Giving and receiving gifts is a core aspect of doing business for many companies, as a way to show appreciation for partnerships, work, and ongoing joint success.
For advisers looking to maintain positive relationships with clients, prospects, and professionals within their network, having a gift be declined can be perceived as a slight.
However, in today’s highly regulated environment, your firm needs to implement a comprehensive gifts and entertainment policy that protects against potential conflicts of interest to ensure accepting a gift won’t result in a regulatory ramifications.
Let’s take a look at what today’s gifts and entertainment regulations include and the best practices for keeping your firm operating compliantly this gift giving season and beyond.
What are the Gifts and Entertainment Regulations?
To put it simply, gifts and entertainment regulations help advisers avoid potential conflicts of interest. When a gift is given or received, it cannot be tied to a future obligation from the recipient. Nor should the gift make the recipient feel a sense of obligation toward the person, firm, or industry employee who gave the gift.
Advisers and associated persons should not give or accept gifts that are either designed to influence the recipient or are considered to be extravagant. Several regulatory authorities, including the Financial Industry Regulatory Authority (FINRA) for U.S. broker-dealers and the Financial Conduct Authority (FCA) for UK financial services firms, provide more specific guidance and monetary thresholds for firms to follow.
Financial Industry Regulatory Authority (FINRA)
FINRA provides specific guidance in its Rule 3220 “Influencing or Rewarding Employees of Others.” No adviser or associated person may give or be given cash or non-cash compensation valued at $100 or more per year to another individual where the payment is in relation to the business of the recipient’s employer or in connection with the sale of specific products. Firms are also required to maintain separate records of payments or gratuities.
FINRA’s restrictions do not apply to gifts worth less than $100, and certain exceptions can be made for occasional meals or entertainment depending on the circumstances.
Financial Conduct Authority (FCA)
The FCA provides less specific guidance than FINRA, as it primarily leaves the limitation setting and analysis up to each individual firm. Firms are required, however, to document and manage real and perceived conflicts of interest, including potential conflicts associated with gifts, gratuities, and entertainment.
Municipal Securities Rulemaking Board (MSRB)
Regulated dealers, municipal advisors, and associated persons who are subject to MSRB guidance must adhere to MSRB Rule G-20. Under this rule, advisers are not allowed to give gifts to, or provide services for, another person when the gift or service is valued at greater than $100/year, and when the gift or service relates to the recipient’s employer’s municipal securities activities.
Like FINRA, there are exceptions to the $100 annual limit, primarily for “normal business dealings” that are not considered frequent or excessive and “infrequent personal gifts” to mark special occasions, bereavement gifts, promotional gifts, commemorative gifts, and gifts of promotional items valued substantially below $100.
Securities and Exchange Commission (SEC)
The SEC does not have a specific rule for investment advisory firms that addresses gifts and entertainment, however, SEC-registered advisers are subject to the anti-fraud provisions of the Investment Advisers Act of 1940 (the “Advisers Act”) which do provide guidance on regulating gifts, gratuities, and entertainment.
This gifts and entertainments guidance means that investment advisers should implement relevant monitoring mechanisms. And in fact, the SEC staff have previously noted that the Advisers Act both:
- (i) requires SEC-registered investment advisers to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act by the adviser or any of its supervised persons
- (ii) provides for the imposition of sanctions on an investment adviser or persons associated with the adviser for failing to reasonably supervise other persons under their supervision from violating the Advisers Act.
Similarly, Rule 17j-1 under the Investment Company Act of 1940 (the “1940 Act”) requires a Code of Ethics for registered investment companies.
The new SEC Marketing Rule, which went into effect in 2022, enables advisers to share testimonials and endorsements as long as they satisfy certain criteria (such as disclosing compensation and providing written agreements). To some extent, this has since shined a brighter spotlight on previous gifts and entertainment regulations – namely, the term “compensation” as it pertains to an endorsement or testimonial which can include “non-cash compensation” such as gifts and entertainment.
It’s as critical now as ever that firms implement procedures to track adviser spending on gifts and entertainment — especially advisers who advertise with the help of endorsements and testimonials. Advisory firms should:
- Leveraging partners that can automate manual tasks
- Working with experts who can provide insights into what other firms are thinking and doing
Best Practices for Managing Gifts & Entertainment Policies
It’s possible your firm may be subject to one or more of the regulatory frameworks mentioned above, which means your gifts and entertainment policies must be in compliance with applicable regulations.
If you don’t already do so, your firm may benefit from implementing customized policies and procedures that specifically address gifts, gratuities, and entertainment, as well as the potential conflicts of interest inherent in the process.
Here are a few best practices for establishing and implementing gifts and entertainment policies:
Clarify confusing terms: Give your advisers the upfront advantage of knowing what constitutes a “gifts and entertainment” by giving clear written examples in your policy. There can also be some confusion regarding what counts as a gift versus entertainment. While your goal is to make your gifts and entertainment rules as black and white as possible, there are some grey areas that can be interpreted differently by different people. Define the difference for employees and try to address various scenarios in which the distinction could be confusing, such as receiving tickets to an event.
Explain the “why” behind your policies: Let advisers know which regulations they are required to follow and how their actions can directly impact the entire firm. Understanding the “why” behind certain policies can help advisers and team members better hold themselves (and others) accountable.
Don’t forget to highlight “nominal”: Your policy should also define what “nominal” value means. For many firms, this is the $100 limit taken from FINRA and MSRB rules. If you’re able to provide specific thresholds and examples in your policy, employees will be better able to comply with the rules.
Create and implement a uniform logging method: Establish a system for your employees to log any gifts and entertainment they receive or give to others, including pre-approval requirements. If your firm is ever audited, auditors will expect to see your gifts and entertainment logs.
Bonus: If you oversee multiple locations or multiple teams, then a unified logging method will help to ensure everyone is seeking the appropriate approvals and providing the necessary information. Trying to pull together records after-the-fact with disparate levels of completeness only leads to headaches and, in the worst case, fines from regulators.
Train your team: Provide employees with ongoing training that clarifies acceptable gifts and entertainment practices and highlights any emerging risks.
Managing Your Gifts and Entertainment Policies
Gifts and entertainment compliance should be a focal point of your firm, as it helps advisers and other team members adhere to the ethical standards set by the SEC, FINRA, FCA, and other regulatory organizations. Failure to follow their guidelines can result in significant consequences, including reputational damage, loss of business, and fines.
With COMPLY, investment firms can streamline the process of managing gifts and entertainment compliance by automating the tracking, reporting, and approval of gifts and entertainment activities.
From crafting a robust gifts and entertainment policy to developing a streamlined pre-approval process, COMPLY can guide you in implementing industry-leading practices for effective compliance.
To learn more about partnering with COMPLY, book a demo today.