The Financial Industry Regulatory Authority said Monday that it has fined First Trust Portfolios $10 million for providing excessive non-cash compensation — which included basketball and concert tickets — in connection with the distribution of First Trust investment company securities and for falsifying expense reports.
First Trust, based in Wheaton, Illinois, provided gifts, meals and entertainment to representatives of retail broker-dealers — its client firms — that sold First Trust investment company securities, which significantly exceeded FINRA limits for non-cash compensation, the broker-dealer self-regulator said.
"In certain instances, First Trust preconditioned the non-cash compensation on client firm representatives achieving sales targets with respect to First Trust products (e.g., exchange-traded funds and unit investment trusts)," FINRA said.
In addition, First Trust wholesalers, who are generally responsible for marketing and selling financial products to client firms, "falsified internal expense records, and 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,” said Bill St. Louis, FINRA's head of enforcement, in a statement.
FINRA Rule 2341, Investment Company Securities, prohibits broker-dealers 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 so long as the gifts, meals or entertainment are not preconditioned on achievement of a sales target," according to FINRA.
Between at least 2018 and February 2024, First Trust wholesalers regularly violated Rule 2341 by providing to client firm reps gifts that "significantly exceeded the annual limit and meals and entertainment that were so frequent and extensive as to raise questions of propriety," FINRA said.
Exceeded Higher Gift Limit Proposals
The gifts far exceeded even the higher limits recently proposed by FINRA.
In May, FINRA filed a proposal with the SEC to increase the gift limit to $250 annually, followed in September with an amended proposal boosting the limit to $300 annually.
On more than 25 occasions during the relevant period, "two First Trust wholesalers provided client firm representatives two courtside basketball tickets at a cost of approximately $3,200 per pair," FINRA said Monday.
Then, over an 18-month period, "various First Trust wholesalers provided one client firm representative entertainment, including tickets to more than 20 concerts and sporting events, with a total value exceeding $31,000," FINRA continued. A First Trust wholesaler also preconditioned a gift of tickets to a professional hockey game on a client firm representative selling $1 million in First Trust products to his customers.
Falsified Expense Reports
During the same period, First Trust wholesalers falsified internal expense records relating to more than $650,000 worth of non-cash compensation provided to client firm representatives.
"First Trust sent client firms false and misleading information about the non-cash compensation provided — omitting more than $500,000 worth of gifts, meals and entertainment," FINRA states.
Another gift: "Two First Trust wholesalers provided a Client Firm representative with tickets to a Broadway show, at a cost of more than $1,800, for the representative to use during a trip to New York, without being accompanied by a First Trust employee," FINRA's order states.
First Trust also failed to establish, maintain and enforce a supervisory system reasonably designed to achieve compliance with non-cash compensation rules and expense-related recordkeeping requirements.
In settling the matters, 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.
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