The Financial Industry Regulatory Authority, or FINRA, fined First Trust Portfolios $10 million for providing excessive non-cash compensation in connection with the distribution of First Trust investment company securities.
According to FINRA, First Trust provided gifts, meals and entertainment to representatives of retail broker-dealers that sold First Trust investment company securities. These gifts significantly exceeded FINRA limits for non-cash compensation.
In some instances, First Trust said the non-cash compensation was preconditioned on client firm representatives achieving sales targets for First Trust products.
Further, FINRA said First Trust wholesalers falsified internal expense records. In addition, First Trust sent client firms reports containing inaccurate information about the value, nature and frequency of non-cash compensation that First Trust provided to client firm representatives.
“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,” Bill St. Louis, executive vice president and head of enforcement at FINRA, said.
These actions were in violation of FINRA Rule 2341, which prohibits member firms from making payments or offers of payments of any non-cash compensation subject to specified exceptions. For example, the exceptions permit gifts that do not exceed $100 per person and an occasional meal, a ticket to a sporting event, or comparable entertainment as long as the gifts, meals or entertainment are not preconditioned on achievement of a sales target.
Between at least 2018 and February 2024, First Trust wholesalers regularly violated Rule 2341 by providing client firm representatives with gifts that significantly exceeded the annual limit. They also provided meals and entertainment that were so frequent and extensive as to raise questions of propriety. The gifts far exceeded even the higher limit recently proposed by FINRA to increase the limit to $300 annually.
For example, on more than 25 occasions during the relevant period, two First Trust wholesalers provided client firm representatives with two courtside basketball tickets at a cost of approximately $3,200 per pair.
FINRA also found that First Trust failed to establish, maintain and enforce a supervisory system reasonably designed to achieve compliance with non-cash compensation rules and expense-related recordkeeping requirements.
First Trust consented to the entry of FINRA’s findings, without admitting or denying the charges. In addition, the firm agreed to provide annual compliance certifications to FINRA for three years regarding the issues identified in the settlement.