NEW YORK (Thomson Reuters Regulatory Intelligence) - For investment advisers giving and receiving client gifts is a rather ordinary practice, but one that can greatly increase regulatory risk.
Advisers frequently offer clients gifts of appreciation, often during the holidays and an advisory client may reciprocate. However, gift giving, no matter the value or recipient, must be free of conflicts of interest, favoritism and lack any future obligation of the client or advisory representative.
To meet these standards, a firm must employ a well-defined plan or policy that includes the definition of a gift, sets monetary limits, a clear approval process and educates it advisory representatives.
There are no specific rules governing gifts as they relate to advisory firms; the practice of giving and receiving gifts is most often regulated by reference to the anti-fraud provision of the Investment Adviser’s Act and the fiduciary duties an adviser owes to its clients.
Therefore, investment advisers should not offer gifts, entertainment or other items of material value that could be seen as extravagant or aimed at influencing decision-making or making a client feel obligated to the firm or that individual.
Similarly, adviser representatives should not accept inappropriate gifts, entertainment, special accommodations, or other things of material value that could influence their decision-making or make them feel obligated to a client or service provider.
The most recent guidance came out in 2015; the Securities and Exchange Commission released guidance that highlighted the conflicts of interest that arise when personnel of a fund’s investment adviser are offered gifts or entertainment in the conduct of doing business.
The guidance suggests that policies and procedures concerning the receipt of gifts or entertainment should be included in the fund’s compliance policies and procedures. It defers to the fund to determine whether there should be an outright ban, or a type of pre-clearance to determine if the gifts or entertainment would violate sections of the Investment Company Act.
The SEC guidance was geared toward investment advisers of registered investment companies (i.e. mutual funds); however the basic issues and SEC recommendations are equally applicable to advisers of all types of clients, specifically those governed by the Investment Advisers Act.
A firm without a gifts policy or one that omits critical items opens the firm to regulatory enforcement. Advisory firms will most likely be asked to produce a gift log during an SEC routine audit and questioned about any disparities from the written policies and procedures.
Keep in mind, if a firm prohibits the giving or receipt of gifts, it should supervise that prohibition and be sure it is being followed.
A typical investment adviser gifts policy may include:
• A definition of what constitutes a gift and entertainment. Usually a gift is a tangible object like a bottle of wine, an iPod or a set of golf clubs, though it can be tickets to a sporting event or even discounts on products and services unavailable to the general public.
In general, entertainment would include meals, conferences and sponsored outings. Entertainment is often distinguished from a gift by whether persons from the firm who are relevant to the business relationship attend the event. Therefore, if an individual only receives sporting tickets, and is unaccompanied by someone connected to the firm, it would be considered a gift;
• Setting limits for what is a nominal gift and one that may not require prior approval. Due to gift giving and receiving being such a common practice, a firm may choose to set a dollar figure that would be considered nominal that doesn’t require prior approval.
The definition of nominal value will vary from firm to firm, but many will enforce a $100 dollar limit, whether given or received. The $100 limit is loosely adopted from FINRA Rule 3220 (here), which must be adhered to if the firm contains dual registrants. A firm can set a nominal value higher than that of $100, and many do. The specific dollar limit may depend on the nature and location of the firm and its clients.
It's worth noting that FINRA recently issued a rule review report (here) that included possible increases to the limits on broker-dealer gifts. The amendments would increase the gift cap from $100 to $175.
A typical entertainment policy will stipulate that a representative cannot provide or accept entertainment that is excessive in nature. Entertainment that may be considered acceptable or reasonable would be a dinner, a round of golf or a single sporting event. Keep in mind, the individual or firm that is providing the entertainment should be present, otherwise the entertainment could classify the event as excessive.
A recent enforcement action (here) underscores the importance for investment advisers to adopt and follow rules designed to prohibit inappropriate gifts to and from clients by advisory representatives. According to the order, the adviser adopted a nominal gift value of $250 or less for its supervised persons. Despite the policy, several employees took numerous flights on private planes of advisory clients, none of which received prior CCO approval as required by the policy;
• A clear gift approval procedure. Require pre-approval for the giving or receiving of any gift that exceeds the stated dollar amount and not considered nominal.
As with gifts, an entertainment policy may include pre-approval for certain business entertainment events that exceed a specific dollar limit or type of event (i.e. travel expenses or hotel accommodations) which is determined by the firm.
To aid compliance supervision and remove much of the speculation for advisory representatives, an advisory firm may create a list of common and acceptable types of gifts and entertainment; and
• A detailed education program. A firm should include the gifts and entertainment policy as part of their ongoing education program. The education could be part of your code of ethics training or a separate module. Many third-party vendors offer online learning courses or if that cost is not feasible, regular informal training (i.e. role-playing during a staff meeting) is suggested to ensure awareness.
--Acceptance of gifts, SEC guidance:here
(Jason Wallace is a senior editor for Thomson Reuters Regulatory Intelligence. Jason began his career at TD Waterhouse Securities Inc., now TD Ameritrade Inc., where he held key positions in the Trading, Risk Management and Compliance departments for both retail and institutional sides of the firm. Jason joins Thomson Reuters after serving as an associate director for National Regulatory Services, in San Diego, California. Follow Jason on Twitter @Wallace_iabrief. Email Jason at firstname.lastname@example.org)