FINRA Sanctions Wholesaler of Securities for Improper Gifts and Entertainment
FINRA sanctioned a wholesaler of investment company securities for providing improper gifts and entertainment.
According to the AWC, the wholesaler failed to maintain sufficient supervisory controls to prevent excessive non-cash compensation and improper sales incentives by its employees, including several who also served as supervisors. FINRA found that gifts, meals, and entertainment routinely exceeded permissible limits and, in many cases, were provided so frequently and extensively as to raise questions of propriety. Examples included courtside basketball tickets worth thousands of dollars, Broadway tickets worth more than $1,800, and high-end bottles of alcohol valued at up to $400—often provided without personnel from the wholesaler present. FINRA determined that wholesaler personnel also tied gifts to sales performance, offering premium tickets or event support to recipients who achieved specific sales targets, including million-dollar sales goals.
FINRA found that the wholesaler failed to maintain accurate books and records and lacked adequate supervision over expense reporting, resulting in the maintenance of false expense records as part of its official books. FINRA determined that more than forty wholesaler employees submitted false reports totaling over $650,000, often listing non-attendees at events, omitting actual guests, and underreporting the value of gifts and entertainment. FINRA noted that at least two supervisors advised employees on how to structure expense submissions to disguise noncompliant expenses, and the false data directly fed into the firm’s quarterly client reports.
FINRA further found that the wholesaler failed to accurately report non-cash compensation to the broker-dealers whose employees received such gifts and that relied on quarterly disclosures to monitor such activity. The wholesaler reports understated or excluded benefits, creating the appearance of compliance when violations existed.
FINRA noted that the firm has since taken significant remedial steps. FINRA stated that the firm created a dedicated compliance audit function reporting to executive management to monitor adherence to non-cash compensation rules and related sales practices. FINRA highlighted that the firm also implemented a ticket-tracking system to improve recordkeeping and imposed disciplinary actions—including suspensions, fines, and heightened supervision—on employees involved.
FINRA concluded that the firm violated Exchange Act Section 17(a) ("Records and Reports") and Rule 17a-3 ("Records to be made by certain exchange members, brokers and dealers") as well as FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade"), 2341 ("Investment Company Securities"), 3110 ("Supervision"), 4511 ("General Requirements").
To settle the matter, the firm agreed to (i) a censure, (ii) a $10,000,000 fine, and (iii) an undertaking requiring senior management to certify—within 12 months and annually for the following two years—that the firm has implemented and maintains supervisory systems and written procedures reasonably designed to ensure compliance with applicable FINRA rules and securities laws.