Gifts, Gratuities and Non-Cash Compensation
FINRA Rule 3220 (Influencing or Rewarding Employees of Others) (the Gifts Rule) prohibits any member or person associated with a member, directly or indirectly, from giving anything of value in excess of $100 per year to any person where such payment is in relation to the business of the recipient’s employer. The rule also requires members to keep separate records regarding gifts and gratuities. The rule seeks both to avoid improprieties that may arise when a member firm or its associated persons give anything of value to an employee of a customer or counterparty and to preserve an employee’s duty to act in the best interests of that customer.
In 1999, FINRA staff issued an interpretive letter stating that the Gifts Rule does not prohibit “ordinary and usual business entertainment” (such as 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.” The 1999 letter noted that the interpretation was based, in part, on FINRA’s rules governing non-cash compensation in connection with the offer and sale of investment company shares and variable annuities.
Non-Cash Compensation Rules
FINRA Rules 2310 (Direct Participation Programs), 2320 (Variable Contracts of an Insurance Company), 2341 (Investment Company Securities), 5110 (Corporate Financing Rule – Underwriting Terms and Arrangements) (together, the Non-Cash Compensation Rules) impose restrictions on non-cash arrangements that are in connection with the sale and distribution of securities covered by those rules. The Non-Cash Compensation Rules prohibit a member firm or associated person from directly or indirectly accepting or making payments of any non-cash compensation, subject to specified exceptions.
The exceptions permit:
- gifts that do not exceed an annual amount per person fixed by the FINRA Board of Governors (currently $100) and are not preconditioned on achievement of a sales target;
- an occasional meal, a ticket to a sporting event or the theater or comparable entertainment which is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target;
- payment or reimbursement by “offerors” (product issuers, advisers, underwriters and their affiliates) in connection with training or education meetings, subject to certain conditions, including meeting location restrictions and not preconditioning attendance on achievement of a sales target; and
- internal firm non-cash compensation arrangements that are based on total production and equal weighting of product sales. (Rules 2310 and 5110 do not impose total production and equal weighting requirements on internal non-cash compensation arrangements.)
Regulation Best Interest
Effective June 30, 2020, SEC Regulation Best Interest (Reg BI) establishes a standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities. Reg BI requires broker-dealers to act in the best interest of the retail customer at the time the recommendation is made, without placing the financial interest of the broker-dealer ahead of the interests of the retail customer.
Reg BI requires broker-dealers to establish, maintain and enforce written policies and procedures reasonably designed to identify and at a minimum disclose, or eliminate, all conflicts associated with such recommendations. Among other things, broker-dealers must identify and eliminate any sales contests, sales quotas, bonuses and non-cash compensation that are based on the sales of specific securities or specific types of securities within a limited period of time. Accordingly, in addition to Non-Cash Compensation Rules’ restrictions, any non-cash compensation arrangement must be consistent with the requirements of Reg BI.
FINRA's e-learning courses cover regulatory requirements and industry compliance practices related to business gifts to help you understand your role as a supervisor in complying with FINRA rules. Scenarios demonstrate how to determine whether gifts are business-related, and illustrate proper gift-aggregation and recordkeeping techniques.
FINRA's Office of General Counsel (OGC) staff provides broker-dealers, attorneys, registered representatives, investors and other interested parties with interpretative guidance relating to FINRA’s rules. Please see FINRA OGC Interpretative Guidance for more information.
- FINRA Amends Its Suitability, Non-Cash Compensation and Capital Acquisition Broker (CAB) Rules in Response to Regulation Best Interest06/19/2020
- FINRA Requests Comment on Proposed Amendments to Its Gifts, Gratuities and Non-Cash Compensation Rules08/08/2016
- FINRA Requests Comment on the Effectiveness and Efficiency of its Gifts and Gratuities and Non-Cash Compensation Rules04/08/2014
- FINRA Requests Comment on Proposed Consolidated FINRA Rule Governing Investment Company Securities06/17/2009
- NASD Issues Additional Guidance on Rule 3060 (Influencing or Rewarding Employees of Others)12/04/2006
- NASD Requests Comment on Proposed Interpretive Material IM-3060 Addressing Gifts and Business Entertainment01/23/2006
- NASD Requests Comment on Proposal to Prohibit All Product-Specific Sales Contests and to Apply Non-Cash Compensation Rules to Sales of All Securities Comment Period Expired August 5, 200505/09/2005
- NASD Requests Comment on Proposed Amendments to Rules 2710 (Corporate Financing) and 2810 (Direct Participation Programs) (This version corrects certain administrative and other non-substantive text)02/03/2004
- SEC Announces Immediate Effectiveness of Amendments to Non-Cash Compensation Provisions of Rule 2710 and Rule 281009/24/2003
- SEC Approves New Rule Relating To The Application Of NASD Rules And Interpretive Materials To Exempted Securities09/28/2001
- Questions And Answers Relating To Non-Cash Compensation Rules07/01/1999
- SEC Approves Rule Change Relating To Non- Cash Compensation For Mutual Funds And Variable Products09/01/1998
- FAQQ. Would it be consistent with FINRA Rule 3220 (Influencing or Rewarding Employees of Others) and the non-cash compensation provisions of FINRA Rules 2310, 2320, 2341 and 5110 for an associated person to host a virtual business entertainment event or a video meeting with the employees of an institutional customer or third-party broker-dealer and provide food and beverage that is designed to be consumed during that event or meeting?July 29, 2020
- Report / Study
FINRA is conducting a retrospective review of its gifts and non-cash compensation rules, and is publishing this report on the assessment phase of the review. The purpose of the review is to assess whether the rules are meeting their intended investor protection objectives by reasonably efficient means and to take steps to maintain or improve the effectiveness of the rules while minimizing negative economic impacts.December 09, 2014
NASD Rule 3060 - Influencing or Rewarding Employees of OthersDecember 17, 2007
- Report / Study
As a result of a recent review of gift and gratuity practices of over 40 member firms, NASD staff is concerned that members may not be fulfilling their obligations to comply with, and establish adequate supervisory systems and procedures reasonably designed to achieve compliance with, NASD’s rule governing gifts and gratuities – Conduct Rule 3060 (the “gift rule”).December 04, 2006
- GuidanceNASD Rule 2830 - Investment Company SecuritiesOffices of sub-adviser holding training and education meeting is permissible location under Rule 2830(l).September 28, 2006
- Interpretive LetterSeparate sales contests under NASD Rule 2820(g) for group variable annuity contracts and employer-sponsored retirement plans.February 03, 2003
Payments by an investment adviser to broker-dealers in the form of rights to receive cash compensation upon the occurrence of specific corporate events (e.g., initial public offering of shares of the adviser) do not constitute "non-cash compensation" under NASD Rule 2830(l).June 18, 2001
NASD Rule 3060(a) does not apply to reimbursements by a registered representative of his or her client's expenses when the reimbursement is unrelated to the business of the client's employer.March 15, 2001
Reminder that offerors may not pay for golf outings, tours or other forms of entertainment while at a meeting it sponsors for the purpose of training or education. This letter was sent by NASD Regulation to a number of members that manufacture and sponsor variable and investment company products and to certain trade associations.March 07, 2001
- GuidanceA member is not an "affiliated member" of an insurance company for purposes of Rule 2820(g)(4)(D) where no control relationship exists between the entities.October 12, 2000
Application of Rule 2820 (h) to a non-cash compensation arrangement that excludes variable annuity contracts that are sold in exchange transactions pursuant to Internal Revenue Code Section 1035 or pursuant to a rollover transaction under Internal Revenue Code Section 402.April 03, 2000
Application of NASD Rule 2830(l)(5)(D) to sales contests involving sales personnel who perform marketing services.November 18, 1999
Mutual fund offeror may directly reimburse personal travel expenses of registered representatives that attend training and education meetings, provided appropriate records are maintained.September 09, 1999
- GuidanceInterpretive Letter to Henry H. Hopkins and Sarah McCafferty, T. Rowe Price Investment Services, Inc.
Rule 3060 does not limit ordinary and usual business entertainment provided by a member or its associated persons to the member's clients and their guests.June 10, 1999
Non-cash compensation sales contest permissible under Conduct Rule 2820(h) where member sells only one variable annuity and one variable life product and appropriate records are maintained.May 20, 1999
A sales incentive program can combine non-conforming criteria based on sales prior to January 1, 1999 with conforming criteria based on sales subsequent to January 1, 1999 for incentives to be provided prior to June 30, 2000.March 31, 1999