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FINRA Issues Update to Non-Cash Compensation Guidance

Have you updated your firm’s written policies in the light of social distancing and FINRA’s updated guidance?

Non-cash compensation can be a slippery slope, can’t it?

Regulatory guidance on non-cash compensation includes a provision for business entertainment and meetings; this provision allows reasonable amounts of food and beverage. However, definitions of reasonable can vary.

For one advisor who’s accustomed to eating a peanut butter and jelly sandwich at their desk, even a basic meal out can seem like a treat. For employees who are accustomed to frequent client meetings over lunch, dinner or drinks, they may not bat an eye at a hefty price tag for a steak dinner.

FINRA has specific guidance in place regarding non-cash compensation. And, with the impact that COVID and social distancing have had on in-person meetings, the regulator has also provided guidance on appropriately managing non-cash compensation when you’re not gathering in person.

What Are the Traditional Guidelines on Non-cash Compensation?

FINRA Rule 3220 prohibits members or associated persons from giving gifts (directly or indirectly) in excess of $100 per year to any person in relation to the business of the recipient’s employer.

Guidance from the rule states that: “No member or person associated with a member shall, directly or indirectly, give or permit to be given anything of value, including gratuities, in excess of one hundred dollars per individual per year to any person, principal, proprietor, employee, agent or representative of another person where such payment or gratuity is in relation to the business of the employer of the recipient of the payment or gratuity. A gift of any kind is considered a gratuity.”

Members and their associates are prohibited from giving or accepting gifts in connection with the sale of specified products. As mentioned, there is a specific provision for reasonable entertainment expenses and they do not fall under this $100 limit.

How Have The Guidelines Changed In the Wake of COVID-19 and Social Distancing?

With many meetings and events being conducted virtually today, there is still a need for connection but fewer opportunities to get together in person.

The original FINRA guidance does not specify whether meetings must be held in person. To address the new reality firms are facing, FINRA has recently updated their FAQs to address virtual meetings.

According to the new guidance, if a member firm’s associated person personally hosts an interactive virtual business entertainment event or meeting, FINRA would consider the associated persons’ provision of reasonable amounts of food and beverage to be consumed by the recipient employees and their guests (during that virtual business entertainment or meeting) as not being subject to the $100 gift limit.

As with the existing rule, the cost of the food and beverages provided as well as the frequency of the provision should not raise questions of propriety and should not be preconditioned on sales targets.  Additionally, the host should control who can participate in the meeting, should interact with each participant and should remain present and visible throughout the meeting.

Any other cash or non-cash compensation such as gift cards or other non-food items should not be provided.

What Else Can My Firm Do To Ensure We’re Following Non-Cash Compensation Guidelines?

Member firms should ensure that they have created robust Written Supervisory Procedures and a gift log to document the costs and purpose of the gifts, food and/or entertainment provided.

Maintaining appropriate documentation while working in remote locations can be challenging. Even if you have an existing policy in place, now is a good time to review it and ensure it covers this new normal and shows your attention to evolving circumstances.

If you need support with reviewing or revising your procedures, reach out to our compliance consulting experts. They’ve worked with firms to manage the many changes that have come along with COVID-19 and can provide insights on how to ensure you’re hitting all your compliance targets, even when they continue to shift.

For more resources on communicating with clients and meeting regulatory requirements during COVID, look at these posts:

Do Communications Requirements Change During A Global Crisis?

Defending Against Cybersecurity Threats During COVID-19

COVID-19 Cyber Safety for Our Clients

Supporting Clients and Protecting their Interests During Tough Times

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About Red Oak Compliance Solutions

Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes. 

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