or associated person from giving anything of value in excess of $100.00 per year to any person, if such payment is connected with the business of the recipient’s employer. Under the proposed revised Gifts Rule, the $100.00 limit would be increased to $175.00 per recipient per year. The proposed increase is designed to account for the rate of inflation since the adoption of the original Gifts Rule. The current requirements that all associated persons’ gifts must be consolidated with those of the member firm and that records be maintained with respect to all such gifts, will be continued in the new rule.
Furthermore, the guidance that the NASD provided in its Notice to Members 06-69 would be incorporated into the new Gifts Rule through Supplementary Materials. Those materials would provide, among other things that business entertainment expenses remain expressly subject to the $175.00 per year limit, unless the gift is of de minimis value. The materials define de minimis value as a gift valued below $50.00. Under the proposed rule, gifts must be valued at the higher of the cost or the market value. The Supplementary Materials also will provide guidance as to how to determine the value of gifts that are given to multiple recipients.
Neither personal gifts nor bereavement gifts would be subject to the $175.00 per year limit, provided that they are customary and reasonable and satisfy certain other specified conditions. In the case of personal gifts, the firm must consider the nature of the preexisting personal or family relationship in deciding whether to exclude the gift from the limit.
Proposed FINRA Rule 3222 would incorporate previous guidance by FINRA regarding business entertainment expenses and would require member firms to adopt policies and procedures relating to entertainment expenses that are tailored to meet the member’s needs. The overriding principle is that a firm should not permit business entertainment that could “reasonably be perceived as” or in fact is intended as an improper quid pro quo. The rule, if adopted, would require each firm in the course of developing its own policies to define what types of permissible and impermissible business expenses will be allowed based upon specific factors specified in the rule. Among other conditions, the rule would require that the member or the offeror (which can be a sponsor or issuer of a product), host the event and that the entertainment must not be preconditioned on the achievement of a sales target. The rule would also require that each firm provide appropriate training and education to all those subject to the rule or who will be supervising others subject to the rule.
FINRA has requested comments be submitted to the proposed rule changes by September 29, 2016.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our website for more information.