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FINRA Proposes Changes to Its Gifts, Non-Cash Compensation and Business Entertainment Rules

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August 29, 2016

Client Alert
The Financial Industry Regulatory Authority, Inc. (“FINRA”) recently proposed amendments to its gifts, non-cash compensation and business entertainment rules that would, if adopted:

The FINRA Regulatory Notice seeking comment is available here.

Amendments to Gift Rule (FINRA Rule 3220)

Currently, Rule 3220 prohibits any member or person associated with a member from, directly or indirectly, giving or permitting to be given anything of value in excess of $100 per person per year where the payment relates to the business of the recipient’s employer. The proposed rule changes would amend Rule 3220 to increase this limit to $175 per person per year. The proposed amendments would also incorporate existing guidance and interpretive positions, such as the aggregation, valuation and supervision requirements that are currently set forth in other FINRA guidance. The new Supplementary Material to Rule 3220 would state that, among other things:

Additionally, FINRA is proposing to codify existing guidance requiring firms to have a supervisory and recordkeeping system in place reasonably designed to achieve compliance with Rule 3220.

Proposed Non-Cash Compensation Rule (FINRA Rule 3221)

Current FINRA rules generally prohibit members and their associated persons from, directly or indirectly, accepting or making payments or offers of non-cash compensation in connection with the sale of variable insurance contracts, investment company securities, direct participation programs and the public offerings of debt and equity securities, subject to specified exceptions. Proposed Rule 3221 would expand this prohibition on non-cash compensation in connection with the sale of any security subject to certain exceptions.

Exception for Certain Gifts from Offerors. The proposed rule would include the existing exception for non-cash gifts from offerors that do not exceed a specified threshold per person per year and are not preconditioned on the achievement of a sales target, but increase the threshold amount from $100 to $175 consistent with the changes to Rule 3220. 

Exception for Training or Educational Meetings. The proposed rule would permit an offeror to make payments or reimbursements of associated persons’ expenses in connection with a training or educational meeting held by an offeror or a FINRA member, provided that the meeting meets the following conditions:

Exception for Internal Sales Contests. Proposed Rule 3221 would also continue to permit non-cash compensation arrangements related to internal sales contests but would change some of the existing requirements. Under the proposed rule, any non-cash compensation arrangement must either:

Contributions meeting the above criteria would also be excepted where made by (1) a non-member company or other member to a non-cash compensation arrangement between a member and its associated person or (2) a member to a non‑cash compensation arrangement of a non-member. Unlike the existing non-cash compensation rules, the proposal would not permit product-specific internal sales contests. Consequently, “stock of the day” and similar promotions would be impermissible under the proposal.

Incorporation of Existing Guidance and Interpretive Positions. Proposed Rule 3221 also includes Supplementary Material similar to that included with the Supplementary Material to the Rule 3220 related to gifts. The proposed Supplementary Material for Rule 3221 would also incorporate prior FINRA guidance regarding training or education meetings. Specifically, the Supplementary Material would provide that:

Recordkeeping. The proposal would also require members to retain records of non-cash compensation received or provided by a member or its associated person. This is different than the existing non-cash compensation rules which only require members to retain records related to non-cash compensation received by it or its associated person.

Proposed Business Entertainment Rule (FINRA Rule 3222)

Under current FINRA guidance, ordinary and usual business entertainment is not prohibited provided that the entertainment is neither so frequent nor so extensive as to raise any question of propriety. Proposed Rule 3222 would replace this standard with a principles-based approach requiring firms to adopt written policies and supervisory procedures that, among other things:

The proposed rule would also require each member to maintain detailed records of business entertainment expenses including:

What’s Next?

FINRA is seeking general comments on the rule proposals and soliciting responses to a specific list of questions set forth in the Regulatory Notice. Comments are due by September 23, 2016 and may be submitted by physical mail or by email to pubcom@finra.org. Firms should also review the proposals and consider how they may impact existing practices.

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