During the webinar Compliance Techniques for Managing Gifts and Entertainment, Tom Kennedy, Managing Director of Abide Consulting Group, shared practical guidance for firms on staying compliant during the holiday season and beyond.
Understand the regulatory expectations
Broker dealers governed by FINRA are held to strict standards around gifts and entertainment under FINRA Rule 3220. The rule puts limitations around gifts as a means of improperly "influencing or rewarding employees of others" and sets a strict gift limit of $100. According to the rule, "No member or person associated with a member shall, 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."
For Registered Investment Advisers, there are no prescribed limits for SEC gifts and entertainment compliance. The last time the agency provided specific guidance around gifts and entertainment was 2015. RIA's are held to standards of fiduciary duty under the Investment Advisers Act of 1940 and Section 206 of the Act prohibits fraudulent, deceptive, or manipulative conduct. Jane says that firms should adopt rules that prohibit extravagant gifts that could lead to undue obligation or influence. Rules should also include either a dollar amount limit or reasonable threshold.
Conflicts of interest around gifts and entertainment are definitely on the SEC's radar. In the agency's Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Conflicts of Interest, conflicts around gifts, meals and entertainment were noted as areas that might incline "an investment adviser—consciously or unconsciously—to make a recommendation or render advice that is not disinterested" and therefore firms must "must adopt and implement policies and procedures reasonably designed to prevent violations."
In February 2015, the SEC issued guidance to remind mutual fund industry participants that the receipt of gifts or entertainment by fund advisory personnel, among others, also may implicate the prohibition in section 17(e)(1) of the 1940 Act. Tom points out that the context here is that the advisory staff are not supposed to receive compensation in connection with the purchase and sale of fund assets other than what is contained in the advisory agreement, and excessive gifts or entertainment can cause conflicts of interest. For compliance, this is another reason to look at the gifts and entertainment that the buy side traders are receiving from the sell side brokers they execute with.
Be clear in your policies and procedures
What’s the difference between gifts and entertainment? Tom emphasized that this is an important differentiation to be aware of and it should be outlined clearly in your compliance manual. If an employee takes a client to an event, it’s entertainment. If an employee gives a client tickets to the event, it’s a gift. Another distinction is that there must be a business purpose for entertainment, for example a meeting over dinner.
Compliance manuals should also clearly outline what the firm defines as a nominal gift or a promotional gift of de minimis value, for example token gifts like pens, calendars or mugs. FINRA warns firms that the presence of a company logo does not make a promotional gift nominal if it is at or near the $100 threshold. “Gifts valued in amounts above or near $100 would not be considered nominal. For example, expensive leather luggage and crystal pieces, notwithstanding the presence of firm logos, are not eligible for the exclusion for promotional items of nominal value.” RIAs have more flexibility and can define limits around gifts of de minimis value with either a hard number or a “reasonable” amount.
During the webinar, Tom answered a common question about the valuation of gifts. Shipping and tax are not included in the valuation of a gift, and this is noted by FINRA in their guidance on Gifts, Gratuities and Non-Cash Compensation Rules, which states the value of a gift is based on its cost or its market value, exclusive of tax or delivery charges.
Tom also notes that many clients have limits on their end around accepting gifts and entertainment. He suggests checking before giving, and also including industry-specific information about gift limitations in firm policy and training where applicable.
Remind employees about expectations
Training on gifts and entertainment policies and procedures should be part of annual and new hire compliance training, but everyone needs a refresher now and again to keep obligations around gifts and entertainment compliance top of mind. Consider scheduling an email series to prompt employees to report any gifts they may have forgotten about or not yet cleared.
If your policy says employees must pre-clear gifts, make sure that your employees know this means all gifts, no matter how small they are. Compliance Officers know that gifts - and their value - can add up quickly. Make sure employees know this too. Most important? Be prepared to answer questions.
And finally, Tom pointed out, there should be repercussions for employees for failure to adhere. Senior management should support that compliance with gift and entertainment rules should be enforced by the firm, and not wait for a regulator to detect a pattern of impropriety.
Compliance technology can mitigate risks associated with gifts and entertainment
Consider having your employees confirm gifts they give after the gift has been given, even if they pre-cleared them first. Things can change. Maybe they went with something different than what they originally intended. An automated email prompt can help to make sure your compliance records are accurate and up to date.
Employees give or receive gifts at other times during the year as well so it's important to monitor their behavior on a regular and ongoing basis. Automation can help mitigate the risks associated with gifts and entertainment by flagging exceptions and uncovering patterns of concerning behavior. Automation can also help manage aggregate gift limits for groups or individuals to insure that gift giving and receiving does not exceed regulatory or company thresholds.
During SEC exams, firms can expect to be asked for their gift logs. FINRA's Rule 3220 requires that records of all gifts and gratuities are properly maintained. Using an automated compliance platform means that gifts and entertainment given and permissioned throughout the year are captured and tracked, making it easy to generate reporting that demonstrates compliance.
Download the user case study "Gifts, Entertainment and Hospitality" to learn more about the benefits of automating your global policies, setting rules to deliver your policies and maintaining control through pre and post clearance activities and reporting.
Most employees want to follow your gift, entertainment and hospitality policies. Compliance officers are well-positioned to make these efforts successful by implementing a few simple changes and utilizing clear communication during this often chaotic time of year.
MCO's Gifts, Entertainment and Hospitality solution provides firms with comprehensive monitoring and management of employee gifts, entertainment, and hospitality activities. Gifts, Entertainment and Hospitality is part of MCO’s Know Your Employee compliance suite, an integrated solution that manages attestations and certifications, personal trades, outside business activities, gifts & hospitality, communications compliance and other areas of employee compliance.
If you would like to see a demo to see first hand how MyComplianceOffice helps firms manage gifts and entertainment and other areas of employee compliance efficiently and cost-effectively, let us know and we'll set something up.
And watch the on-demand webinar Compliance Techniques for Managing Gifts and Entertainment for more insight from Tom Kennedy plus answers to audience questions including the impact of gifts when you're doing business with friends, limits involving customer conferences, and best practices for logging gifts.
Gifts and Entertainment Compliance Resources from MCO:
- Analysis: Global Gifts and Entertainment Trends
- How to Build a Strong Gifts, Entertainment & Hospitality Program
- Gifts, Entertainment and Hospitality Solution
- FINRA Gifts Rules and Rule 3220
- On-Demand Webinar Books and Records in the Regulatory Spotlight with Jane Shahmanesh