The Financial Industry Regulatory Authority announced that it has penalized First Trust Portfolios over violations involving gifts and entertainment.
The firm was fined $10 million for providing what FINRA said was excessive non-cash compensation in connection with the distribution of First Trust investment company securities and related misconduct.
According to FINRA, First Trust provided gifts, meals and entertainment to representatives of retail broker-dealers that sold First Trust investment company securities, which significantly exceeded FINRA limits for non-cash compensation. In certain instances, First Trust made the compensation conditioned on client firm representatives achieving sales targets with respect to First Trust products.
It was also determined that First Trust wholesalers falsified internal expenses and the firm sent client firms inaccurate records about the value and nature of gifts that they were providing.
“FINRA’s non-cash compensation rule is designed to protect investors by preventing financial recommendations from being unduly influenced by excessive gifts, entertainment or other perks supplied to broker-dealers or their registered representatives,” said Bill St. Louis, Executive Vice President and Head of Enforcement at FINRA.
Under FINRA Rule 2341, member firms are barred from making payments or offers of payments of any non-cash compensation subject to specified exceptions. The exceptions include gifts that do not exceed $100 per person and an occasional meal, a ticket to a sporting event, or comparable entertainment so long as these are not preconditioned on achieving a sales target.
“Between at least 2018 and February 2024, First Trust wholesalers regularly violated Rule 2341 by providing to client firm representatives gifts that significantly exceeded the annual limit and meals and entertainment that were so frequent and extensive as to raise questions of propriety,” according to FINRA. “The gifts far exceeded even the higher limit recently proposed by FINRA.”
Last May FINRA filed a proposal with the SEC to increase the gift limit to $250 annually, and in September, FINRA filed an amended proposal further increasing the limit to $300 annually.
Regulators found that on over 25 occasions, two First Trust wholesalers provided client firm representatives two courtside basketball tickets at a cost of approximately $3,200 per pair. In another example, Furthermore, various First Trust wholesalers provided one client firm representative entertainment, including tickets to more than 20 concerts and sporting events, with a total value exceeding $31,000.
First Trust also failed to establish, maintain and enforce a supervisory system reasonably designed to achieve compliance with non-cash compensation rules and expense-related recordkeeping requirements.
Under the settlement, FIrst Trust did not admit or deny the charges but consented to the entry of FINRA’s findings. The firm also agreed to provide annual compliance certifications to FINRA for three years regarding the issues identified in the investigation.
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