Gifts/Business Entertainment/Non-Cash Compensation FAQs
Q. 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?
A. FINRA Rule 3220 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. Likewise, the non-cash compensation rules prohibit members and their associated persons from giving or accepting such gifts in connection with the sale of specified products. The non-cash compensation rules permit business entertainment provided by “offerors” (generally product sponsors and their affiliates) to representatives of third-party broker-dealers and their guests that is not subject to the $100 limit as long as it “is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target." FINRA staff has interpreted Rule 3220 to permit similar business entertainment of a member’s clients and their guests. (These rules do not apply to meetings or entertainment involving retail customers.)
The provisions permitting business entertainment do not specify whether the entertainment must be in-person. Nevertheless, a key distinction between gifts and business entertainment is that the latter involves an associated person of a member personally hosting employees of institutional customers or third-party broker-dealers and their guests, rather than simply giving those employees something of value. Accordingly, where a member firm’s associated persons personally host an interactive virtual business entertainment event or meeting, FINRA would view the associated persons’ provision of reasonable amounts of food and beverage designed to be consumed by the recipient employees and their guests during that virtual business entertainment or meeting as not being subject to the $100 gift limit, provided that the cost of the food and beverage as well as the frequency with which it is provided do not raise questions of propriety. The provision of food and beverage must not be preconditioned on achieving a sales target.
As hosts, the associated persons who send the food and beverage should control who can participate in the meeting, interact with each participant during the meeting, and remain present and visible throughout the meeting, which may be part of a larger video setting involving entertainment. The member firm or its associated persons should not provide any other cash or non-cash compensation (such as gift cards or other non-food items) to the recipient employees or their guests. In addition, members should supervise and maintain records of these meetings and events, including a description, the amount, and the value of the food and beverage, in a manner similar to in-person meetings and events.
Third-Party Distributor Gift Limits under Non-Cash Compensation Rules
Q. A member serves as an underwriter or distributor of securities offered by unaffiliated issuers, the sale of which is subject to non-cash compensation restrictions (direct participation programs, variable insurance contracts, investment companies, and public offerings of securities) (“third-party distributor”).1 Does the $100 limit on gifts in the Non-Cash Compensation Rules require the third-party distributor to aggregate the value of gifts given to the same associated person of a retail broker-dealer by its wholesaler representatives if they are acting on behalf of different, unaffiliated offerors of those securities?2
A. No. The Non-Cash Compensation Rules provide an exception from the prohibition on accepting or making payments or offers of non-cash compensation in connection with the sale and distribution of securities covered by those rules for “[g]ifts that do not exceed [$100 annually] per person and are not preconditioned on achievement of a sales target.” The purpose of this limit is to prevent “significant point-of-sale incentives that may compromise the requirement to match the investment needs of the customer with the most appropriate investment product.”3 Such incentives can occur particularly when persons acting on behalf of an offeror provide gifts to retail broker-dealer registered representatives with the goal of encouraging sales of the offeror’s products.
Often a third-party distributor will register persons employed by its client offerors to act as wholesalers for the offerors' products. Although FINRA believes that a third-party distributor should aggregate gifts given by wholesalers acting on behalf of the same or an affiliated offeror in determining whether the $100 gift limit has been reached, the Non-Cash Compensation Rules do not require a third-party distributor to aggregate gifts given by other wholesalers who are promoting unaffiliated offerors’ products, since those gifts do not create the same point-of-sale incentives. Accordingly, it is consistent with the Non-Cash Compensation Rules if, in determining whether a gift exceeds the $100 limit under those rules, a third-party distributor aggregates only gifts given by its wholesalers acting on behalf of the same or an affiliated offeror.
- See FINRA Rules 2310(c) (Direct Participation Programs), 2320(g)(4) (Variable Contracts of an Insurance Company), 2341(l)(5) (Investment Company Securities), and 5110(f) (Corporate Financing Rule – Underwriting Terms and Arrangements) (collectively, “Non-Cash Compensation Rules”).
- An “offeror” under the Non-Cash Compensation Rules generally refers to an issuer, an adviser to the issuer, and any affiliated person of such entities. See Rules 2310(c)(1)(C); 2320(b)(3)(E); 2341(b)(1)(E); and 5110(f)(1)(C). For purposes of this question, “offeror” does not include the third-party distributor itself.
- See Notice to Members 98-75 (SEC Approves Rule Change Relating To Non-Cash Compensation For Mutual Funds And Variable Products) (September 1998).