Gifts and Gratuities & Non-cash Compensation

tamer hamed 1:36:00 AM

FINRA does not allow member firms and their associated persons to buy influence at other firms with gifts of cash or gifts with resale value over a certain amount. Currently the amount is $100 but is expected to rise to $175 in the near future. Why would someone at your firm want to give someone at another firm a $1,000 set of titanium golf clubs? Maybe your firm would like to start getting invited to join certain municipal securities underwritings that they run as syndicate manager. Or, maybe your firm would just like the other firm to start throwing some of the smaller accounts they don't want your way? Maybe a case of expensive scotch would do the trick?

While gifts and business entertainment are not completely prohibited, we are now entering a gray area that can either be considered normal business expenses or a violation of FINRA rules on influencing or rewarding the employees of other member firms.

Here is how FINRA states the rule:
No member or person associated with a member shag directly or indirectly give or permit to be given anything of value, including gratuities, in excess of one hundred dollars per individual per year to any person, principal proprietor, employee, agent or representative of another person where such payment or gratuity, is in relation to the business of the employer of the recipient of the payment or gratuity. A gift  of any kind is considered a gratuity.

FINRA then makes it clear that what they are prohibiting here is more along the lines of a $1,000 set of golf clubs, as opposed to legitimate contracts of employment where one member employs another member's employee for legitimate purposes. As the rule then states:

This Rule shall not apply to contracts of employment with or to compensation for services rendered provided that there is in existence prior to the time of employment or before the services are rendered a written agreement between the member and the person who is to be employed to perform such services. Such agreement shall include the nature of the proposed employment, the amount of the proposed compensation, and the written consent of such person's employer or principal.

As with most sensitive issues, FINRA requires records surrounding these activities to be kept:
A separate record of all payments or gratuities in any amount known to the member, the employment agreement referred to in paragraph (b) and any employment compensation paid as a result thereof shall be retained by the member for the period specified by SEA Rule 17a-4.
 
Note that "SEA' means "Securities Exchange Act of 1934" and "SEA Rule 17a-4" would be that SEC Rule promulgated under the Securities Exchange Act of 1934.

Non-cash Compensation
Associated persons may not accept compensation from anyone other than the member firm. The only exception here is if there is an arrangement between you and the other party that your member firm agrees to, and your firm deals with a bunch of other requirements. Associated persons (you) may not accept securities from some-body else in exchange for selling variable contracts. The only non-cash compensation that can be offered or accepted is:
  • gifts that do not exceed an annual amount per person fixed periodically by the Association, and that are not preconditioned on achievement of a sales target. The gift limit is still $100, by the way.
  • an occasional meal, a ticket to a sporting event or the theater, or comparable entertainment that 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 in connection with meetings held by an offeror or by a member for the purpose of training or education of associated persons of a member.
For that last bullet, the associated person must get the firm's permission to attend and his attendance and reimbursement of expenses cannot be preconditioned on meeting a sales target. Only he -not a guest- can have expenses reimbursed. The location of the meeting must be appropriate, too, meaning if the offeror's office is in Minneapolis, it looks suspicious when the meeting is held in Maui.
And, the rule states that the "member firm shall maintain records of all compensation received by the member or its associated persons from offerors. The records shall include the names of the offerors, the names of the associated persons, the amount of cash, the nature and, if known, the value of non-cash compensation received."

A firm can give their registered representatives non-cash compensation for selling variable contracts, but they can't compensate them more for selling one variable contract than for another. This rule states that the non-cash compensation arrangement requires that the credit received for each variable contract security is equally weighted.

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