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Introduction<\/u><\/strong><\/p>\n As FINRA\u2019s proposed amendments to Rule 3220 (Influencing or Rewarding Employees of Others), aka the \u201cGift Rule,\u201d and related rules are pending, it has sent a strong message that firms must continue diligently policing gifts and entertainment provided to clients and prospects. In First Trust Portfolios LP<\/em> (Case no. 2020066123602, Nov. 3, 2025), First Trust (\u201cthe Firm\u201d), a wholesale distributor of securities issued by affiliated investment companies, entered an AWC in which, without admitting or denying the allegations, it agreed to (i) findings of violations of gifts and entertainment-related rules, (ii) pay a precedent-setting $10 million fine and (iii) certify its compliance with applicable rules for three years. The hefty sanction in the AWC, which is based on several categories of alleged violations during six years, may be an outlier limited to the underlying conduct, but it\u2019s a wake-up call that firms must be vigilant in their monitoring, even as FINRA seeks to ease some of the challenges associated with supervising this part of their business.<\/p>\n Gift Rule Amendment Proposals<\/u><\/strong><\/p>\n The proposed amendment to the Gift Rule would increase the gift limit from $100 to $300 \u201cper individual per year,\u201d[1]<\/a> the first increase in 30 years. The new rule would also provide for exemptive relief and incorporate existing guidance and interpretive letters into supplementary material.[2]<\/a> In addition, it would raise the gift limits in the Non-Cash Compensation Rules by the same amount, i.e. Rule 2310 (Direct Participation Programs), Rule 2320 (Variable Contracts of an Insurance Company), Rule 2341 (Investment Company Securities), and Rule 5110 (Corporate Financing Rule \u2013 Underwriting Terms and Arrangements).<\/p>\n The current Rule 3220 \u201cprohibits any member or person associated with a member, directly or indirectly, from giving anything of value [which includes both cash and non-cash compensation] in excess of $100 per year to any person where such payment is in relation to the business of the recipient\u2019s employer.\u201d[3]<\/a> The current Rule 2341(l)(5)(A), at issue in the First Trust<\/em> case, provides the same gift limit. By contrast, business entertainments under Rule 2341(l)(5)(B) and educational meetings under Rule 2341(l)(5)(C) are not subject to the $100 limit but must be reasonable. To constitute \u201centertainment\u201d pursuant to Rule 2341(l)(5)(B), the representative \u201cmust accompany or participate in an event,\u201d and under Rule 2341(l)(5)(C) (as for both subsections (A) and (B) of the Rule) the reimbursement may not be preconditioned on the achievement of a sales target.<\/p>\n The primary proposed changes to the Gift Rule are as follows:<\/p>\n First Trust Portfolios LP 2025 AWC<\/u><\/strong><\/p>\n The AWC, based on alleged violations of Rules 2341, 4511, 3110 and 2010, and Section 17(a) of the Securities Exchange Act and Rule 17a-3 thereunder, found that for more than six years, the Firm provided non-cash compensation (e.g., gifts, meals, and entertainment) to representatives of retail broker-dealers that sold the Firm\u2019s funds in amounts that significantly exceeded FINRA limits, and provided non-cash compensation preconditioned on the achievement of sales targets. The Firm\u2019s wholesalers also falsified expense reports relating to non-cash compensation provided to the broker-dealer representatives, and the Firm sent the broker-dealers false information concerning the value, nature, and frequency of non-cash compensation provided. In addition, the Firm failed to establish, maintain, and enforce a system reasonably designed to achieve compliance with non-cash compensation rules and expense-related recordkeeping requirements.<\/p>\n Despite the magnitude of the fine, the AWC credited the Firm with taking \u201cnumerous remedial actions\u201d to address the underlying conduct.<\/p>\n Background Concerning FINRA\u2019s Enforcement of the Gifts and Entertainment Rules<\/u><\/strong>.<\/p>\n This AWC is the first case brought under Rule 2341 (Investment Company Securities) relating to gifts and entertainment. (There is only one other Rule 2341 precedent, relating to a subsection of the rule unrelated to gifts and entertainment).<\/p>\n Although FINRA has initiated more disciplinary actions under Rule 3220 (the Gift Rule), since 2014, there have been only a few cases, with the largest fine being $800,000. [7]<\/a><\/p>\n Conclusion<\/u><\/strong><\/p>\n So, is this case a sign that in the wake of its rule proposal, FINRA is sharpening its enforcement focus on gifts and entertainment? Probably not. The precedent-setting fine in this case appears to be based on the allegations of egregious misconduct, the duration of that conduct and the lack of effective controls. That said, the AWC is a serious reminder that firms need to stay vigilant in monitoring how they and their sales teams are trying to \u201cinfluence or reward employees of others.\u201d<\/p>\n [1]<\/a> https:\/\/www.finra.org\/rules-guidance\/key-topics\/gifts-gratuities-and-non-cash-compensation<\/a><\/p>\n [2]<\/a> https:\/\/www.finra.org\/rules-guidance\/rule-filings\/sr-finra-2025-003<\/a><\/p>\n [3]<\/a> https:\/\/www.finra.org\/sites\/default\/files\/2025-05\/sr-finra-2025-003.pdf<\/a><\/p>\n [4]<\/a> FINRA initially proposed increasing the gift limit to $250 and then raised the proposed limit to $300 after receiving comments supporting an additional increase.<\/p>\n [5]<\/a> This proposed supplementary material was added after comments of possible issues concerning whether bereavement gifts should be included as personal gifts, specifically because of the presumption created for personal gifts where the firm member would bear the cost of the gift.<\/p>\n\n
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