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Regulatory intelligence

Regulators offer guidance on “free lunch” for virtual meetings, aggressive advertising & penalties for non-cooperation

Julie DiMauro  Regulatory Intelligence and E-learning Expert

Julie DiMauro  Regulatory Intelligence and E-learning Expert

Despite the COVID-19 pandemic, there is still such a thing as a free lunch, at least for business partners of financial services professionals who join them for online virtual meetings.

This is among the edicts last month from the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) that might have flown under the radar.

Besides the clarification of gifts and entertainment rules in light of remote working conditions, the regulators also issued an investor alert warning of overly-broad advertisements by regulated firms and warned individuals of what awaits those who fail to cooperate with regulators during investigations.

Each of these edicts and clarifications could be incorporated into compliance training as businesses strive to show regulator that they take their compliance obligations seriously.

Gifts & entertainment in the age of remote work

Remote working conditions might not only be temporary, as businesses think about new work-from-home business arrangements amid the COVID-19 pandemic, accelerating an already emerging trend. But FINRA rules don’t always contemplate remote working and meeting practices, at least not explicitly. This is has led to the question of whether meals and beverages paid for by a FINRA member during a virtual meet-up would be subject to the customary $100 gift limit for anything of value per year.

And that came in the form of an answer to a hypothetical frequently-asked-question (FAQ) quietly issued by the agency.

FINRA’s Rule 3220 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. Likewise, the non-cash compensation rules prohibit members and their associated persons from giving or accepting such gifts in connection with the sale of specified products.

The non-cash compensation rules permit business entertainment provided by offerors, generally product sponsors and their affiliates, to representatives of third-party broker-dealers and their guests that is not subject to the $100 limit as long as it is “neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target.”

FINRA now clarifies in the FAQ that if a member firm’s associated persons personally host an interactive virtual business entertainment event or meeting, FINRA would view the associated persons’ provision of reasonable amounts of food and beverage designed to be consumed by the recipient employees and their guests during that virtual business event as not being subject to the $100 gift limit.

That is valid as long as the cost of the food and beverage as well as the frequency with which it is provided do not raise questions of propriety and are not preconditioned on achieving a sales target. As a best practice, members should supervise and maintain records of these meetings and events, including a description of the purpose behind it and who attended, the amount, and the value of the food and beverage and other items involved.

Regular training of the firms’ gifts and entertainment policies and procedures is likewise helpful to the business and serves as evidence to the regulator that these rules and the intentions behind them are important to the business’s leadership.

Broadly promoted, aggressively advertised

The SEC’s Office of Investor Education & Advocacy and Division of Enforcement’s Retail Strategy Task Force issued an investor alert to urge retail investors to be mindful when investing in offerings that are broadly advertised, such as investment opportunities advertised through radio, TV, and social media. The SEC also mentioned how invitations to seminars or dinners at nice hotels are sometimes used by financial services firms to entice new clients.

The alert told investors to remain vigilant and do their homework by checking the backgrounds of investment professionals and businesses, using the EDGAR platform to ensure an offering is registered. It also cited examples of red flags for fraud, such as claims of high returns with little or no risk or the use of aggressive sales tactics, saying such verbiage as “once-in-a-lifetime” creates a false sense of urgency and should be viewed with skepticism.

In light of the COVID-19 pandemic and discussions and transactions happening remotely, regulated businesses should remember that documents, even if electronically supplied or exchanged, must detail the essential terms of agreements reached and business transactions to be performed.

Turning over evidence to regulators

Jessica Hopper, head of enforcement for the FINRA, writes that in the last two years, FINRA has barred more than 730 brokers and associated persons. She said the most prevalent rule violation that resulted in these bars was FINRA Rule 8210, which allows FINRA to request documents, information, and testimony from member firms and their associated persons in connection with an examination or investigation.

She said individuals often refuse to cooperate or turn over evidence to FINRA during such investigations, leading to them being barred from the industry.

The lesson is clear: Not turning over evidence as requested by the agency can often lead to harsher outcomes.


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