Gifts & Entertainment Guidance Update
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The proposed revisions to the Non-Cash Compensation Rule provisions are significant, especially the broker dealer gifts and entertainment applicability of the rule to all securities products sold by a FINRA member. The structure of the Non-Cash Compensation Rule provisions will remain largely the same within Rule and will address 1 gifts, 2 training or education, and 3 sales contests. Proposed Rule would separately cover business entertainment.
FINRA proposes to impose the general prohibitions on the payment or receipt of non-cash compensation to all securities products from a more limited applicability to investment company securities, variably insurance contracts, direct participation programs, and public offerings of debt and equity securities.
FINRA also introduces uncertainty by proposing to define existing concepts. Currently, the term does not contemplate the retroactive analysis of whether a sales target may or may not have been unstated, inferred, or tacitly in place. FINRA proposes that the term refer to a non-cash compensation arrangement in which an offeror or broker-dealer communicates in advance i.
This proposal, if adopted, would require broker-dealers to analyze each communication or series of communications or broker dealer gifts and entertainment to determine whether broker dealer gifts and entertainment such communications or events might comprise an unstated sales target. Specifically, the proposal prohibits product-specific internal contests. If the compensation is preconditioned on achieving a sales target, however, the proposed amendments to the rule would state broker dealer gifts and entertainment the contest must be based on the total production of associated persons with respect to all securities distributed by a member and not be based on conditions that would encourage an associated person to recommend particular securities or categories of securities.
The proposal broker dealer gifts and entertainment to prohibit product-specific internal sales contests that favor one security or type of security, although FINRA expressed its belief that such contests are not widely used.
Greater precision on what FINRA will consider a de minimis gift is a new addition to the collected guidance. Proposed Rule codifies and expands the current business entertainment guidance from the non-cash compensation rules into a standalone but complementary principles-based rule. The proposed Business Entertainment Rule seeks to consolidate provisions and guidance that govern business entertainment both provided and accepted by a broker-dealer and its associated persons and would require written supervisory procedures WSPs that address such business entertainment.
Although the new standard is equally subjective, it may be easier to administer than the current standard. The required WSPs would be designed to.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:. Los Angeles John F. New York Amy J. San Francisco Mary M.
WashingtonDC John V. This provides consistency in compliance programs, however, firms that have done so will have to consider the implications of maintaining broker dealer gifts and entertainment consistency given the proposed expanded scope of the gifts, gratuities, and business entertainment rules.
See Notice to Members Gifts and Gratuities Decemberhttp: Hopkins and Sarah McCafferty, T. Rowe Price Investment Services, Inc. June 10,http: The existing guidance found in the proposed SMs includes reiterating that there is no express exclusion from the general gift cap for gifts given during the course of business entertainment SM. Business Entertainment Proposed Rule codifies and expands the current business entertainment guidance from the non-cash compensation rules into a standalone but complementary principles-based rule.
The required WSPs would be 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 broker dealer gifts and entertainment 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 such business entertainment; and require appropriate training and education for all personnel who supervise, administer, or are subject to the WSPs.
Contacts If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers: Boch Los Angeles John F. Harris New York Amy J. McCoy Philadelphia John J.