Gifts, Gratuities and Non-Cash Compensation

Gifts Rule

FINRA Rule 3220 (Influencing or Rewarding Employees of Others) (the Gifts Rule) prohibits any member or person associated with a member, directly or indirectly, from giving anything of value in excess of $100 per year to any person where such payment is in relation to the business of the recipient’s employer. The rule also requires members to keep separate records regarding gifts and gratuities. The rule seeks both to avoid improprieties that may arise when a member firm or its associated persons give anything of value to an employee of a customer or counterparty and to preserve an employee’s duty to act in the best interests of that customer.

In 1999, FINRA staff issued an interpretive letter stating that the Gifts Rule does not prohibit “ordinary and usual business entertainment” (such as an occasional meal, sporting event, theater production or comparable entertainment event) provided that the entertainment “is neither so frequent nor so extensive as to raise any question of propriety.” The 1999 letter noted that the interpretation was based, in part, on FINRA’s rules governing non-cash compensation in connection with the offer and sale of investment company shares and variable annuities.

Non-Cash Compensation Rules

FINRA Rules 2310 (Direct Participation Programs), 2320 (Variable Contracts of an Insurance Company), 2341 (Investment Company Securities), 5110 (Corporate Financing Rule – Underwriting Terms and Arrangements) (together, the Non-Cash Compensation Rules) impose restrictions on non-cash arrangements that are in connection with the sale and distribution of securities covered by those rules.  The Non-Cash Compensation Rules prohibit a member firm or associated person from directly or indirectly accepting or making payments of any non-cash compensation, subject to specified exceptions. 

The exceptions permit: 

• gifts that do not exceed an annual amount per person fixed by the FINRA Board of Governors (currently $100) and are not preconditioned on achievement of a sales target; 
• an occasional meal, a ticket to a sporting event or the theater or comparable entertainment which 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” (product issuers, advisers, underwriters and their affiliates) in connection with training or education meetings, subject to certain conditions, including meeting location restrictions and not preconditioning attendance on achievement of a sales target; and 
• internal firm non-cash compensation arrangements that are based on total production and equal weighting of product sales.  (Rules 2310 and 5110 do not impose total production and equal weighting requirements on internal non-cash compensation arrangements.)

Regulation Best Interest

Effective June 30, 2020, SEC Regulation Best Interest (Reg BI) establishes a standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities.  Reg BI requires broker-dealers to act in the best interest of the retail customer at the time the recommendation is made, without placing the financial interest of the broker-dealer ahead of the interests of the retail customer.

Reg BI requires broker-dealers to establish, maintain and enforce written policies and procedures reasonably designed to identify and at a minimum disclose, or eliminate, all conflicts associated with such recommendations.  Among other things, broker-dealers must identify and eliminate any sales contests, sales quotas, bonuses and non-cash compensation that are based on the sales of specific securities or specific types of securities within a limited period of time.  Accordingly, in addition to Non-Cash Compensation Rules’ restrictions, any non-cash compensation arrangement must be consistent with the requirements of Reg BI.

E-Learning

FINRA's e-learning courses cover regulatory requirements and industry compliance practices related to business gifts to help you understand your role as a supervisor in complying with FINRA rules. Scenarios demonstrate how to determine whether gifts are business-related, and illustrate proper gift-aggregation and recordkeeping techniques.

Contact OGC

FINRA's Office of General Counsel (OGC) staff provides broker-dealers, attorneys, registered representatives, investors and other interested parties with interpretative guidance relating to FINRA’s rules. Please see FINRA OGC Interpretative Guidance for more information.

OGC staff contact:
Victoria Crane
Joe Savage
FINRA, OGC
1700 K Street, NW
Washington, DC 20006
240-386-4534