SEC Guidance on Gifts and Entertainment: Section 206 of the Advisers Act

SEC Guidance on Gifts and Entertainment: Section 206 of the Advisers Act


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Full video transcript available below:

Hello, everyone, and welcome to today's webinar, hosted by me, Joe Boyhan of MCO and Jennifer Lin, Partner and Head of the Compliance Group at DLA.

Today's webinar is titled, "Best Practices to Keep your Firm SEC and FINRA Compliant this Season." 


So I'd like to start with some SEC guidance on gifts of entertainment, because for investment advisors, giving and receiving client gifts is an ordinary practice, but one that can greatly increase your regulatory risk. As others frequently offer client gifts of appreciation, often during the holidays, and an advisory client may reciprocate. However, gift-giving, no matter the value or recipient, must be free of conflicts of interests, favoritism, and lack any future obligation of the client or advisory representative. In order to meet these standards, a firm must employ a well-defined plan or policy that includes the definition of a gift, set monetary limits, and also have clear approval process and also educates its advisory representative. 

So with respect to gifts, you know, there is no specific rules governing gifts as they relate to advisory firms. The practice of giving and receiving gifts is most often regulated by reference to the anti-fraud provision of the Investment Advisors Act and the fiduciary duties an advisor owes to his client.

Therefore, investment advisors should not offer gifts, entertainment, or other items of material value that could be seen as extravagant or aimed at influencing decision making, or making a client feel obligated to a firm or that of an individual. Similarly, advisor representatives should not accept inappropriate gifts, entertainment, special accommodations, or other things of material value that could influence their decision making or make them feel obligated to a client or service provider. 

I thought it might be helpful to give a regulatory guidance perspective and the most recent guidance came out in 2015. The FTC released guidance that highlighted the conflicts of interest that arise when personnel of a funds investment advisor are offered gifts or entertainment in the conduct of doing business. The guidance suggests that policies and procedures concerning the receipt of gifts or entertainment should be included in the fund's compliance policies and procedures. It defers to this fund to determine whether there should be an outright ban or a type of preclearance to determine if the gifts or entertainment would violate sections of an investment company act. 

So I think we really geared this guidance toward investment advisors of registered investment companies or, in other words, mutual funds. However, the basic issues and recommendations are equally applicable to advisors of all types of clients, specifically those governed by the Investment Advisors Act. 

So we can move to the next slide. I want to talk a little bit about some best practices for a policy. A firm without a gifts policy or one that admits critical items opens the firm to regulatory enforcement. Advisory firms will most likely asked to produce a gift log during an FTC routine audit. They can get questions about any disparities from the written policies and the procedures. 

Keeping in mind does the firm prohibit the giving or receipt of gifts? It should supervise that prohibition and be sure that it is being followed. A typical advisor's gift policy may include definitions of what constitutes a gift and also what constitutes entertainment. Usually a gift is a tangible object, like a bottle of wine, an iPod, a set of golf clubs, though it can also be tickets to a sporting event and even discounts on products and services unavailable to the general public. Generally, entertainment would include meals, conferences and sponsored outings. The biggest distinguishing factor from a gift and entertainment is whether persons from the firm who were irrelevant to the business relationship attend the event. Therefore, if an individual only receives sporting tickets and is unaccompanied by someone connected to the firm, that would be considered a gift. 

Another best practice for a policy is setting limits for what is a nominal gift and one that may require prior approval. Due to gift giving and receiving being such a common practice, a firm needs to set a dollar figure that would be considered nominal, that doesn't require prior approval. So the definition of a nominal value, it may vary from firm to firm and many will enforce a specific dollar limit, whether given or received. I think $100 is something that people are used to hearing. It is loosely adopted from the FINRA rule for broker dealers, rule 3220, which must be adhered to if the firm contains bill registrants. A firm can set a nominal value higher than that of $100 and many firms do. Many PE firms set their limits at higher thresholds given the nature of their business. So I think it's important that the specific dollar limit be tailored and is dependent on the nature, the location of the firm, and it's clients. 

A typical entertainment policy will also stipulate that a representative cannot provide or accept entertainment that is excessive in nature. So things that I think are considered acceptable or in an ordinary course of business are reasonable, would be a dinner, a round of golf, or a single sporting event, keeping in mind that the individual or firm that is providing the entertainment needs to be present. Otherwise, the entertainment could be classified as excessive. 

A recent enforcement action highlighted the importance for investment advisors to adopt and follow rules to prohibit inappropriate gifts to and from clients by advisory representatives. The enforcement action was against the advisor, while it did adopt a nominal gift value of $250 or less for its supervised persons, despite having the policy in place, several employees took numerous flights on private planes of advisors' clients and none of those received prior CCO approval as required by the policy. 

I think having a clear gift approval procedure and requiring pre-approval for the giving and receiving of any gifts that exceeds the stated dollar amount is extremely important. As with gifts, an entertainment policy may include pre-approval for certain business entertainment events that exceed a specific dollar limit or a type of event, such as travel expenses or hotel accommodations. These are all going to be determined by the firm. So the aid and supervision will remove much of the speculation for advisory representatives and advisory firms should create a list of common and acceptable gifts and entertainment.

Lastly, a detailed education program is also important. A firm should include the gifts and entertainment policy as part of their ongoing education program. This could be a part of your code of ethics training or even a separate module. You know, many third party vendors offer online training courses and, if the cost if not feasible, just regular informal training, either role playing during a staff meeting, just suggest it just to ensure awareness.


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