FINRA Issues Regulatory Notice on Proposed Amendments to Its Gifts, Gratuities, and Non-Cash Compensation Rules | Practical Law

FINRA Issues Regulatory Notice on Proposed Amendments to Its Gifts, Gratuities, and Non-Cash Compensation Rules | Practical Law

FINRA issued a regulatory notice seeking comments on proposed amendments to its gifts, gratuities, and non-cash compensation rules.

FINRA Issues Regulatory Notice on Proposed Amendments to Its Gifts, Gratuities, and Non-Cash Compensation Rules

by Practical Law Corporate & Securities
Published on 10 Aug 2016 • USA (National/Federal)
FINRA issued a regulatory notice seeking comments on proposed amendments to its gifts, gratuities, and non-cash compensation rules.
On August 8, 2016, the Financial Industry Regulatory Authority (FINRA) issued a regulatory notice seeking comment on proposed amendments to its rules on gifts, gratuities, and non-cash compensation. The proposed amendments are summarized below. FINRA is accepting comments on the proposal until September 23, 2016.

Gifts

Currently, FINRA Rule 3220 prohibits any FINRA member broker-dealer or associated person of a member, directly or indirectly, from giving anything of value in excess of $100 per year to any person, where the payment relates to the business of the recipient's employer. Rule 3220 also requires members to keep separate records regarding gifts and gratuities.
The proposed amendments would:
  • Increase the gift limit from $175 per person per year to account for the rate of inflation since the $100 gift limit took effect in 1992.
  • Incorporate into Rule 3220 as Supplementary Material existing guidance and interpretive positions to provide that:
    • there is no express exclusion from Rule 3220 for gifts given during the course of business entertainment, unless the gift is of de minimis value, or a promotional or commemorative item;
    • gifts must be valued at the higher of cost or market value;
    • members must aggregate all gifts given by the member and each associated person of the member to a particular recipient over the course of the year;
    • bereavement gifts that are customary and reasonable are not subject to Rule 3220;
    • gifts given for infrequent life events (such as a wedding or the birth of a child) are not subject to Rule 3220, provided the gifts are customary and reasonable, personal in nature, and not in relation to the business of the employer of the recipient; and
    • gifts of a de minimis value, promotional items of nominal value, and commemorative items are not subject to Rule 3220, provided they meet the conditions specified in the Supplementary Material.

Non-Cash Compensation

Currently, FINRA and NASD rules generally prohibit members and their associated persons from directly or indirectly accepting or making payments or offers of non-cash compensation in connection with the sale of variable insurance contracts, investment company securities, direct participation programs, and the public offerings of debt and equity securities, subject to specified exceptions. The proposed amendments would eliminate the existing non-cash compensation rules and replace them with proposed FINRA Rule 3221, which would apply to the payment or receipt of non-cash compensation in connection with the sale of any security. This prohibition would be subject to the following exceptions:
  • Gifts from offerors. Consistent with the existing non-cash compensation rules, the proposal would except from the prohibitions on non-cash compensation arrangements gifts from offerors that do not exceed a specified threshold per individual per year and are not preconditioned on the achievement of a sales target. The proposal would limit the gifts exception under proposed FINRA Rule 3221 to $175.
  • Training or education meeting. The proposal would permit an offeror to make payments or reimbursements of associated persons' expenses in connection with a training or education meeting held by an offeror or a member, provided that the meeting meets certain conditions.
  • Internal sales contests. The proposal would continue to permit non-cash compensation arrangements between a member and its associated persons or a non-member company and its sales personnel who are associated persons of an affiliated member if payment or reimbursement of expenses associated with the non-cash compensation arrangement is not preconditioned on achievement of a sales target. If payment or reimbursement is preconditioned on achievement of a sales target, the non-cash compensation arrangement must:
    • be based on the total production of associated persons with respect to all securities distributed by the member, and
    • not be based on conditions that would encourage an associated person to recommend particular securities or categories of securities.
    In addition, no unaffiliated non-member company or other unaffiliated member could directly or indirectly participate in the member's or non-member's organization of a permissible non-cash compensation arrangement.
    The proposal would permit members to continue to pay non-cash compensation to their associated persons outside the context of an internal sales contest. Unlike the existing non-cash compensation rules, however, the proposal would not permit product-specific internal sales contests. "Stock of the day" and similar promotions would be impermissible under the proposal.
The proposal would also incorporate into proposed FINRA Rule 3221 as Supplementary Material:
  • Language similar to the language discussed above in connection with the proposed Supplementary Material to Rule 3220.
  • Prior guidance regarding training or education meetings.
In addition, the proposal would require a member to retain records of all non-cash compensation provided or received by the member or its associated persons for arrangements permitted under the proposed rule.

Business Entertainment

The proposal would replace the business entertainment standard in the existing non-cash compensation rules and in a 1999 FINRA interpretive letter with proposed FINRA Rule 3222, which would require each member to adopt written policies and supervisory procedures relating to business entertainment tailored to its business needs. Proposed FINRA Rule 3222 would require that each member's written policies and supervisory procedures:
  • Are designed to detect and prevent business entertainment that is intended as, or could reasonably be perceived as intended as, an improper quid pro quo.
  • Define forms of permissible and impermissible business entertainment based on the location, nature, frequency, and dollar amount of the business entertainment provided, as well as the type and dollar amount of any accommodations or transportation provided in connection with the business entertainment.
  • Require that the offeror, member, or one or more of the member's associated persons hosts the business entertainment.
  • Specify that the business entertainment must not be preconditioned on the achievement of a sales target.
  • Require appropriate training and education of all personnel who supervise, administer, or are subject to the written policies and supervisory procedures.
The proposal would also mandate that each member's written policies and supervisory procedures must require the maintenance of detailed records of business entertainment expenses.